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The Ad Industry is Metamorphosing

30 Jun

dreamstime_xs_83082522It was the best of times; it was the worst of times…” Most of us are familiar with the opening line from Charles Dickens in his epic work A Tale of Two Cities. Many marketers may even consider it an apt description of both the current state of the advertising industry and the challenges that they face in sustaining brand relevance and driving growth.

Phoenix risingSo, who will marketers count on to assist them with the tasks of deepening brand engagement with core target segments, revitalizing sales and profits in a low-growth environment and in differentiating their brands for competitive advantage?

Over the course of the last few years, many have opined on the viability of the ad agency model and what it portends for advertiser/ agency relationships going forward. And with good reason. Concerns cited include threats from non-traditional competitors such as management consulting and technology firms encroaching on their turf, talent recruitment and retention challenges and margin compression due to downward pressure on fees and expanded scopes of services.

It may be as some predict that management consulting firms will leverage their capabilities in the area of strategy and integration to pirate work from ad agencies and that ad-tech providers will enable marketers to take certain tasks in-house. The question remains, how will marketers adjust to this dynamic and the evolution of their agency networks to potentially include consulting, data and ad-tech firms? There are already very real challenges related to agency stewardship today due to under-resourced client marketing staffs.

The aforementioned challenges, combined with the rate of digitization and the emerging role of artificial intelligence occurring within the ad industry, certainly pose challenges for advertising agencies and could serve to lessen their stranglehold on the marketing and advertising sector. In a recent McKinsey article entitled; “The Global Forces Inspiring a New Narrative of Progress” the authors note that “disruption is accelerating.” They opine that this dynamic is raising serious concerns for many organizations relating to the question, “How long can their traditional sources of competitive advantage survive in the face of technological shifts?”

That said, in spite of these risk factors and other marketplace developments, ad agencies are doing just fine:

  • Agency holding companies have continued their aggressive acquisition drives, supporting both their horizontal and vertical integration strategies. While overall M&A activity is down from 2016 levels, WPP and Dentsu have consummated twenty acquisitions with a combined value of $700 million through the first 4 months of 2017. (Source: R3’s “State of Agency M&A report” for January – April, 2017).
  • While down from 2016’s 5.7% growth rate, global ad spending is projected to grow 3.6% in 2017 (Source: Magna Global, June, 2017). Of note, this is higher than the International Monetary Fund’s projected increase for global GDP growth.
  • Even though 1Q17 Advertising Industry gross margins fell to 44.15%, the industry itself is healthy. For instance, within the services sector, the Advertising Industry achieved the highest gross margins, net margins, EBITDA margins and pre-tax margins for the quarter (Source: CSIMarket.com).
  • Some 86% of mid-sized ad agencies are confident that this year will be better than last in terms of profitable growth (Source: Society of Digital Agencies (SoDA) survey).

Importantly, since the demise of the “good ole days” of full-service agencies and the fifteen-percent commission remuneration model, agencies have demonstrated a unique ability to not only keep up with industry changes, but to take the lead from both a thought leadership and innovation perspective. They have been able to scale, attracting more clients and deeper talent pools, they have invested in emerging technologies to deal with increasingly complicated, data driven processes and to pioneer the use of algorithms and artificial intelligence to efficiently execute deliverables ranging from digital media investment to creative adaptations… all while dealing with evolving client expectations.

Further, it bears noting that the publicly traded holding companies; WPP, Omnicom Group, Publicis Groupe, Interpublic Group of Cos. and Dentsu, had combined estimated worldwide 2016 revenue levels of $60.7 billion (Source: Advertising Age, June 2017). When one considers the pre-dominance of the estimated billing process and agency remuneration schema that includes direct labor and overhead cost reimbursement plus guaranteed profit margins of 14% to 17% or more, one must also respect the financial clout that these publicly traded entities wield.

Is there a need for near-term belt tightening to offset softer 2017 ad spending levels? Yes. Do the holding companies need to consolidate agency brands and realign capabilities to boost the efficacy of their service delivery models and generate much needed efficiencies? Yes. Will agencies need to improve their talent recruitment and retention practices, across a diverse range of specialties? Yes. But no business is immune from these challenges, including management consultants, ad-tech platforms and publishers.

