Advertising agencies are exceptionally complex businesses, driven by digital / social media innovations, large and fragmented scopes of work, procurement-led fee reductions, holding company-led downsizings, and client pressures to get brands moving again. Agencies have developed hyper-targeted digital executions and ROI tracking tools to help their clients. What they have not done is develop new and better metrics for managing their own businesses.
The shoemaker's children always go barefoot, goes the proverb. Client-focused businesses, like advertising agencies, focus on their clients' needs and often ignore their own.
When an industry goes from simple to complex, and from rich to poor, the past prevails over the present, and outdated metrics, designed for long-gone periods of simplicity and richness continue to be used.
Advertising was a simple TV, radio, and print business prior to 1994. Creative and media agencies were paid healthy commissions for their work; agencies were well-staffed; and there was a significant history of expertise to guide creative development, media planning and media buying efforts.
Since 1994, creativity and media have changed enormously in character, and agencies have had to deal with dramatic increases in complexity for which their past experience or metrics did not provide relevant guidance.
Throughout this period, agencies have measured their business operations by staff-cost ratiosandoperating margins.
Staff-cost ratios simply measure the percentage of staff costs versus income. An agency might set a staff-cost ratio target of 50%, saying "Our total staff costs cannot exceed 50% (or some other percentage) of income." Operating margin is simply income less operating costs — a similar metric.
The problem with staff-cost ratios and operating margins, of course, is that procurement-led fee reductions must always lead to agency staff reductions in order to hit the metrics, even if agency workloads are growing. WPP, under Sir Martin Sorrell, was an aggressive staff-cost measurer, and WPP's staff-cost reductions drove WPP's spectacular 30-year share price growth through 2016, when it hit $118 per share. This game got played out. The stock is trading at about $40 today.
Agencies need a better suite of metrics, and they must include "workload metrics" that measure the amount of work in client SOWs — a particular need in this era of large and fragmented SOWs.
For creative agencies, this simply means counting and categorizing their creative and strategic deliverables, and negotiating fees based on an agreed workload. In our consulting practice, we developed a standardized unit of work called theScopeMetric® Unit (SMU), which is roughly the size of a TV origination spot. All the deliverables in a creative SOW can be converted into SMUs (or TV equivalents) to measure the size of a total SOW. A typical creative agency team of account executives, creatives, strategic planners, and production people can complete roughly two SMUs per FTE per year — a more useful way of thinking about staffing than the staff-cost ratio, which ignores workload.
For media agencies, which have a mix of planning, buying, analytical and reporting activities across a large number of media channels, SOW measurement is more complicated, but it is possible. Here, we use the Media ScopeMetric® Unit (MSMU), which is the same size as the creative ScopeMetric® Unit (SMU) but it is driven not by deliverables but instead by media spend, media fragmentation across channels and the complexity of relationship processes, which can all be measured.
The use of workload measurement gives rise to the following enhanced metrics:
Metric enhancement begins with workload documentation and measurement. Once enhanced metrics are in place, agencies can review each of their client relationships and categorize the health of each of their relationships, using Price, Productivity and Workload Intensity metrics.
The shoemaker's children need shoes during this complicated era — they've gone without for much too long.
Agency CEOs need to commit themselves to the development of enhanced metrics for improved agency management.
Photo credit:Charles Barsotti, The New Yorker, The Cartoon Bank. With permission.
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The opinions expressed here are the author's views and do not necessarily represent the views of MediaVillage.com/MyersBizNet.