360° Coverage : How Ad Agencies Can Avoid A Death Spiral

2 Updates

How Ad Agencies Can Avoid A Death Spiral

Apr 21 2014, 3:36pm CDT | by

Leo Burnett’s fledgling firm got off to an inauspicious start when it opened in 1935.  With one client account, a staff of eight and a bowl of apples in reception, cynics said that he would...

Filed under: news

 
 
 

23 weeks ago

How Ad Agencies Can Avoid A Death Spiral

Apr 21 2014, 3:36pm CDT | by

Leo Burnett’s fledgling firm got off to an inauspicious start when it opened in 1935.  With one client account, a staff of eight and a bowl of apples in reception, cynics said that he would soon be selling those apples on the street.

Yet, even in the midst of the Great Depression, the firm survived and Burnett, along with other pioneers such as David Ogilvy and Bill Bernbach helped create the consumer culture that defined the post-war economy.  Those halcyon days are now long gone.

As long time industry veteran John Winsor recently noted, advertising agencies are no longer the valued partners they once were.  In fact, he argues, brands don’t really even need agencies anymore.  He might actually be understating the case.  It’s not just their work that’s losing relevance, the ad agency business model itself may now be defunct.

The Age Of Consolidation

The agency business has changed a lot since the “Mad Men” days.  What used to be a diverse industry of creatively driven full-service shops has now consolidated into a handful of enormous holding companies like Publicis Omnicom, WPP and Interpublic.

These are monstrous organizations that manage a wide range of businesses including media and public relations agencies, digital shops, specialty players in areas like mobile and social marketing as well as marketing research companies.  Perhaps not surprisingly, now that just a handful of people manage the entire industry, differentiation has suffered.

The holding companies have largely centralized innovation efforts in order to make their investments more efficient, so improvements in services tend to be general and incremental rather than targeted and disruptive.  Hiring practices are somewhat incestous, with nearly all of the senior executives coming from within the industry.

The consequences of the present industry structure are clear:  Ad agencies offer very similar services carried out by very similar people.

The Race To The Bottom

Although the mammoth size of the holding companies might in theory increase pricing power and investment, the reality is just the opposite.  In fact, as consolidation breeds uniformity, pressure on margins increases, making any effect from gains in efficiency short lived.

Further, this constant pressure on margins has inhibited the industry’s ability to develop talent.  While other professional services firms in fields like finance, accounting and law put a heavy emphasis on training and keeping skills current, training in the agency world is almost non-existent.

The result is communication professionals who don’t write well, “data driven” analysts with little understanding of basic statistics and content strategists without content skills.  What passes for “thought leadership” is mostly confined to trade publications and industry conferences.  You can’t have a first rate industry with second rate capabilities.

In the past, the heavy consolidation and low differentiation would have been sustainable, but digital technology has made barriers across industries more permeable.  While ad agencies remain focused on competition within the industry, the real threats are coming from outside it.

Porter’s Five Forces Closing In

Probably the best way to understand the challenges that ad agencies face is through the lens of Porter’s five forces, which illustrate the impact outside threats can have on an industry.
 

 
Once you take a broader view, it become clear that the agency business faces an existential strategic threat.  Bargaining power with suppliers and customers has always been a challenge, but now publishers are starting to offer marketing services and, as Winsor’s article pointed out, agency clients are doing more work themselves./>/>/>/>

There are also new market entries on the high end, such as IBM, who have vastly more resources and capabilities than ad agencies (IBM’s market cap is higher than all the top marketing services companies combined).   New digitally enabled freelance services can do basic work, like producing a video or designing graphics, without agency overhead.

Agencies like to say that they provide strategic services, but that’s not really true.  Mostly, they offer planning related to their own work.  For any significant strategic challenges, clients usually prefer to go to a consulting firm like Bain or McKinsey, where strategic literacy is far higher./>/>

A Classic Innovator’s Dilemma

Clearly ad agencies need to innovate their business model and redefine how they create, deliver and capture value.  In the meantime, however, they still need to keep their clients happy and the truth is that their clients don’t want them to change.  Ad agencies are, in fact, quite good at what they do—delivering large scale marketing solutions efficiently.

So there is no clear path forward.  Marketers pay agencies to do work that is contracted for and have no vested interest in the agency model.  There are, after all, no shortage of companies offering them services. Within agencies themselves, executives are rewarded for winning and retaining business, not creating new capabilities.

Yet, the situation is by no means hopeless.  Open innovation strategies such as accelerator programs could spur innovation.  Training in crucial areas, such as coding and data skills, would help build capacity even if unrelated to day-to-day work.  Initiatives like these wouldn’t immediately increase margins, but they would improve future competitiveness.

Unfortunately, there is no easy solution to the industry’s woes.  No grand initiative, strategy wrapped in a bow or presentation deck that can bring back the glory days.   The reality is that in order to survive, ad agencies will have to learn to experiment, risk failure and pivot quickly.  In effect, they will have to stop thinking like ad agencies.
 
