Tag Archives: agency holding company

The Real Cost of Agency Employee Turnover

31 May

talentTalent. Whether viewed in the context of attracting, developing and or retaining ambitious, gifted employees, talent management is a major challenge for all professional service providers, perhaps none more so than for advertising agencies.

As the industry has evolved over time, the ability to attract entry-level talent has become more difficult. Agencies have reduced their on-campus recruiting presence, starting pay levels are not as competitive as other professional services firms, such as management consultants and agencies are viewed by many candidates as “sweat shops” with low pay, long hours and little loyalty.

Sadly, once a young graduate joins an agency, some of these perceptions too often mirror reality. This is often compounded by limited opportunities for training and development, in favor of a “baptism by fire” on-boarding process marked by immediate deployment onto client accounts with high expectations and demanding, results oriented environments.

The end result for advertising agencies has been an increased level of employee turnover. In turn, this lack of stability has led to higher operational costs ranging from increases in time-on-task to higher recruiting and training costs. The impact of increased agency employee turnover rates negatively impact clients. This often takes the form of higher re-work rates and the need for greater staff coverage to cover of employee inexperience and a lack of direct knowledge of the client’s business.

More significantly, many would argue that these talent issues have negatively impacted client/ agency partnerships, resulting in shorter tenures and more shallow relationships between personnel on both sides of the aisle.

For its part, the industry has acknowledged that “talent management” is a challenge that must be addressed. Given the rapidly changing marketing landscape, driven in part by a seemingly never ending stream of technology advancements, there is a clear need to expand not only the depth of the agency talent pool, but the breadth as well. The need for application developers, coders, data scientists, user-experience architects, social community managers and content curators and creators is now just as important as attracting account managers, copywriters, art directors, media planners and buyers.

By comparison, management consulting firms have been able to more successfully manage their talent pipelines, attracting the best and brightest of our university graduates, developing that talent, retaining their personnel and achieving billable rates that are much higher than their agency counterparts (or should we say competitors).

The irony is that management consulting firms have quickly morphed their business models, competing directly with traditional ad agencies. Firms like Accenture and Deloitte now provide a full suite of marketing and advertising services involving branding, attribution modeling, digital management, graphic design, social and experiential marketing to provide clients with end-to-end customer engagement support. Importantly, these firms also have the ability to readily deploy personnel within these functions on a global basis.

With an expanding set of competition including other professional services firms, technology firms, media sellers and advertisers migrating select functions ranging from their agencies to in-house solutions the challenges for agencies looking to address their talent needs will likely remain steep in the near-term. That said, given the importance professional staff play in establishing trust and credibility with clients, the growing pressure from advertisers for full-disclosure remuneration systems and the resulting need to build out agency teams and the pool of billable hours will be critical to driving top-line success.

If agency holding companies want to avoid becoming temporary staffing firms, one important element in the talent acquisition cycle is to build strong agency brands with compelling cultures that appeal to college graduates, young professionals and mid-level managers. With the multitude of agency’s within their networks, holding companies may ultimately have to consider consolidating and integrating some of their agency brands to create scale, introduce a broader range of services and to provide meaningful career development opportunities for their associates.

Beyond building compelling brands/ cultures, agencies will likely have to rethink their staff compensation programs, which over time have become very polarized, with top managers earning significant salaries and more junior personnel laboring at lower salary levels with few perks. Unfortunately, the easiest way for these folks to advance their economic status is to jump ship and go to another agency for a loftier title and a bigger paycheck. Too often this pattern is then repeated every two to three years.

This will require ad agencies to begin with rethinking entry level pay, which pales in comparison to what a college graduate can earn by going to work for another professional services or technology development firm. There is no sense in ratcheting up the on-campus recruitment effort, if an organization is not willing to back that up with a competitive compensation program.

According to a 2014 4A’s report, average ad agency starting salaries of $25,000 paled when compared to the $70,000 paid at management consulting and technology firms and $125,000 for 1st year law associates. Sir Martin Sorrell called it right in 2011 when he called the agency talent situation “criminal.” In the past, agencies were able to leverage the industry’s reputation as an energetic, forward thinking, collaborative, fun sector and the agencies themselves were thought to have engaging cultures that helped candidates look beyond compensation. Today, it is the technology companies that are viewed as having employee friendly cultures, while agencies are viewed as having more competitive, more cutthroat culture, which does not appeal to millennials.

Earlier this spring, Digiday published an article suggesting that as challenging as the competition for entry-level personnel might be, the real talent crisis was in middle management, individuals with 3 – 5 years of experience. These are the frontline troops, the doers and problem solvers. While compensation is a concern for this group, they are also looking for “more challenges” and “leadership experience.” Often times, they cannot satisfy their desires in this area at their agency and when they leave, many don’t stay within the industry.

