At a highly-attended agency conference this summer, a well-aged agency founder next to me lamented, “I’m old enough to remember back when it was about the magic, the creative, not the money like it is today. This business just isn’t the same. Now it’s all about finance.”
Our industry has plenty of headline-grabbing woes these days. Neanderthal executive behaviors, the ANA transparency investigation and ongoing brouhaha, dizzyingly frequent agency reviews, aggressive procurement organizations squeezing the last dollar, and the flight of talent to other industries – all talked about over and over.
But this grizzled agency vet mentioned our real problem, the one that nobody is talking about – how and why our business lost its way. What he’s talking about is a seismic shift several decades ago – quite possibly before you were part of advertising – that turned many agencies into de facto financial instruments.
As the surge in TV ad spending pumped billions of dollars into the advertising business in the Sixties and Seventies, many agencies went public. Suddenly they faced shareholder demands for higher valuations, which meant laser focus on margins. When shares soared, it triggered the acquisition binge that created today’s holding companies. When publicly traded agencies were acquired it was often at high multiples that required keen cost-cutting and sales focus. Likewise, when privately held agencies were purchased, it often included aggressive “earn-out” clauses that also emphasized increasing free cash flow and other key financial metrics.
To maintain top-line revenue and bottom line margin growth, agencies added oversight. Extra management became layers, at one point reaching a mind-numbing manager to talent ratio greater than 1:1 – that’s at least one manager-type per talent-employee.
That ratio has diminished slightly with time, but still hovers around 1:2 for big agencies. Stacked with managers, large-agency organizations resemble financial services companies more than creative enterprises.
Having finance as a focus can have an insidious effect on behavior. The “non-transparency” and “rebate” scandal sounds a lot like Wall Street, with its history of highly motivated people crossing the lines to engineer financial results.
Finance-oriented companies also strive for predictable results, like maintaining revenue with incremental margin gains. In advertising, that’s a recipe for mediocrity. Roger Enrico, former CEO of PepsiCo, once pointed out that our enemy is the “tyranny of incrementalism” – the belief that somehow dramatic results will come about from undramatic actions. Advertising was built on greatness that comes from inspiring talent to bust the norms, not managing it to make a number.
Advertisers recognize this instinctively. Three of the top five things that matter to them in an agency, according to a recent study by Advertiser Perceptions, are talent-based: ability to execute, quality of talent, and attention to needs.
Now smaller agencies without financial engineering legacies are changing the landscape by focusing on the fundamentals.
For example, LaneTerralever, Starr Conspiracy and Elite SEM keep their management ranks lean, with a manager-to-employee ratio between 1:5 and 1:8. With fewer managers, nearly everyone does the work rather than manage the money. Teams have to talk and work with clients directly.
And amazing things happen. These agencies’ client and employee satisfaction ratings (50+ client and 80+ employee Net Promoter Scores) eclipse industry averages. Not surprisingly, happy teams and clients generate better financials as well. Much better.
The shift requires a change of focus, one that that old agency exec would applaud, I expect. Do great work, make sure your people love doing it, and you will improve people’s lives and your bottom line.
Let go of the account-centric model where managers craft narratives to excuse failures and keep the romance (read: revenue stream) alive. Our increasingly-savvy clients bridle at these saccharine stories and the here-and-then-gone pitch teams. Enduring success comes from empowered and engaged teams working directly with clients to create the unexpected.
In advertising, inspired work creates money in ways money can never inspire. The real way for agencies to resolve their client and finance problems is to return their focus to what really makes a difference – the creative teamwork that generates breakthrough advertising results.