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Media Agencies on Edge as Management Consultants Take Aim

1 Jun

Contract SigningIt came as no surprise to anyone in the industry when Accenture recently announced the launch of its programmatic ad unit. After all, weeks before Accenture had completed the acquisition of Meredith’s digital media unit MXM. Further, over the course of the last few years many of the large management consultancies, including Accenture, had acquired creative, design, digital, CRM, Social and full-service agencies as they looked to expand their presence in the marketing services sector.

The row over Accenture’s announcement, at least within the agency community, was focused on its Media Management practice and the work that they do globally in the media auditing and agency review space. The argument proffered by agencies and their associations, specifically the 4As and the UK’s IPA, was that it was inappropriate for Accenture to provide media auditing and search consulting services and programmatic media buying due to the potential for conflict of interest. In short, the agencies expressed concern that Accenture would utilize the data that is accesses in its media management practice to inform its work in the programmatic buying area.

Many would argue that the “conflict of interest” defense raised by the agency community rings hollow. This is due to the fact that Accenture and other management consulting firms routinely implement firewalls and processes to separate and protect data from one client or practice being co-mingled or misused intentionally or not by another.

Further, the agency community has had its share of “conflict of interest” challenges in the recent past ranging from its acceptance of AVBs to media arbitrage to ownership interests in intermediary firms not disclosed to clients that have served to undermine their credibility and the level of trust clients are willing to afford them. Thus, while Accenture’s announcement may be a sensitive topic for agencies, clients will likely have little concern.

Let’s face it, the world is changing and the media landscape has become more complex thanks in large to the growing impact of technology, accelerated levels of media fragmentation and fundamental shifts in consumer media consumption habits. Marketers in particular have become more highly focused on the effective use of data and insights to better target select audiences, geographies, behaviors, etc. Thus, organizations looking to boost their performance and to optimize their marketing investment, are seeking partners that can provide holistic, objective, strategic insights to guide their decision making.

Management Consultants are well positioned to provide the requisite marketplace, competitive and consumer assessments along with strategic recommendations and tactical implementation support across the evolving marketing funnel. Global in scope, the large consultancies have hundreds of thousands of employees, serving in a variety of specialized practices that can be tapped to work with marketers in the identification of problems and opportunities and the pursuit of strategies to achieve their business objectives. The addition of programmatic media capabilities to encompass planning and buying is a logical extension of the consultants service offerings.

Media agencies were long the profit engines for agency holding companies and the onset of digital media and the meteoric growth of programmatic buying represented a boon for media agency margins. Unfortunately, revelations about certain buying practices and growing advertiser concern over the lack of transparency surrounding their digital media investment ushered in a period in which advertisers began to actively evaluate new media agency partners, tighter client-agency contracts and new digital media models. It should be noted that among the new models that advertisers have pursued has been bringing aspects of the programmatic media buying process in-house, often with the counsel and assistance of management consulting firms. These trends have allowed the consultancies to curry favor with CEOs and CMOs and to expand their toe hold in what had been space traditionally dominated by ad agencies.

Given the size of the global programmatic marketplace, measured at $14.2 billion in 2015 and estimated to be $36.8 billion in 2019 (source: MAGNA Global, June, 2016), it is easy to see the appeal for the management consulting firms in general and Accenture in specific. As an aside, the market potential in this sector dwarfs the size of the media auditing and review market by a wide margin.

The media agency community would best be served by focusing on what it can do to leverage its position of strength to protect its share of the media planning and buying business. Time spent focused on “conflict of interest” claims as a defense against incursions from consultants or other non-traditional competitors will likely garner little support outside of the agency community and will therefore not be productive.

 

 

Will the Media Industry Find Its Way?

27 Apr

agencies as media ownersThere was a time when ad agencies represented an advertiser’s interest when interacting with media sellers to secure time and or space for the conveyance of the advertiser’s messaging. The media supply chain was uncluttered, machine-to-machine buying was not even a distant thought and the roles of the various players were understood by all parties.

As the media industry has evolved, the complexities of the supply chain and the clarity of “what” each intermediary does, what they are responsible for and what they earn have sown confusion, limited advertiser transparency and eroded stakeholder trust.

