MediaBizBlog: Cory Treffiletti: Prescription to Heal the Ad Agency Business (II)

Part Two

This guest Media Business Commentary was written by Cory Treffiletti, President and Managing Partner of Catalyst SF, a Marketing Capital Firm based in San Francisco and working with clients on the development and management of strategic marketing efforts designed to achieve measurable business success. Catalyst has adopted many of the prescriptions suggested in this commentary, with great success. In this 3-part article Cory offers his prescription for what ails the agency business and how agencies can succeed in the forward. Cory has been an executive in such interactive agencies as i-Traffic, Freestyle Interactive and Carat, starting his career at DeWitt Media in 1995.

The second part of Cory’s article refers to The Prescription. This is the manner in which the ad agency business can respond to the issues and challenges facing their success and continue to play a valuable role in the marketing continuum.Cory can be contacted at cory@catalystsf.com.

DIAGNOSIS A: CHANGE IN LIFESTYLE

Fundamentally there are three primary afflictions facing the Agency business; three primary lifestyle issues that need to be addressed before our prescription will take effect.

The first lifestyle issue facing the Agency business is they’ve created a de-emphasis on Account Management and Strategy and focused on execution first rather than intelligence. If you ask an Agency if they are strategic, they will always respond, “Yes”, but I’m afraid that it’s just not true. If you ask an Account person for their insights into a client’s business they will not always be able to deliver one in an efficient and effective manner because they have not been tasked to do so very often and they mostly have not been trained to do it either. Account Management and Strategic Planners are supposed to be the leads for any business, but they have become glorified Project Managers with a little bit of Sales wrapped in. An Account Director these days is encouraged to think about execution and what’s best for the Agency before they think about what is best for the client, because that is the model under which they are paid. More media dollars being spent means more commission for media. More creative units being developed means higher margins on banners, commercials and print ads Their salary, specifically their bonus structure, is the direct result of billings for the Agency, so when the client and the Agency disagree, the Account team is not incentivized to agree with the Client. For the model to become effective we need to have Strategists’ time paid for directly by the clients and incentivized with bonus structures based on their client’s needs rather than the needs of the Agency. Since the client is fundamentally where the money comes from, why can’t they be incentivized in that manner?

Another lifestyle issue facing the agencies is the fact that digital media requires more work than non-digital media and not all agencies are adept at the intricate details of operating in this medium. The medium is work intensive because of its profession of accountability but Account Management and Strategists are rarely billed at accurate rates while executional teams, such as Media Planners and Designers/Developers are many times unfamiliar with the technology they’re working in. When a traditional Agency does an interactive campaign, they longer than a digital shop because they have to learn as they go. The Interactive agencies, on the other hand, do not bill accurately because they are trying to keep pace with the pricing offered by the traditional shops who profess to be able to work in this environment just as well as the digital shops. The Traditional shops try to work under the margin of profitability they make from traditional media, but even this margin is no longer what it once was and dollars are lost on execution because agencies are either attempting to handle a medium they are unfamiliar with or they are spending too much time executing on these projects. There is more data on how consumers interact with the media as well as with each other. There is more data on the performance of the advertising units being integrated into the platforms. There is more data that outlines that the consumer is in control of when and where and how they will interact with the media, and there are more ways than ever for a consumer to choose to interact with media. All this explosion of opportunity and choice has created a system whereby planning, analyzing, and trafficking advertising units is more complex and management of campaigns are more difficult because they can be changed out in a close-to-real-time manner. With accountability and this resultant flexibility, managing a digital effort is much more intensive than managing a traditional media campaign.

Another lifestyle observation is that the Ad Agency business is threatened by digital media because margins for operating a digital Agency are lower and continually being pushed even lower by a desire for efficiency. With more accountability in the media and with a better window into the process for managing this media, clients are requesting fees be cut lower and their Agency partners find more efficient ways of working, which is hard when we know that the work required to manage these efforts is higher than it ever was before and the costs to build a team which is knowledgeable in these fields is becoming exponentially higher than they were before. These two forces are at odds with one another and they are making it increasingly difficult to be an Agency in this environment!

Decreasing margins and higher volumes of work required to execute and manage a campaign are diametrically opposed forces and are squeezing the business dry. I routinely read through the headlines to see which agencies are pitching what businesses and I know that in many of these pitches there are procurement departments managing pitches and judging against hard numbers such as retainers and monthly fees and media commissions. In creative reviews there are examples of reverse auctions where creative shops bid against each other for the right to work on the business, thereby devaluing the creative element they bring to the table. These processes are cruel and unusual and are forcing the agencies into an uncomfortable position, but I also argue that a portion of the blame lies on the side of the agencies themselves!

The agencies are also partly to blame because they’ve created the system in which they are being evaluated and they refuse to accept the possibility of change and the chance they have to revise their models to react accordingly. For many years we’ve seen the growth of the holding company model without any new revision to the ways in which they run their individual businesses and that resistance to change and to flexible business practices has created an immovable object; a situation where the change that will be necessary is more radical and probably more painful than it would have been five years ago. The change will now be on a revolutionary scale rather than an evolutionary scale, with people’s positions and jobs in the current model being put in jeopardy.

So rather than continue to talk about the problems, I want to talk about the solution. I’ve read article after article, and I’ve written a fair number myself, on the problems facing the advertising Agency business but here I propose a solution. If I were a doctor this would be my prescription for how to fix the Agency business.

The Prescription

The prescription is simple in message but very difficult in implementation. The prescription has three components:

• "Lose The Fat"
• Outsource Execution
• Base Your Business On Strategy

Next Wednesday: Making Real Change
Click to read Part 1