Ad Agencies are Complex Businesses. New Metrics are Needed for Improved Management

The shoemaker39s children always go barefoot goes the proverb Clientfocused businesses like advertising agencies focus on their clients39 needs and often ignore their ownWhen an industry goes from simple to complex and from rich to poor the past prevails over the present and outdated metrics designed for longgone periods of simplicity and richness continue to be usedAdvertising was a simple TV radio and print business prior to 1994 Creative and media agencies were paid healthy commissions for their work agencies were wellstaffed and there was a significant history of expertise to guide creative development media planning and media buying effortsSince 1994 creativity and media have changed enormously in character and agencies have had to deal with dramatic increases in complexity for which their past experience or metrics did not provide relevant guidance1994 First banner ads1994 Amazon1996 Improvements in ROI tracking tools1998 Google19992002 Development of paid search and payperclick2004 Facebook2005 YouTube2006 Twitter2006 Development of hypertargeted digital ads2008 Global financial crisis affecting client brand growth and profitability Dramatic procurementled fee cuts and marketingled Scope of Work SOW increases2019 Digital advertising overtakes traditional advertising spendThroughout this period agencies have measured their business operations by staffcost ratios and operating marginsStaffcost ratios simply measure the percentage of staff costs versus income An agency might set a staffcost ratio target of 50 saying quotOur total staff costs cannot exceed 50 or some other percentage of incomequot Operating margin is simply income less operating costs amp8212 a similar metricThe problem with staffcost ratios and operating margins of course is that procurementled fee reductions must always lead to agency staff reductions in order to hit the metrics even if agency workloads are growing WPP under Sir Martin Sorrell was an aggressive staffcost measurer and WPP39s staffcost reductions drove WPP39s spectacular 30year share price growth through 2016 when it hit 118 per share This game got played out The stock is trading at about 40 todayAgencies need a better suite of metrics and they must include quotworkload metricsquot that measure the amount of work in client SOWs amp8212 a particular need in this era of large and fragmented SOWsFor creative agencies this simply means counting and categorizing their creative and strategic deliverables and negotiating fees based on an agreed workload In our consulting practice we developed a standardized unit of work called the ScopeMetricamp174 Unit SMU which is roughly the size of a TV origination spot All the deliverables in a creative SOW can be converted into SMUs or TV equivalents to measure the size of a total SOW A typical creative agency team of account executives creatives strategic planners and production people can complete roughly two SMUs per FTE per year amp8212 a more useful way of thinking about staffing than the staffcost ratio which ignores workloadFor media agencies which have a mix of planning buying analytical and reporting activities across a large number of media channels SOW measurement is more complicated but it is possible Here we use the Media ScopeMetricamp174 Unit MSMU which is the same size as the creative ScopeMetricamp174 Unit SMU but it is driven not by deliverables but instead by media spend media fragmentation across channels and the complexity of relationship processes which can all be measuredThe use of workload measurement gives rise to the following enhanced metricsPrice Price is simply fee divided by the number of SMUs or MSMUs It is a measure of the price per unit of work Every industry in the world measures price ad agencies need to do the same particularly to put a floor under declining prices which are today down by 23rds since the dawn of the first banner ad in 1994Productivity Productivity is output per head or SMUs or MSMUs per FTE A reasonable benchmark is 20 SMUs or MSMUs per head per year Understaffed relationships have higher numbers than this overstaffed relationships have lower numbers than this Productivity is a normal business metric that needs to be measured to ensure proper staffing Agencies need to understand and negotiate productivity levels with clientsMedia Workload Intensity WI For media agencies the number of MSMUs per million of media spend is a useful complexity metric Relationships with a high workload intensity 10 to 15 MSMUs per million of spend are highly complex relationships that are difficult to manage Process efficiency is critical Low workload intensity is in the range of 03 to 05 MSMUs per million of spend and these relationships are much easier to manage Agencies and their clients need to share an understanding of relationship complexity and process efficiencyMetric enhancement begins with workload documentation and measurement Once enhanced metrics are in place agencies can review each of their client relationships and categorize the health of each of their relationships using Price Productivity and Workload Intensity metricsThe shoemaker39s children need shoes during this complicated era amp8212 they39ve gone without for much too longAgency CEOs need to commit themselves to the development of enhanced metrics for improved agency managementPhoto credit Charles Barsotti The New Yorker The Cartoon Bank With permissionClick the social buttons to share this story with colleagues and friendsThe opinions expressed here are the author39s views and do not necessarily represent the views of MediaVillagecomMyersBizNetamp160

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Ad Agencies are Complex Businesses. New Metrics are Needed for Improved Management

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Michael Farmer

FEMA and the Ad Council Encourage AANHPI Communities to Enhance Disaster Preparedness in New PSAs - Ad Council InSites

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Ad Agencies are Complex Businesses. New Metrics are Needed for Improved Management

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