One of the key drivers of supply chain complexity, and all that comes with it, has been the rapid growth of digital media in general and specifically the expansion of programmatic buying. Thus, there may be no better barometer of this dynamic than the “Marketing Technology Landscape” prepared annually by Scott Brinker. Mr. Brinker’s landscape chart incorporates the logos of each available advertising, marketing and search solution. This year’s version contains logos for over 6,800 solutions, up from 150 in 2011. That is a staggering number of ad tech and mar tech solutions vying for a slice of an advertiser’s digital media dollar.

In spite of the dramatic increase in the number of marketing technology solutions and the exponential increase in the level of data available to inform practitioners media decisions, the industry is still grappling with issues that negatively impact media performance. Issues that include ongoing limitations in attribution modeling, difficulties with omnichannel measurement, a lack of standardization in assessing audience delivery and continued concerns regarding ad viewability, fraud, ad blocking and privacy.

Many would agree that the current state of affairs is not healthy for the global media industry which totaled $500 billion in 2017 (source: MAGNA Global Advertising Forecast, December, 2017).

Marketers, who are under increasing pressure to improve performance, are clearly not satisfied with the status quo within the media supply chain, which many describe as “murky” and “inefficient.” These marketers are committed to seeking out new partners, processes, tools and solutions that can improve working media and increase the chance that each dollar they invest in media has the opportunity to positively impact business outcomes.

Media agencies, for their part are increasingly being challenged to improve both transparency and the cost effectiveness of their clients’ media spend. Sadly, many agencies have taken the stance that there is a cost to be paid for improved transparency, enhanced viewability and brand safety and believe that these costs should be borne by the advertiser. Advertisers rightly disagree with this position.

Let’s be clear. When agencies strayed from a singular focus on their fiduciary responsibility to their clients, they did so at their own risk. Their pursuit of principal based media buys, non-disclosed relationships with other commercial entities in the media supply chain (including their own affiliates) and the myriad of unauthorized, non-transparent revenue generation practices employed by some agencies netted them significant profit gains… in the short-term.

However, as advertisers became aware of these practices and began to understand the negative impact on their business this created a crisis in confidence among advertisers and lessened the level trust that they had in their agency partners. In turn, this has created opportunities for management and technology consultants to make inroads with CMO’s as it relates to their media business and incented many advertisers to begin looking at taking control over portions of their media business, including bringing work in-house.

These trends coupled with the corresponding reduction in non-sanctioned revenue opportunities resulting from greater levels of advertiser transparency have constrained agency margins. How agencies positon themselves for the future in light of the evolving competitive set, while rethinking their service offerings and charging practices remains to be seen, but will be of critical importance.

As for the ad tech sector, there will surely be a shakeout that will result in a reduction in the number of vendors (over 6,200 in 2018) providing solutions. This will be driven in part by consolidation due to the convergence of ad tech and mar tech solutions and the dominance of large players, such as Google, Facebook and Amazon. In addition, the emergence of consumer privacy protection regulatory actions and the eventual emergence of blockchain technology within the media market has the potential for significant disruption.

Clearly, there are uncertainties and challenges facing the media industry and the myriad of supply chain participants. That said, while continued change will be the norm and course corrections required, there will be winners that are able to navigate these turbulent times and position their organizations for future success.

“It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.” ~ Charles Darwin

 

Advertisers Beware: Agency Margin Optimization Efforts

19 Apr

Traffic LightIt was with great interest that I read an article on Digiday dealing with “key issues” facing ad agencies and, ostensibly, the “agency model” ranging from transparency to in-housing.

Masked behind the author’s perspective that transparency comes at a high cost was the reality that marketers remain at risk to the predatory non-transparent revenue practices applied by certain agencies.

Why? With marketers demanding more transparent ad buying practices and transitioning certain tasks and or ownership of elements of the tech stack in-house, agency gross margins are under pressure. In turn, this has created an environment where agencies attempt to make up for the margin shortfall from clients that don’t actively monitor agency contract compliance, financial management or media performance.

Of note, one anonymous agency executive went so far as to suggest that some agencies use a “traffic-light system to determine how knowledgeable the procurement teams at clients are.” This guidepost allows the agencies to assess how much margin they can make on a given account.

