The Agony of the Agency (I)

Advertising agencies now confront business challenges that go beyond the cyclical downturn in marketing and advertising expenditures. They face several trends that will force a restructuring of the advertising business and the way agencies operate.

At a recent industry conference a leading advertising executive (predictably) called on agencies to "redefine" and "reposition" themselves. Bob Schmetterer of Havas admitted that clients "don't trust agencies to make strategic business decisions." Nonetheless, he maintains that agencies must move "beyond advertising" and help clients with "core business strategy". (Ad Age 4-14)

He wants the advertising profession to be known for something more substantial than Super Bowl commercials.

It is true that agencies need to reinvent (not just reposition) themselves. They are not held in high esteem by clients. Recently Du Pont decided to use an on-line reverse auction to select a new agency. This suggests that Du Pont thinks advertising work is a commodity service like lawn mowing rather than a professional service like strategic consulting.If other clients follow suit agency margins will shrink.

Ian Brookbanks of Chicago's Roscoe Group, in a letter to Ad Age (4-28) made several telling points on the matter. He noted that agencies are making "the assumption that your problems and your customer's problem are the same." There is no evidence that clients lack for strategic advise givers. Nothing suggests that client executives are begging agencies to step into that role.

As noted, the problem for advertising agencies is pressure on margins in their core business-- producing advertising. The choice faced by each agency comes down to this:

1. accept that they produce a commodity service and restructure internal operations accordingly. That way they can still make a profit on lower margins.

2. Focus on being a great and effective creative agency so that they can justify their higher fees. (This might require that they adapt a different compensation system, one which pays them based on bottom-line results).

Time spent "repositioning" the agency is just wasted time. No matter how impressive the presentation, clients are not going to believe an ad agency is better at strategy than McKinsey. At present most agencies do not have the intellectual capital for strategic work and developing that capital is expensive.

Those Super Bowl ads did one thing fairly well; they showed that clever TV ads are neither necessary nor sufficient to business survival (compare Google to Pets.com). In light of that lesson, simply justifying the value of advertising and doing good ads is enough work for almost any agency.