Ad industry’s new business cycle is now a ‘loser’s game’ warns top consultant

One of the most respected agency consultants in the world has said “each new business win is a loss for the industry”, and warned agencies are rapidly putting themselves out of business.

Michael Farmer:

Michael Farmer: ‘The situation is not healthy’

Speaking at the Secrets of Agency Excellence – SAGE – conference this morning Michael Farmer, who consults with global networks and independents, described the ad industry as it stands as “a loser’s game” for all parties.

Farmer, author of the book ‘Madison Avenue Manslaughter’, said the agency of the future would be one that starts from the mindset of a consultancy rather than just being the creator of campaigns.

He started the talk by charting the decline in average pay for units of work versus increase in workload for agencies, showing a graph that showed Ogilvy UK’s average pay per unit of work going from $450,000 in 1992 to just over $150,000 today.

“It’s very tough to run a creative business in this environment when your cost line is people, not machines,” he pointed out.

He pointed out that as an industry there was “no action plan to put a floor under those declining prices”.

“In the early days agencies had low productivity, but as clients started adopting shareholder value, CEOs started getting paid millions for salaries where what they really looked at was share prices, procurement cut the structure,” he said.

He added: “This situation is not healthy – declining fees, downsizing that goes with it, the uncontrolled workloads, the failure to negotiate workloads – not healthy.

“Unless agencies restrengthen themselves and have a better understanding of the relationships between fees, workloads and resources we can expect this to continue. And it has a knock-on quality.”


Farmer’s chart showing the increased productivity expectations for creatives

Pointing out that even the most creative agencies aren’t paid more than their competitors in all but exceptional circumstances, with the likes of Droga5, he said: “It’s never coming back – the conditions are not there. Back then the pay was three times as high as it was today and no-one’s going to turn that price curve around.

One has to live with the conditions as they are today in order to make money.”

Turning to new business he described the continual pitch cycle as a “loser’s game” for every party, including the clients themselves, quipping “every new business win is a loss for the industry overall”.

“New business wins are the lifeblood of agencies because they are needed to replace client losses. New business wins do not grow agencies. The hope is to at least keep things as big as they are,” he said.

“New business wins are won today at commodity prices. Whether the pitch is handled by a search consultant or procurement it’s clear when clients bring on a new agency they’re paying them less than the agency they just got rid of.”

Farmer also disabused the idea held by some agencies they can raise fees with their clients in the second year of the relationship once they had done some work for them.

“In the client’s mind they get agency, media and production fees fixed in their budget and all they have to do is manage the relationships. The workload isn’t really part of the negotiation. The client isn’t assuming it is.”

He said most clients do not understand what their scopes of work actually cost, pointing to McDonald’s which has more than tripled its content requirements on its agencies in the last two years.

Farmer: 'Everyone is a loser, the house is not winning'

Farmer: ‘Everyone is a loser, the house is not winning’

Talking about the market as it stands today he said: “Everybody is a loser, the house is not winning. The only people winning are the senior executives watching their share price rise.

“Go through the list of major advertisers and they are all very unhappy with where their brands are today – they haven’t cracked millennials, they aren’t growing and aren’t getting the right work from their agencies.”

Turning to how things could be brought back into line he said agencies needed to look at becoming “consultancies with creative capabilities”, pointing out how management consultancies generated fees at five times head costs while agencies were paid at around a 2.2 multiple.

But in order to do that agencies needed to get their own houses in order in terms of management and reporting structures, and make their group heads actually report back as to what they were actually selling into clients, and the workload expectations of it.

He counselled the audience: “Manage and measure workloads and improved remuneration will happen.

“You can do it if you set your mind to it. If we do something different over the long term and our competitors do not we can gain long term advantage.”


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