What, then, can we say about the prospects for creative advertising agencies in the year ahead? Will senior executives' collective commitment overcome the industry's negative trends? Will senior executives demonstrate that they are championship swimmers who can conquer the undertow? Or, instead, will they be swept out to sea, victims of overconfidence and weak change programs?
Unfortunately, I cast my vote for the undertow. I believe that Madison Avenue's manslaughter will only worsen. Senior executive actions, as they have been defined, are inadequate, and creative ad agencies will be in a worse position at the end of 2017 than they are in today.
Let's define the undertow. Agency economics are deteriorating and have been steadily deteriorating for several decades. Scopes of Work (SOWs) have been relentlessly growing, fueled by client-led digital and social media experimentation, while procurement-led fees have simultaneously declined. This leads to a chronic erosion in the price that creative agencies are paid (fees divided by workloads). However, since agency SOW workloads are not measured in any meaningful way, the decline in priceis not a familiar metric for senior agency executives. In their minds, there's no such thing as a price that agencies are paid for the work they do. The only pricethey're aware of is the hourly rate of their people. The fallacy in this, of course, is that clients are actually buying agency work, not agency hours, in the hope of growing their brands.
This is a problem unique to the advertising industry. Senior agency executives do not know of or track or fix their pricing problems. Pricing is not on their radar scope. Yet, ironically, industry pricing is the No. 1 problem facing senior creative agency executives today.
I've been tracking the price of agency scopes of work since 1992, when my firm developed a way to quantify the SOW workloads of our clients, normalizing the variety of SOW deliverables into a uniform measure of work, the ScopeMetric® Unit (SMU) -- a unit of work about the same size as a typical TV spot.
If the price received by my agency clients was indexed at 100 in 1992 (with inflation removed), it declined to 56 by 2004 and then to 35 by 2015.