This certainly reinforces the reality of the old adage; “Where there is mystery, there is margin” and signals the importance for all marketers to get up to speed on both the potential benefits and the pitfalls related to their digital and other advertising investments. For client organizations, most of which do not have the bandwidth or subject matter expertise in-house, engaging an independent contract compliance or media performance auditor or consultant could greatly help to mitigate risks in this area.

In spite of the potential for efficiencies that fueled the rise of programmatic media buying, what we have all come to realize is that the costs related to algorithmic, machine-to-machine buying have far outweighed these efficiencies. One dynamic, which drives costs is the number of agent firms involved in a typical programmatic digital media buy and the fees that each charge for their role. Below is an overview of typical fees or mark-ups that are charged by those on the demand-side of a programmatic transaction.

Digital Dollar

Source: Industry Experts

As is readily apparent, the dollar dissipation that occurs between the advertiser’s initial investment and the money that actually ends up with the publisher is significant. Industry studies have consistently shown that less than forty cents of each digital dollar invested makes its way to the publisher.

To combat this trend, rightly or wrongly, marketers have focused on reducing the number of intermediaries and the fees charged by each, with the goal of improving working media ratios and ultimately the performance of their digital campaigns. Thus, the agency margin squeeze.

That said, the agency practice described in the aforementioned Digiday.com article of taking advantage of unsuspecting, less knowledgeable clients to make up for the margin lost on those that have moved to transparent buying models, is neither appropriate nor sustainable. Agencies conducting themselves in this manner may want to reflect on the words of the renowned physicist, Stephen Hawking:

Intelligence is the ability to adapt to change.”

This is particularly true given the competitive inroads being made by the management consultant and tech consultancies that are focusing on the digital media segment of the market. The best path forward for agencies is to actively engage their clients in an open dialog about mutually beneficial remuneration methodologies.

In our opinion, it is right and just to eliminate the potential for media arbitrage, non-disclosed fees, no charge media weight and volume-based rebates that often accrue to agencies, and much of the time without the advertiser’s knowledge. Further, we also don’t believe that clients are obligated to make up the gap in lost agency revenue tied to transparency reforms. That said, we are fully supportive of an agency’s right to earn a fair and reasonable profit and to have the potential for incremental gains tied to extraordinary performance.

Near-term, the best way to balance an advertiser’s quest for transparency and an agency’s ability to generate a reasonable profit will likely be a compensation schema that incorporates a base fee using a direct-labor or cost-plus methodology with an outcome-based performance incentive. This approach is particularly apropos for advertisers that are leaning toward a managed-service model. With this approach, ownership of the tech stack and or tech platform licensing agreements transition from agency to advertiser; and the agency is then engaged to oversee the digital planning, buying and ad operations chores associated with programmatic media.

Keeping Pace with the Rate of Change in Ad Industry Can be a Challenge

31 Jan

lexiconDo you sometimes wonder how you will ever keep up with the dizzying array of change that has become a constant in the ad industry? The good news is that you may not be alone in your angst. Just take a look at how industry lexicon has evolved in recent years to reflect the technological changes that the industry is dealing with and one can easily surmise why practitioners feel stressed out…