The big question the industry in general and marketers will need to assess is related to whether these players will be able to boldly transform their current business models, repositioning their firms to deliver integrated, multi-specialist services in a nimble, cost efficient, on-demand manner.

Broadly speaking, all participants are facing challenges as the ad industry undergoes its current metamorphoses. We believe that it is too early to predict winners and losers or to suggest that marketers adapt an attitude of empathy toward any of their marketing supply chain partners. After all, it is their marketing spend that has built this sector into a $457.4 billion global machine in 2017 (Source: Statista, 2017). And they must vigilantly safeguard and optimize that investment.

Below is one of the closing lines from A Tale of Two Cities, one that many may not be as familiar with:

“It is a far, far better thing that I do, than I have ever done…”

With this parting thought, Dickens’ suggests that the main character in his novel and the city of France will be resurrected, rising above their present strife and “made illustrious.”

Here’s hoping that the ad industry achieves similar transformative success.

 

 

Is the 4A’s Action on “Transparency” a “Tipping Point” for Client/ Agency Relationships?

17 Feb

Tipping PointMuch has been written about the content of the American Association of Advertising Agencies (4A’s) recently released “Transparency Guidelines,” less about the potential impact of the 4A’s decision to break rank from the cross-industry task force with the Association of National Advertisers (ANA) and to act unilaterally.

For the record, from both an advertiser and agency perspective, we believe that the guidelines proposed by the 4A’s have the potential to do irreparable harm to client/ agency relationships. The guidelines appear to driven by greed and a certain naiveté about the source of agency leverage… namely their clients’ advertising budgets. Let’s face it, in the context of a principal-agent relationship there is no logical way to rationalize a guideline which states:

The agency, (agency group and holding company) may enter into commercial relationships with media vendors and other suppliers on its own account, which are separate and unrelated to the purchase of media as agent for their clients.”

One, the notion that the potential for financial gain would not introduce a level of bias that could influence an agency’s recommendations to its clients is unrealistic. Two, pooling client dollars to use as collateral in cutting side deals with media vendors and suppliers for its own benefit is inappropriate.

From our perspective, we believe that the 4A’s and any of its members that support the association’s guidelines on transparency have made a serious error in judgment. Yet, it should be noted, that not one agency has spoken out against the 4A’s action or the composition of its “Transparency Guidelines” nor has one agency seceded from the association. Thus, one might assume that all of the 4A’s members support the position taken.

At a time when issues such as transparency, trust, talent and compensation are posing serious challenges to the length and efficacy of client/ agency relationships, the 4A’s action on the topic of transparency will not serve their members well in the long-term. Why? There are, we believe two reasons.

First of all without clients, agencies have no means for existence. On the other hand, as it stands today, some may view agencies as a luxury, not a necessity for advertisers. Without agencies, clients still have a number of options for marketing their firms, brands and products. These options range from dealing direct with suppliers that are today considered “third-party vendors” such as; production companies, photographers, content developers and curators and media owners. Additionally, one must consider an advertisers option to create in-house capabilities rather than outsource all or some elements of their advertising.

The second reason is that absent an underlying level of trust, agencies can never hope to recover the coveted position of “strategic partner” that they once enjoyed. In our opinion, the 4A’s action has relegated their member agencies to “vendor” status whose goods and services an advertiser might choose to avail themselves of, without being beholden to the agency in a meaningful way.

In Malcolm Gladwell’s book; “The Tipping Point” he suggested to readers; “Look at the world around you. It may seem like an immovable, implacable place. It is not, with the slightest push – in just the right place – it can be tipped.” Think about that statement in the context of some of the trends our industry is experiencing today:

  • Growing impact of social media in shaping consumer views and behaviors
  • Rapid expansion of programmatic media buying
  • Advances in ad technology, impacting many facets of the message creation & distribution cycle
  • Increasing prevalence of advertiser/ publisher direct relationships
  • Rise of non-traditional alternatives to ad agencies (i.e. IBM, Deloitte, Accenture)

Surely the 4A’s is aware of the aforementioned trends and the moves in recent months by advertisers such as P&G, Facebook, Google, Netflix, Expedia, L’Oreal and Wal-Mart to either move certain aspects of their advertising in-house ranging from creative to programmatic media buying; or are purported to be actively investigating “alternative models.”

