Who will mourn the death of the advertising agency?

Tuesday 02nd, February 2016

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A recent book that I came across “Madison Avenue Manslaughter” by Michael Farmer highlights the difficulties that the advertising agency business worldwide is being increasingly subject to. The book raises the larger question whether agencies are soon going to be considered a relic of the past.

Striking a blow

The first nail in the coffin was hammered some twenty plus years ago when the system of media commissions – a flat 15% of media billing paid to advertising agencies by clients – went out of the window.

Instead, clients began to demand that agencies work on a fee or retainership basis. The ostensible reason was that this gave agencies the security of business that they needed, whilst simultaneously guaranteeing their source of income.

The larger agency networks responded by setting up separate media buying houses. In a matter of years, the creative fees paid by clients to agencies dwindled. The lion’s share of the revenue came from the negotiated commissions that clients paid out depending upon the savings negotiated by the media buying arms.

If you’re a Unilever or a P&G or Coke, shaving off even a percentage point on media buying costs is going to add a few million to the bottomline.

Agencies panic

The writing has been on the wall for years now, but agency chiefs continued to live in denial. There was far too much at stake to acknowledge the fear. Advertising has traditionally paid good salaries and benefits to staff; the talent pool is a small one and attracting and retaining talent is a serious challenge.

The larger agency networks such as WPP Group and Publicis have responded by diversifying into new media. Increasingly, the trend is to set up small digital units focusing on specific disciplines such as analytics.

Sources of business

There are two aspects which are shaping how agencies are going about sourcing business. First, the age of clients depending upon a single agency to meet all their requirements from creative to media buying to digital marketing etc have long gone.

Clients are now comfortable working with a whole bouquet of smaller shops, picking and choosing those with the best deliverable expertise in that area of activity. From a client perspective, this gives them the ability to get the best talent.

Secondly, clients are now holding the negotiating strings. They do this by craftily playing off one agency against the other. There is nothing new about this practice, but what is perhaps alarming is the speed with which this trend has accelerated. Effectively, this means that agencies can no longer take their security of tenure for granted and are forced to compete each time for a win.

Race to the bottom

The agency culture has become a number-driven game, since the vast majority of ad agencies the world over are now controlled by a handful of powerful conglomerates. The real reigns of power have long shifted from the creative and business people to the finance specialists. With their relentless quest on the next quarter, creative shops have been forced to make compromises in their quality of output.

An increasing trend amongst agencies is to staff the ranks with younger people, who lack the experience and the insight to deliver great work. This has resulted in a situation where the work increasingly looks lacklustre and fails to provide brands a distinctive voice. And this was supposed to be what an agency delivered best to client brands.

Piling on the pressure

Agencies are also supposed to cope with increasing client demands for more sophisticated services. These capabilities may or may not exist within the network, leading to a situation where the client decides to look elsewhere.

The rise of technology has dramatically altered the service offering. Agencies are most comfortable talking the language of creativity, of concepts and ideas and larger-than-life executions. That conversation has increasingly begun to shift to a data-driven culture where the number crunchers have begun to assert themselves.

Competition from a new quarter

Ad agencies are also hopelessly ill-equipped to deal with the new crop of competitors. Over the last decade or so, large consulting firms like Accenture and others have begun to set up their own digital shops. IBM recently announced that it had bought out Ammirati Puris, a digital ad agency to complement its offerings.

These are conglomerates with deep pockets who have the ability to build up creative and design capabilities quickly. Not only that, their ready access at the top levels of engagement with client organisations means that they can bundle their capabilities far more easily. In contrast, ad agencies have traditionally engaged with CMOs, who are increasingly under pressure to deliver results.

If agencies don’t do something to enhance their capabilities, they will very soon find themselves out of business. The sad part is, there will nobody around to write their epitaphs.

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