Industry Lexicon for the 21st Century

Algorithm, artificial intelligence, programmatic media buying, header bidding, second-price auctions, big data, fraud, domain spoofing, viewability, demand side platform, Pinterest, supply side platform, data management platform. Ad tech, exchange, tech stack, human marketing, voice activation, block chain technology, deep learning, managed service model, the duopoly, GDPR, hyperlocal media, ad spoofing, biometric recognition, virtual reality, winning bid log metadata files, econometrics, transparency, martech, Facebook, linear TV, Snapchat, digital content production, ad tech integration, ads.text, brand safety, publisher addressable marketplace, blackhat SEO, walled gardens, proprietary tech integration, trading desks, principal-based buying, PII-based consumer ID’s, brand safe environments, push notifications, mobile-app fraud, spoof impressions, ad networks, e-commerce analytics platform, contextual fit, attribution fraud, HULU, curated inventory, general data protection regulation, CX strategy, cyber security, white list, multi-screen viewing, bid management fees, Instagram, PAM, PII based identifiers, automated monetization, onboard connected TV, app-install, exchanges, click spam, downstream metrics, dynamic creative optimization, sustainable ecosystems, dynamic personalization, performance media platform, extremist content, audience engagement, monetization, fake followers, hard news, enterprise brands, CPI, retargeting, data controller, software development kits, mediation products, combinatorial bidding, people-based marketing, waterfalling,  trust, content recommendation guarantees, Alexa, frequency capping, probabilistic methodology, addressable IDs, over-the-top video streaming, TAG, streaming environments, cross-channel messaging, influencer marketing, direct-to-consumer brands, brand activation, experiential marketing, growth hacking, social selling, fake news, user generated content, storytelling, illegitimate traffic sourcing, private marketplaces, sandboxing, non-human viewing, synchronized nodes, decentralized ad networks, voice assistants, cross-channel attribution, verification technologies, internet of things, personalization, social search, facial recognition platforms, 3-D printing, hyper-relevance, automated buying, voice activation, first-price ad auction, AI machine learning, in-home sensors, smart re-ordering services, digital workspace, multi-channel ecosystem, native advertising, organic posts, privacy settings and controls, FVOD free-video-on-demand, clearing price, net neutrality, invisible bots, Spotify, voice strategy, audio logos, autonomous vehicles, behavioral DNA, spot cloaking…

Never a dull moment for ad industry professionals to be sure. Consider the words of the twentieth century American writer, Alvin Toffler:

“Future shock is the shattering stress and disorientation that we induce in individuals by subjecting them to too much change in too short a time.” 

The questions to be considered are; “Can the industry sustain this rate of change, without compromising its ability to deliver? Can you?” Only time will tell.

 

3 Keys to Strengthening Client-Agency Relationships

25 Jan

Keys to SuccessMost would agree that strong client-agency relationships are more conducive to achieving positive results that drive in-market performance levels which meet or exceed expectations.

Similarly, both client-side and agency executives agree that “trust” is imperative in building and maintaining a solid partnership. Thus, one could logically conclude that establishing a relationship predicated on trustworthiness would be beneficial to advertisers and agencies alike.

However, as the ad industry has evolved and grown over the last decade or so, it seems as though the ability to establish trust between stakeholders has been greatly compromised. Whether this is between advertisers and agencies or agencies and ad tech providers or between ad tech providers and publishers. While the reasons for this are many, pundits will point to the myriad of documented transparency related issues that have plagued the industry, while cynics might suggest that Agatha Christie had it right when she said: “Where large sums of money are concerned, it is advisable to trust nobody.”

As consultants specializing in marketing supply chain accountability, working with advertisers and their agency network partners, we take a more pragmatic view. We believe that trust is not elusive, that it can be earned and nourished if clients and agencies are willing to commit to the following three steps:

  1. Establish a Principal-Agent Relationship – In short, an advertiser should never have to doubt the allegiance of their agency partners or the objectivity of their recommendations. A principal-agent relationship establishes the expectation that the agency has a fiduciary responsibility to always act on behalf of and in the best interest of its client. Memorialized within the client-agency agreement, this principle is the single best means for fostering trust.
  2. Perform Independent Transparency Accountability Reviews – Actions that advertisers should consider and that agencies should welcome include contract compliance reviews, financial management audits and media performance assessments. Independent reviews of agency performance relative to client expectations and contractual performance requirements instills a certain level of discipline when it comes to governance, and provides both parties with the assurance each is acting within the guidelines of agreement and a platform in which to discuss improvement opportunities.
  3. Conduct QBRs and 360° Performance Evaluations – We are all in the communications business, yet too often client-agency communications are inadequate when it comes to strengthening the relationship. Not talking about day-to-day interactions, but dialog regarding key business strategies and challenges, performance expectations and opportunities that occurs at even the most senior level within each organization. The use of quarterly business reviews (QBRs), that involve cross functional team members and executives from both the advertiser and client organizations are a great way to ensure that both sides are focused on the business and relationship priorities established at the beginning of the year. Complementing the QBRs should be an annual performance evaluation where representatives from the client and agency are invited to provide feedback on the relationship and identify opportunities to improve processes and performance. This should then be followed by a brief meeting to discuss the results of the evaluation and come to an agreement on actions to be taken in the coming year.