Do the 4A’s and their members believe that they are impervious to such trends? What were they hoping to gain by breaking ranks from the ANA and the joint transparency task force? Perhaps more importantly, are 4A’s members prepared for the potential impact of the association’s actions? According to Mr. Gladwell:

“That is the paradox of the epidemic: that in order to create one contagious movement, you often have to create many small movements first.”

For the sake of the advertising agency community, let’s hope that their recent action on the topic of transparency isn’t the “small movement” that fuels the “epidemic” which forever tips their once favored status as trusted confidants to alternative vendors of commodity like marketing services.

Expanding Your In-House Agency?

10 Sep

in-house advertising agencyAccording to a recent survey by the Association of National Advertisers (ANA); “More companies are leaning on in-house  resources for their marketing needs in place of external shops.”  In fact, the survey showed that the “penetration of in-house agencies shot up to 58% in 2012 from 42% in 2008.” 

While there are many reasons that might prompt an advertiser to consider such a move, ranging from budgetary pressures and content ownership rights to responsiveness, “cost efficiencies” were cited by 88% of the ANA survey’s respondents.  A recent announcement from Apple reinforces this trend.  Apple indicated that it sought to bring more of its advertising in-house, hiring outside creative talent, including “senior level creatives known for innovative work” to bolster their in-house design team.  Of note, Apple indicated that this group could grow from 300 people today to over 500 in the near-term. 

While the notion of “cost savings” may sound alluring, advertisers should tread cautiously in this area.  Boosting headcount comes with its own challenges, risks and costs… some of which may be transparent and others that may be unknown.  Perhaps the first question to be asked is; “How do you know whether or not moving work in-house will yield savings?”  Validating this hypothesis would require that the advertiser  has historical information on “what it cost” to execute work utilizing their advertising agencies; a level of detail that goes well beyond agency billings, agency labor hours and bill rates, and studio rate sheets. 

As part of the discovery process for analyzing potential benefits associated with transitioning work from agencies to an in-house staff, advertisers may want to consider gathering very detailed project time and costing information..  This would include securing answers to questions such as: 

  • What are the typical project lead-times provided to the agency by the various client stakeholder groups?  What would the impact on lead times be in an in-house model?  Would there be efficiencies and and thus cost savings by adjusting the cycle?  Can this be achieved in-house?
  • What about project turn-around time parameters?
  • Does the separation between client and agency cause communication issues and re-work?  At what cost?
  • What % of the work is highly complex? Moderate?? Or Simple?  What are the costs for each category?
  • What is the cost of innovation vs. adaptation?  Should an agency relationship be maintained for one or the other?
  • What level of staff proficiency/ experience is required?
  • And MOST importantly, can creativity, and overall advertising effectiveness be continually improved in an in-house model? 

For many advertisers, this type of data may not be readily available from the project tracking and summary documents utilized by your agencies today.  

Thus it makes sense to identify the key decision making criteria which will be utilized to benchmark any efficiency gains tied to bringing work in-house.  Once identified, there are at least two avenues an advertiser can consider: 

  1. Go Forward – Amend current project tracking reporting to incorporate measures which support the aforementioned decision making criteria and monitor performance against those criteria for a pre-determined period of time.
  2. Historical – Work with the agency to conduct a review of project activity over the course of the prior 12 to 24 months to establish an historical database of information to aid the organization in preparing a “business case” for such a move. 

Depending on the timeline for the decision, the “Historical” approach may prove to be both more practical and will likely yield a more accurate perspective on organizational behaviors which can impact project costing.  

So, “Where to begin?” you ask.  It may be a worthwhile investment of time and resources to engage an independent consultant to work with you and your agency to accumulate this information.  Of note, most client-agency agreements afford advertisers access to the data necessary to conduct a thorough audit of past project costs (i.e. agency fees, time-of-staff, 3rd party invoice detail, in-house studio charges, etc…).  The key then becomes conducting a comprehensive analysis of the DATA, timeframes, time value of money, vendor costs, studio costs, labor costs, overhead costs, etc., rather than “hard copy” assessment of a limited sample set of projects, which is necessary to make an informed decision across the hundreds if not thousands of jobs initiated/ completed on an annual basis.  

Armed with a detailed, historical perspective an advertiser will be able to accurately assess if the “efficiency gains” are substantial enough to warrant a further examination of building out an in-house resource. 

 

 

 

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