Wednesday, 14 October 2009

Hurdles in Developing a New Ad Agency Revenue-Sharing Model

Maurice inquires:
As part of my internship at a London agency I've been tasked to put together a paper on new business models in advertising. I was reading about the failure of on your blog and was curious if you had any more opinions or examples on this topic? I would be grateful for help in particular with information on actual financial figures (profits/losses) of agencies launching products and taking equity shares in clients.
Stumbling blocks in the evolution of a new agency revenue sharing model:

Well Maurice, you’re likely figured this out, given what you’re focusing on, but essentially, as I spoke to last week in the post about large margins, the key to any new revenue model is not simply being inventive, it is being inventive in a way that will pay out the BIG money, as the dinosaur agencies used to enjoy. In the old model the media department got 1-2% of the spend, while the creative ‘mother’ agency got 13-14%. Once the latter began to get cut to 10%, then lower, all the “cream” (profit) was eliminated. (Every 1% of a dinosaur agency’s $1 bn in global commission billing represented $10 mn in profit lost.)

Cutting out ‘non-essential’ departments like Strategic Planning led to the agencies being even more narrowly focused on what they’d always been: developers of :30 TV ads. Once the Internet revealed that consumers had never wanted the endlessly repeated TV ad “push marketing model”, traditional ATL agencies had essentially painted themselves into a corner. ATL billings are inevitably going to plummet (note: marketing spending will not) as “push” is gradually, but steadily, rejected by consumers. Even the purchase of so-called “profit centres” like digital shops, DM shops, etc., only further highlighted the dinosaurs’ inability to let go of their ancient mindset. Percentage of billings is no longer a viable model, yet charging for ‘hours worked’ is going to turn agencies into little more than salaried providers of a commodity, but the latter is exactly the direction the big spending clients are pushing agencies towards. 

The only way to tap into the big money is to charge for brilliant ideas that build huge sales, first locally, then around the globe, tapping into the upside and sharing the downside of our clients’ businesses. The problem today is that the clients are all in charge — they can withhold the commission percentages, but don’t need to share revenue because they have all the agencies over a barrel. There is so much competition, and such a depression in spending due to the economy, that the plethora of small start-up agencies are willing to work for very little and give up any control over the IP they’re creating, allowing the “current best approach” developed by a small independent agency in Durban (for example) to be re-used around the world by the global client without royalties. The agencies best poised to ‘push-back’ and make demands for concessions in revenue sharing are the same ones tied to the old model (and totally reliant upon it for survival).

The Virgin luggage example at Anomaly is a red herring. There’s nothing wrong with being entrepreneurial and stepping outside the core of our business focus (which is fundamentally developing creative marketing efforts that help drive our clients’ sales), but it doesn’t solve the real problem: how to get back to being very well paid for doing something other businesses cannot. Make no mistake, the ad agency structural model (a large group of diverse creative types with support staff) continues to exist because it cannot be duplicated client-side (human nature decrees that true creativity evaporates once it’s brought in-house), nor can the breakthrough creative product agencies produce be consistent if only freelancers are contracted to develop it. There is no replacement for the creative hot-house that an ad agency is, first and foremost.

I had Tim Penner, P&G Canada’s President, in response to an offer to do some creative/innovation inspiring seminars, write to me about “ already very creative people (here at Procter).” Of course it is human nature to believe we’re each naturally creatively gifted, but the type of creativity possessed by people carefully pre-selected for their analytical abilities is distinctly different than the type of creativity exhibited by agency Creative Departments. Successful marketers use agencies because they acknowledge they cannot duplicate the results they get using only their own staff. That means agencies naturally posses a unique selling proposition, a clearly differentiated product that other types of companies cannot duplicate.

The Honeyshed example, while brave and entrepreneurial (if poorly handled by an agency who did not challenge its own methodology), is not really a solution to the big problem the agency business is facing. Creating new media vehicles isn’t the answer, getting a slice of the big profits is. Until one big client with really big marbles (P&G comes to mind, and they are definitely off experimenting with this, but a successful start-up could leverage this idea to expand globally) and a similarly gutsy agency (of any size, really) “gets it” that it is only when you offer a really big carrot that you get a major effort/investment from your “partners,” will this new business model become reality. Our world needs just one ‘best in class’ model to springboard off.

The amazing thing is that agreeing to a commission of 1% on net profit means nothing before a breakthrough new campaign, or brand, or business model has been invented. At Day Zero, it is 1% of nothing, just potential. Given the power of big ideas (and the fact that the majority of new product launches fail), it only makes sense to agree to a deal like this, yet the big publicly-held players shake in their boots at the prospect that they might have to share profits outside of their organization and shareholders for years to come — yet they think nothing of licensing technology for decades, or buying big ideas, like Procter buying Gillette or the technology to make Pringles or Febreeze.

So I apologize, Maurice, I don’t have any specific examples at the moment, but if you find some, do share!

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