Business relationships can be complex and at times difficult. In our experience, implementing the aforementioned steps greatly enhances effective levels of communication, which fosters trust and confidence, which leads to solid relationships that drive superior performance.  As George Bernard Shaw intoned: “The biggest problem in communication is the illusion that it has taken place.”

Interested in learning more about how to improve your marketing supply chain accountability for your organization? Contact Cliff Campeau, Principal at AARM | Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation on the topic.

 

Agencies vs. Consultants: What Does the Future Hold for Marketers?

24 Nov

pro vs conHave you formed an opinion yet on the battle between traditional advertising agencies and management consulting firms for marketing and advertising supremacy?

Many have, citing profound differences between these two types of professional services providers. The basis for the beliefs are centered on a range of characteristics attributed to each type of firm, including; company culture, strategic focus, business processes, talent pools, breadth of capabilities and ability to provide integrated solutions.

The question to be asked, as management consultants continue to push into ad agency territory (largely through acquisition) is; “Are the differences between these entities meaningful?” Or will the blending of these two types of firms ultimately result in a level playing field among the large agency holding companies and international consultancies?

Most pundits suggest that the differences are very real, with consultants largely grounded in a strategic focus on how to boost a company’s performance, and agency services centered on building brands by leveraging traditional media channels and touchpoints. Clearly both perspectives are valuable in their own right. Along with these differences, other complicating factors are at play that will determine the ultimate outcome.

  1. Marketers seem to be increasingly focused on improving in-market performance, which is becoming the principal means of validating the efficacy of their advertising programs. Metrics such as awareness, consideration and brand purchase intent are all well-and-good, but at the end of the day organizations are more interested in topline growth, market share expansion and bottom-line profits.
  2. There have been profound shifts in consumer purchase behavior and questions raised about the validity of the traditional purchase funnel used by marketers to map a consumer’s progression from awareness to action. In today’s digital-centric world of transacting business the path to purchase is not as linear as it once was.
  3. Research among younger shoppers suggests that marketers can no longer pre-suppose that brands matter. Certainly not to the extent that they once did. In an industry where it is projected that companies will spend in excess of $1.0 trillion on marketing services in 2017 (source: GroupM, 2016 “Global Ad Expenditures Forecast”) this is quite alarming. According to Havas Worldwide’s 2015 annual index of “Meaningful Brands” it was determined that “only 5% of brands would truly be missed by consumers U.S. consumers.” Driving this trend has been the emergence of the 75 million plus U.S. millennial target segment, whose trust in brands has been eroded as have their perceptions of genuineness and brand authenticity.

These trends may point to a larger shift, where consumer purchase behavior is more readily shaped by relationships, peer input and social influences rather than by branding. Thus the ad industry’s model of pushing brand messaging through a variety of media channels as a way of creating awareness and consideration in the hope of driving purchase intent may not yield the results it once did. It is likely that this traditional approach will be supplanted by social engagement and social selling as consumers take control of the pre-purchase learning and competitive evaluation portion of the purchase decision making process.

This could allow management consultancies to curry favor among marketers under pressure to drive performance in the short-term. The consultancies ability to offer integrated end-to-end solutions including; organizational design, transformational strategy development, user experience design, data analytics, technology support and increasingly branding and marketing expertise is considered to be quite compelling to many Chief Marketing Officers.

With so much at stake, it is certain that the agency holding companies and global consulting organizations will continue to invest in transforming their businesses to better serve marketers seeking to evolve their approach to achieving in-market success. In the words of Jeff Bezos, Founder of Amazon:

“We expect all our businesses to have a positive impact on our top and bottom lines, Profitability is very important to us or we wouldn’t be in this business.”

Will AI Render Media Agencies Obsolete?

11 Sep

artificial_intelligenceArtificial intelligence (AI) is already reshaping how advertising is developed, planned and placed. The marketing applications being envisioned and adopted by agencies, consultancies, publishers and advertisers are nothing short of remarkable.

From the onset of “Big Data” it stood to reason that the concept of predictive analysis, the act of mining diverse sets of data to generate recommendations wouldn’t be far behind. Layer on natural language processing, which converts text into structured data, and it is clear to see that “deep learning” is on the verge of revolutionizing the ad industry. As it stands, algorithms are currently optimizing bids for media buying, utilizing custom and syndicated data to match audience desires (or at least experiences) with available inventory.