In our experience, addressing the challenges of attracting top talent and reducing turnover in the ad business is an important component in reinvigorating client/ agency relationships, boosting the levels of trust and confidence… and the caliber of the work. We hope that agencies can make meaningful progress in this area and once again become desirable, highly coveted career alternatives for talented young people.

 

 

Turnover: Temporary Anomaly or Omnipresent Reality

26 Feb

 

 

agency compensationChief Marketing Officers come and go every twenty-three months or so. The average Client-Agency relationship tenure is thought to be around three years. So has anyone really noticed that average ad agency turnover is reportedly running between 28 – 30 percent? 

In an industry where change and upheaval have become constants, the agency talent crisis has likely not received the attention that it deserves… outside of the agency community. Clearly, this is a dynamic that agencies in general and agency HR executives specifically are acutely aware and are trying to address. After all, in a service business that is highly reliant on talented professionals with diverse skill sets to create and deliver their product, the talent challenge cuts to the heart of agency sustainability. 

During the fall of 2014, Digiday published an article entitled; “Anatomy of an Agency Talent Crisis” which suggested that entry-level salaries were one of the primary challenges in attracting college graduates to even consider a career in advertising. In light of the 4A’s annual talent survey findings, which found that “most entry-level salaries” for agency personnel “were between $25,000 – $35,000,” most agency insiders understand the challenges in attracting and retaining top tier talent. 

The question, which has not been addressed is; “Why aren’t agencies paying more to secure top college graduates?” If a capable young person armed with a college degree can earn a starting salary of $70,000 by going to work for Accenture, McKinsey, Booz & Company, Adobe, Google or Microsoft then it stands to reason that advertising agencies must close the salary gap if they hope to attract their fair share of talent. As the American inventor and businessman, Charles Kettering once said: 

“We should all be concerned about the future because we will have to spend the rest of our lives there.” 

Importantly, this is a decision which the agency community owns. Their ability to pay higher salaries to attract young graduates is not hindered by the fees being paid by advertisers. Unfortunately, many advertisers have little exposure to many of the agency “worker bees” deployed on their account, spending most of their time interacting with more senior “point people” such as account directors, creative directors or senior media planners. As such, advertisers may have little transparency into the high turnover rates being experienced within the agency community. 

That’s not to say that advertisers aren’t paying a price from a learning curve perspective, which can affect the caliber of an agency’s work or the number of iterations required to generate satisfactory outputs. 

What is intriguing when looking at the fully-loaded hourly rates being charged by agencies, is that there appears to be plenty of room to increase compensation for junior to mid-level personnel. 

There are a couple of issues which impact an agency’s willingness to free up funds to address the pay scale issue. The first is the growing salary disparity between entry-level personnel and senior executives. One need look no further than the 4A’s own 2014 talent survey, which found that in the same year in which entry-level personnel were earning on average between $25,000 – $35,000, they had an agency report a $1,000,000 base salary for a Chief Creative Director position. 

Additionally, agency holding companies are growing and require resources to fuel their expansionary appetite. This growth comes largely via acquisitions of specialist agencies and investing to support in-network horizontal integration strategies which have spawned the birth of digital media trading desks and the creation of global cross-platform production hubs

Ultimately, market dynamics will force the agency community’s hand when it comes to a reapportioning or prioritization of resources to address the competitiveness of their salary offerings. Smart agencies will move to address this issue, recognizing that the lack of success in recruiting top college graduates combined with 30% staff turnover rates, is clearly not a formula for success.

There are no guarantees. Are there?

10 Sep

profit guaranteeWhether it relates to new product launches, store openings, catalog sales or a new advertising campaign, there are no guarantees that marketers will meet with success.  No matter how sound the strategy or crisp the execution or the level of investment made to support these initiatives, there is no certainty that response rates, sales, market share or profitability results will achieve expectations.

The same can be said of an organization’s investment in marketing.  Just because a firm spends 5.0% of revenues on advertising support, the investment alone doesn’t automatically guarantee an upward move in the organization’s key indicators.  Further, there is always the risk of campaign failure, or under-delivery, which can have negative consequences on an advertiser’s bottom line. 

Despite this risk, many advertisers continue to contractually guarantee a profit margin to their advertising agency partners.   And yet, agency pundits continue to lament how “unfair” current remuneration programs are, and that the agencies don’t fully participate in the “upside” results of their clients’ demand generation efforts.

Turn it around.  If a client-side CFO knew  they could book guaranteed profits as a result of the advertising investment made by their organizations they would surely take that deal.  Further, the industry would see a steady increase in advertising spending.

