Why agencies should get out of the service business

The most persistent client criticism of agencies is that they have become too submissive and reactive. Surveys of client organizations over the years give agencies high marks for responsiveness but persistently low ratings for proactivity. When asked about their agency relationships, the CMO of a major American automaker offered a provocative response: “Our agencies are sickeningly subservient,” explaining that they dutifully fulfill assignments and honor deadlines but rarely push back or offer ideas without being asked. This regrettable perception emanates largely from agencies operating as “service businesses,” which creates a deeply embedded service mentality within the industry. A-List & Creativity Awards Enter for a chance to be recognized as the best in advertising Submit your entry here While agencies consider themselves marketing professionals, their day-to-day behavior signals “service providers.” There’s a notable difference between these two vocations. As business author Michael Hammer observes, “A professional is someone who is responsible for achieving a result rather than performing a task.” Highly-talented, highly-paid vendors As long as agencies continue to compete on the basis of who is the most responsive, the fastest to deliver and the most cost-effective (read inexpensive), they will struggle to earn their desired reputation as “marketing partners.” Instead, they will continue to be viewed as what a legendary creative director once called “highly talented, highly paid vendors.” The dictionary definition of partner implies a vested interest. Partners have skin in the game. They take responsibility for solving problems that connect to outcomes. Unfortunately, the current agency business model has become almost purely transactional. As the saying goes, “Act like a servant and you’ll be treated like a servant.” History shows how this dynamic can change. In the pre-hourly rate era (prior to the 1980s), a thoroughly different set of economic incentives was in play. Because agencies were compensated by commissions instead of billable hours, they were motivated to provide proactive solutions to their clients without worrying if their work was “billable.” If their advice helped improve a brand’s sales, their clients would spend more on media, and the agencies would earn more in commissions—a virtuous cycle. Hourly billing creates a vicious cycle in which the agency wants more hours and the client wants fewer—a classic misalignment of economic incentives that perpetuates a business model in which agency professionals are focused only on activities that can be monetized via data entered on time sheets. Clients buy effectiveness, not efficiency Thanks to years of laboring under the hourly rate system, most agencies have become so wrapped up in the production of “deliverables” that they have lost sight of the real value they provide to their clients. They are caught up in the illusion that their clients are buying services or “time of staff” rather than business results. Worse, the hourly rate system creates a self-imposed profit ceiling. Agencies have a finite inventory of hours that can be billed to clients, therefore a maximum amount of revenue and profit that can be earned. Only professional service firms are constrained by this type of myopic revenue model. Other businesses earn income by selling and pricing products and services, not hours and activities. In this way, they create scalable businesses by leveraging and monetizing the intellectual capital of their people in ways that have nothing to do with tracking and billing for time. See Ad Age’s 2024 Breakout Brand Leaders and Work here Agencies can escape the service business by cultivating a business model that offers solutions to business problems in place of a bullet-point list of competencies and capabilities. This means selling and pricing programs and products, not hours and staffing plans. The result is a scalable business that is not constrained by the tyranny of the billable hour. Such is the story of agencies such as IPG’s Huge, as recounted in the new book “Madison Avenue Makeover,” along with numerous other firms making the commitment to the development of a fully productized business model—not what you do, but what you know. One of the beliefs that made Crispin Porter + Bogusky such a breakout agency years ago was their doctrine that “Advertising is not a service business. We’re a product business, like publishing and other businesses that deal with intellectual property.” At the time, the firm famously eschewed hourly billing, refused to give away its IP in speculative reviews, and built solutions that were often product ideas, not advertising campaigns. It was also inclined to propose compensation tied to business results, which earned it a reputation as business partner, not service provider. The fact is that agencies shouldn’t be regarded as professional service firms, but rather as professional knowledge firms. Service is a commodity. Smart thinking is not. Clients can get good service anywhere, but proactive marketing leadership is in short supply. To become true partners with their clients, agencies must remember that smart clients don’t hire them only for what they do, but rather for what they know. NextGen Marketing Summit Join us for a crash course on Gen Z, DTC marketing and the creator economy Register today

Why agencies should get out of the service business

Featured Stories