Effective, efficient, automated methodologies for sorting through vast volumes of data to evaluate and establish patterns that reflect customer behavior for use in segmenting audiences and customizing message construction and delivery holds obvious promise.

So, what does this mean for media agencies? Will they be at the forefront of automation technology? Or will they be swept away by the consultancies and ad tech providers that are already investing here?

If media agencies desire to remain in control as the industry evolves, there are real challenges that they will have to address to remain viable:

  • Re-establish role as “trusted advisor” with the advertiser community. Recent concerns over transparency, unsavory revenue generation practices and a failure to pro-actively safeguard advertisers’ media investments from fraud and from running in inappropriate environments have created serious client/ agency relationship concerns.
  • Attract, train and retain top-level talent to re-staff media planning and buying departments. The focus will need to be on bridging the gap between developing, and applying automation technology and providing high-level consulting support focused on brand growth to their clients. Presently, media agencies are not effectively competing for talent, whether in the context of compensation and or personal and career development options being offered by their non-traditional competitors.
  • Provide a framework for addressing the compensation conundrum. Whether this is in the form of cost-based or performance-based fees tied to project outcomes, commissions or hybrid remuneration systems, tomorrow’s successful media agencies will need to establish clear, compelling compensation systems. These systems will need to reflect value propositions that will differentiate them from an expanded base of competitors, while offsetting (to some extent) non-transparent sources of revenue that many media shops have come to rely on in recent years.

This will not be an easy path for media agencies, particularly for those that are hampered by legacy systems, processes and management perspectives that may limit their ability to more broadly envision and ultimately, assist client organizations addressing their needs and expectations.

Either way, the race is on, as management consulting firms are acquiring various marketing and digital media specialist firms and as media agencies raid the consultancies for personnel to build out their strategic consulting capabilities. The key question will likely be, “Which business model holds the greatest promise, in the eyes of the Chief Marketing Officer, for improving brand performance?

 

 

 

Economic Growth Projections Raise Concerns for Ad Industry

25 Aug

economyAdvertising agencies are finding that organic growth will be a difficult objective to achieve in the near-term.

One contributing factor comes in the form of marketing spending constraints on the part of advertisers. Why? Organizations are feeling pressure to control costs in the wake of lack luster market conditions that are limiting growth and reducing margins.

The key economic indicator driving advertiser concern is “slow growth” which is impacting many sectors of the economy:

  • GDP growth of 1.2% during the 1st quarter and 2.6% in the 2nd quarter (short of the sustained 3%+ growth rate promised by the White House)
  • U.S. retail sales, excluding auto and gasoline, rose 0.5% in July ’17
  • Fast-Casual restaurant sales fell more than 3% in the first quarter 2017
  • U.S. automotive sales have fallen for seven straight months (Jan. – Jul.)
  • Homebuilder confidence sank, posting HMI’s lowest reading in over 6 mos.

Two CPG giants have announced dramatic moves, which reflect the nature of this challenge. Unilever signaled its intent to reduce the number of agencies on its roster by 50%, while cutting the quantity of ads produced by 30%. Procter & Gamble Co. indicated that it would trim $2 billion in marketing spend over five years as part of an enterprise wide expense reduction initiative.

It is worth noting that there are motivations beyond “cost reduction” driving these decisions by advertisers. Consider fast-food giant McDonald’s, which earlier this year trimmed the number of agencies that it works with from 60 to fewer than a dozen. Their goals included streamlining marketing and improving the consistency of their output… in addition to reducing expenses.

Unfortunately, the impact of slower spending by advertisers is being felt on Wall Street. According to an August, 24 article in the NY Times, WPP which had earlier cut its revenue forecast saw its share price decline by 10.9% in London, with Omnicom Group and Interpublic Group falling 7% and 6.3% respectively in the U.S. and media stocks are generally lower as a sector.

Interestingly, advertisers have made a conscious decision not to fuel marketing spend to counter slowing sales, but to cut spending to protect margins, which is particularly concerning to the ad agency community.

With increased competition from non-traditional players (i.e. management consulting and technology firms) and the continued fall-out from an industry transparency crisis, the lack of confidence on the part of marketers regarding advertising’s ability to drive profitable revenue growth is certainly a worry.

