Friday, 2 October 2009

Trimming the Fat From Your Golden Geese Will Kill Their Value

I've talked about how Procter et al are helping to kill creativity at all the agencies and the production houses the agencies work with, even while demanding the opposite.  I've suggested a link between that same phenomena and why CMOs are lamenting a lack of creativity and 'spark' in the entry level marketing people they're interviewing.  I've also suggested that so-called 'social marketing' is a misnomer that should be changed to 'social PR' (link to post).

What's the common thread between all these things?
More specifically, high margins.

With the introduction about two decades ago of the dreaded Procurement Department and their beloved RFP, which precipitated a shift in agency selection decision-making from CMOs to subordinates of CFOs (yes, a guarantee of poor agency choices -- but that's not my key point), we saw profitability at agencies begin to weep, then bleed, then hemorrhage.  (Once a client begins cutting your margins, they're not going to stop until yours are lower than theirs -- and you'll never have as much access to their numbers as they will demand to yours...)

Once the biggest global clients had cut the agency margins down sufficiently painfully, most agencies did the worst possible thing, they fired most of the Strategic Planners, especially the smartest (most expensive) ones (most agencies never figured out how to turn Planning into a profit center -- and why would they?  Developing marketing solutions for Clients isn't the business they're in -- producing Lion-winning mini-films is.).  Account Service (although I've never seen a 20 year comparison) doesn't seem to command the kind of salary advantage over other industries (financial sector, anyone?) they once did.  The media folk all went independent in the late 80's/early 90's and took the top 1.5-3% of the ad agencies' 15% with them, the first step in the clients knocking their margins to an 'even' 10%, then lower still.

The only talent agencies couldn't cut back on were the Creatives.  When you cut down to the bone, you can't run a creative service business without talented Creatives, but you can with only fair-to-middling talent in most other areas.  (Experiments by clients to bring the Creatives in-house failed miserably, over and over again until they accepted that the 'wild child' will inexplicably die 'in captivity.')  Ironically, the Creatives live a co-dependent existence -- despite their value to the agency industry there's really no other place for them to work, so when agency revenue declined across the board, their compensation no longer continued to climb.  The only exception are the rare few talented enough to become Directors at production houses, then this year Procter announced their intention to cut that industry's margins down to the bone (link to post)...  Great idea to lower their costs and raise shareholders' dividends!

I find it humorously ironic, too, that the CMO's of the multi-nationals feel the really aggressive, strategically-creative thinkers aren't walking in their doors anymore (link to post).  Many of this relatively rare type of individual used to enter marketing via top schools or agencies.  Why don't they choose marketing anymore?  These people go where both the challenge of innovation and big bucks converge.  With pressure on both agencies and CMOs to lower salary costs, they've all been skimmed off by the financial industry, amongst others.
There's a thread here.
Question: Where are the really talented Directors of advertising's :30 mini-films going to go once P&G cuts all the 'fat' out of the production house business model?  These firms are run by aggressive, strategically-creative individuals who are in the business because it is creative, high-pressure (suits their risk-taking, "A" type natures) AND gives them the opportunity to make really big dollars.  Take their carrot away and they immediately go looking elsewhere for work.
So what has this got to do with "Social Marketing" and experiential agencies?
Nobody enjoys a higher margin today, if they're smart, than "Social Media Specialists"!  I mean, how much should they get paid?  It's a new, mysterious segment!  If these firms/individuals aren't making an absolute killing right now, they're doing something very wrong.  It's their moment in the lucrative spotlight.  How much should it cost to develop an app that entices people to share it amongst their Facebook friends?  LOTS!!!  What about the development of a branded iPhone app?  TONS!!!

In the early days of website development, HTML designers who hadn't yet graduated were starting new agencies that made 90% profit.  Clients have no idea what they need to pay for "Social Marketing" services any more than they did in the early days of TV commercial pricing.  (Media pricing has always been about 'whatever the market will bear', not 'value for money.') All clients know is that everyone else is jumping on the bandwagon and the ones who are most active are increasing their share of market, so they better create a budget for it!  "Will $1,000,000 be enough, do you think?"  (Strangely, despite all the CFOs demands for ROI metrics, big bucks are being shifted to "Social" only because the CEO/CMOs are convinced they need to be there.  Hm...)

So what can today's experiential marketing agencies learn from this?  I mean, most of them are stuck in 'commoditized, cost-plus, executional-provider mode'.  It's hardly like they can suddenly raise their mark-up in an environment where, not only are they fighting each other to offer the lowest prices, but the clients can more or less work out their real costs.
Strategic-creativity.  "Added-Value."  Mystery and magic, folks.
For far too long experiential agencies (and many of the digitals) have been confusing "wild and crazy" with "on-brand-strategy."  Simply stopping people in their tracks, even engaging them for a few minutes, ain't the same as building an on-strategy brand experience.  The big bucks are in the nebulously valuable realm of strategic-creativity (where the successful ad agencies continue to make good money), COMBINED with flawless execution in-field.

When more than just the bleeding-edge of the experiential marketing agency contingent begin offering the magic and mystery that the hot shops (and dinosaurs) and new "Social Marketing" agencies do (by investing in strategic-creative thinkers who've proven their chops in other segments), the segment will not only start winning the FRIGGIN' HUGE slice of the marketing mix pie that XM should be garnering, they'll start making the kind of margins that the other agency segments do.  And they'll do it without a proven ROI metric (although having one would guarantee their success!).
"Trimming the fat from your golden geese will kill their value."
That's the underlying insight for clients, here.  When the aggressive, strategically-creative, entrepreneurial types out there who create and run the world's most creative and leading-edge businesses lose the opportunity to "strike it rich," they abandon that pursuit, to the detriment of their clients' brands (and go to work in the 'creative financial sector').

Sure, look for ways to cut costs, for 'efficiencies', but keep in mind that there are some high-margin supply businesses that, strategically, should be coddled and nurtured, not cut to the bone.  (Yes, their principals drive new Porsches and vacation in Patagonia -- that's called "a cost of doing business," a small price to pay for captivating and motivating marketing efforts.)

If, as Fast Company has labeled it, this is the age of One-on-One marketing, then where should all marketing campaign spending be starting? (link to post)  (Hint: it's not digital or social!)

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