 />/>

The Real-Life Mad Men (And Women) Of 2012

 
Update
2

4 weeks ago

Khazanah throws MAS RM6b lifeline

Aug 29 2014 5:01pm CDT | Source: Business Times Singapore

August 30, 2014 1:15 AMKHAZANAH Nasional will inject RM6 billion (SS$2.4 billion) over three years to resuscitate loss-making Malaysia Airlines (MAS) under a recovery plan that includes even an Act of Parliament. Other key moves are migrating its operations, assets and liabilities to a new company (NewCo) and slashing the workforce of 20,000 ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 
Update
1

4 weeks ago

MAS posts loss of RM307m for Q2

Aug 28 2014 5:00pm CDT | Source: Business Times Singapore

August 29, 2014 1:13 AMMALAYSIA Airlines (MAS) registered a loss of RM307 million (S$122 million) for the second quarter to end-June, but warned of worse to come in the second half when the "full financial impact of the double tragedies of MH370 and MH ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Algeria's tourism takes a hit after guide's beheading
Algiers, Sep 30 (IANS) Last week's beheading of a French mountain guide in Algeria has hit the tourism sector of the north African country, over a thousand tourists cancelling their bookings.
 
 
New frontier for heart failure treatment
Toronto, Sep 30 (IANS) Opening new avenues for the treatment of heart failure, a research has found how the function of a key cardiac protein changes in the case of heart failure.
 
 
Alcohol can disrupt sleep even after quitting
New York, Sep 30 (IANS) Chronic alcohol exposure can lead to disruptions in the sleep cycle, not just when one actively drinks but even years after one stops drinking.
 
 
World's fourth largest sea dried up completely: NASA
New York, Sep 30 (IANS) Aral Sea - the giant lake between Kazakhstan in the north and Uzbekistan in the south - has dried up completely, says NASA.
 
 
 

Latest from the Network

Lesotho mediation efforts to continue
Cape Town, Sep 30 (IANS) South African Deputy President Cyril Ramaphosa will undertake a third visit to Lesotho Tuesday to mediate the political crisis in the country, it was announced Monday. During the visit,...
Read more on Politics Balla
 
Algeria's tourism takes a hit after guide's beheading
Algiers, Sep 30 (IANS) Last week's beheading of a French mountain guide in Algeria has hit the tourism sector of the north African country, over a thousand tourists cancelling their bookings. Kidnapped Sep 21 in Tizi...
Read more on Politics Balla
 
New frontier for heart failure treatment
Toronto, Sep 30 (IANS) Opening new avenues for the treatment of heart failure, a research has found how the function of a key cardiac protein changes in the case of heart failure. Since 1976, researchers have known...
Read more on Business Balla
 
Alcohol can disrupt sleep even after quitting
New York, Sep 30 (IANS) Chronic alcohol exposure can lead to disruptions in the sleep cycle, not just when one actively drinks but even years after one stops drinking. Individuals with alcohol use disorder frequently...
Read more on Business Balla
 
NASA app teaches kids about rocket launches
New York, Sep 30 (IANS) The US space agency NASA has launched a new app to make children aware of how rockets are launched. The free app called "LSP Activity Book" lets kids learn about the mission planning process...
Read more on Politics Balla
 
Hong Kong chief executive urges protest stoppage
Hong Kong, Sep 30 (IANS) Hong Kong Chief Executive C.Y. Leung Tuesday urged the people to end the on-going protest over the issue of Hong Kong's constitutional development. Protests have been taking place in various...
Read more on Politics Balla
 
Elizabeth Banks joins 'Magic Mike XXL'
Elizabeth Banks has joined the cast of 'Magic Mike XXL'. 'The Hunger Games' star' has signed up to appear alongside newly announced cast mates Jada Pinkett Smith and Andie MacDowell in the stripper comedy sequel, though...
Read more on Movie Balla
 
Angelina Jolie buys £2million watch for Brad Pitt
Angelina Jolie has given Brad Pitt a rare £2 million watch as a wedding present. The 'Maleficent' actress has splashed out on the expensive gift - a 1952 Patek Philippe platinum chronometer - which has been inscribed...
Read more on Celebrity Balla
 
Phil Collins reveals extent of drink troubles
Phil Collins used to drink wine at 11am and struggled to get out of bed in the morning. The 63-year-old musician - who has a personal fortune estimated to be worth £120 million and has won seven Grammy awards - insists...
Read more on Celebrity Balla
 
George Clooney feels 'pretty great' after wedding
George Clooney feels ''pretty damn great'' after marrying Amal Alamuddin. The 53-year-old star gushed he is ''looking forward to everything'' in his life after tying the knot to the 36-year-old lawyer in Venice, Italy...
Read more on Celebrity Balla