Whether or not this slowdown in organic growth on the part of ad agencies portends a slump, remains to be seen, but at the very least the macro-economic uncertainty will serve to increase industry volatility. Perhaps the industry can find some solace in the words of Yogi Berra the hall of fame catcher and manager of the New York Yankees: “Slump? I ain’t in no slump… I just ain’t hitting.”

 

 

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.

 

 

Has the Time Come and Gone for Digital Advertising Agencies?

28 Apr

digital trading deskWe all understand the concept of “specialization” and the potential benefit delivery for certain service providers in select industries. That said, the era of the digital media specialist agency may be drawing to a close.

Think about it, we have specialist agencies for programmatic advertising, paid search, organic search, social media, email, mobile marketing, website development, user experience, social, native and display advertising.

Why? What are the advantages that accrue to an advertiser from this level of specialization? More importantly, how many advertisers are equipped to engage with multiple media agency partners?

Integrating strategy and resource allocation decisions, coordinating roles and responsibilities and effectively managing relationships among several media agencies takes time, energy and money… assets that are tougher and tougher for marketers to come by. Not to mention, the additional costs incurred for overlapping agency services/personnel.

Specialist agencies aside, when it comes to digital media, advertisers are also contending with general market agencies, PR firms, multi-cultural, experiential and promotional agencies that are also involved with their digital marketing efforts. It is damn difficult for a marketing staff to coordinate and optimize digital communications along this many fronts, let alone integrate such efforts with an organization’s “traditional” media efforts. And, let’s face it, the task is not any easier (or cheaper) for an advertiser’s media agency-of-record to take the lead on this task and coordinate multiple disparate agencies working collaboratively and cohesively toward a common goal.

The ultimate question for advertisers may be, why take what is already a complex process and further complicate it by dividing efforts and resources across so many players?

In our contract compliance auditing and financial management practice we have seen advertisers pay a steep price for assembling agency networks that are too broad for their existing teams to effectively manage. This in turn leads to cost inefficiencies related to duplicative services and fees tied to the lack of clear role differentiation across agencies, and in turn, a reduction in working media. Say nothing of the impact on digital media effectiveness tied to communication and briefing gaps that inevitably arise in these scenarios. Perhaps there is a lesson to be learned from the words of William Blake, 18th century English poet and painter:

“The road of excess leads to the palace of wisdom”

We believe that the time has come for advertisers to give more serious consideration to streamlining their agency networks in general, and specifically to pare back the number of agency partners involved with their digital media efforts… beginning with “specialist” shops.

A great place to start is to evaluate the potential for centralizing media planning for traditional and digital media. This is a logical “first step” and will allow marketing organizations to better leverage their data, to improve their targeting and segmentation schema, enhance their resource allocation decisions and integrate all facets of their communication plans. Additional benefits from such a strategy include more collaborative and improved media briefings and streamlined communications across agency partners. Similarly, when it comes to media buying, focusing on fewer partners makes it easier to leverage an organization’s overall media spend, optimize sponsorship and value-add opportunities across media properties, and to minimize agency fees by eliminating redundant buying activities across partner shops.

Major holding company media agencies and larger independent media firms, with broad resource offerings and the scale to provide “one-stop” service certainly stand to benefit from consolidation. As do ad technology firms such as Adobe, Oracle and Google that provide advertisers with the tools to manage certain digital functions in-house. It should be noted that while the large media networks of a holding company will benefit, specialized, stand alone digital media shops within those holding companies may face challenges related to such a consolidation.

In closing, we wanted to address the topic of the “rise of the management consultancies” as legitimate competitors to traditional agencies. As it relates to media planning and placement, we believe that the large ad agencies and holding companies will retain an edge in this area for some time to come. However, vulnerability in the areas of strategic consulting and customer connectivity (i.e. data integration, user experience and system development) is where we believe consulting firms will continue to make significant inroads with CMOs as marketers seek to fulfill corporate mandates to assist in digitally transforming their businesses. As this is occurring, some agencies have announced plans to expand their resource offerings to compete with the likes of Accenture, IBM, PwC and Deloitte in this area. Realistically, at least in the near-term, agency constraints on talent and functional expertise represent significant hurdles before an attack in this area can be mounted… while concurrently defending their current base of business.

 

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