Shared pain, shared gain.  As investors know, generally financial returns are directly proportionate to the risks incurred.  In light of this truism, should there be any upside potential when agencies benefit from the security of a guaranteed profit floor?  

With the move toward direct labor based compensation programs, agencies are able to recoup their sunk costs (i.e. labor, employee benefits, rent, corporate expense, etc…) and to secure a guaranteed profit margin typically ranging from 12% – 18% (excludes additional profit from in-house studio and the like).  Perhaps it is time for advertisers to begin to question the efficacy of this practice.  Don’t get me wrong.  I believe that an agency should have the opportunity to earn a profit on each of their client account, and I don’t believe that agencies should bear inordinate risks to their remuneration for items and outcomes that are beyond their control.  However, it seems that agency profitability should be more aligned with resource investments and the outcomes of their efforts.

Further, from a financial control standpoint, without the benefit of tight controls and audit oversight, a cost-plus / fixed profit margin remuneration system can inflate an advertiser’s fees as a percent of marketing spend.  Too often client-agency contracts fail to adequately define key components of agency overhead or to identify employee compensation levels, agency staff utilization and out-of-pocket cost expectations.  Beyond inadequate contractual clarity on these items, there is another factor which compounds an advertiser’s risk in this area… the lack of a disciplined process to verify actual financial performance for each of these categories.

To optimize agency fee investments and enhance transparency into this aspect of advertising spend, there are three items that an advertiser can include in their letter-of-agreement (LOA):

  1. Comprehensive definitions of key remuneration program components and examples of how various factors will be calculated.
  2. Quarterly reconciliation process for agency fees, time-of-staff investment and billings.
  3. An advertiser’s “Right to Audit” clause and an “Agency Records Retention Policy.”

Successful optimization hinges on a commitment to actually following through on the right to audit, whether through the advertiser’s Finance/ Audit team or by engaging a 3rd party agency contract compliance auditor. 

To kick off the process, we would suggest an open dialogue and information exchange between client and agency to discuss profit expectations and to review those items which impact agency costs and client fees.  This conversation should take into account a client’s total spend with the agency and its parent company, which offices the client’s account is serviced from, agency employee compensation, retention & training philosophies and the agency resources that will be brought to bear on the client’s business.

In the end, it is in each parties best interest to develop an agency remuneration program that incents an agency to deliver superior performance, recognizes an agency’s resource investment and where there is a shared investment in market-based performance stemming from the client’s and agency’s efforts. 

If you would like to gain the benefit of what we’ve learned through first-hand experiences and would like to schedule a complimentary consultation on “Client-Agency Contract Trends,” please contact Don Parsons, Principal at Advertising Audit & Risk Management at dparsons@aarmusa.com.

4A’s Conference Debate Not Healthy

9 Mar

Intriguing article in Advertising Age on the musings, or should I say public rants, of some agency executives coming out of the 4A’s conference. Are the views voiced by this select group of executives indicative of others in the industry?  If so, this year’s 4A’s conference is likely to have a negative impact on client (and employee) perceptions of the industry.

If select agency leaders aren’t proud of their shop’s work product or staff talent levels or feel that the agency holding company model stifles creativity then they should address these issues in a constructive manner. Blaming clients for their woes and publicly slurring advertiser procurement professionals is certainly not going to address their internal housekeeping issues Read More.

How Will Madison Avenue Fair in the Future?

19 Nov

how will madison ave fare?For an industry that has long prided itself on its ability to adapt to change the future will prove interesting for the advertising industry.  Technology driven trends ranging from dynamically generated behavioral driven ad generation to media fragmentation and dramatic changes in consumer media consumption have ushered in a number of changes that must be dealt with during this time of marketing convergence.

Perhaps the most fundamental change is that the industry’s “old” communications model of intrusive media talking at consumers is waning in relevancy in a world where user generated, user shared content forms the basis of a dialogue among consumers’ and between consumers and brands.

How will agency holding companies and individual agencies structure themselves to deliver services? What services will they offer?  Will there be room for specialist marketing services providers or will we see the re-emergence of the full-service agency (or agency holding company)?  How will compensation practices evolve to reflect the structural changes that are occurring within this market?

While change creates challenges, it also generates opportunities for advertisers and agencies alike. Those that grasp the strategic relevance of the rapidly evolving landscape will emerge as thought leaders and will have an opportunity to establish distinguished positions for their firms. As George Bernard Shaw the Irish playwright and co-founder of the London School of Economics once said:

“Reasonable men adapt themselves to their environment; unreasonable men try to adapt their environment to themselves. Thus all progress is the result of the efforts of unreasonable men.”

Where will your firm fall on the progress continuum? The following Fast Company series on “The Future of Advertising” provides a thought provoking look at what’s next for the advertising industry Read More.

 

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