How Do Ad Agencies Rekindle Revenue Growth?

How big is the problemamp160 According to my research 2004 was the last year that creative agencies were paid fairly by their clients for the amount of work in their Scopes of Work SOW and for the number of Creative Production Client Service and Strategic Planning people required to do the work at an acceptable level of qualitySince 2004 industry fee levels have declined by 26 in constant dollars and Scopes of Work have grown by 34 as measured in ScopeMetricamp174 Units or SMUs which harmonize the sizes of the different types of deliverables in a SOWamp160 These are average industry figures derived from my consulting experience and researchThe combination of declining fees and growing SOWs has been a deadly oneamp160 Price which is mathematically income divided by workload has declined by an alarming 45 since 2004 in constant dollarsamp160 Put another way the price for agency services is only 55 of what it was in 2004 The gap between workloads and fees is enormousAgencies of course have dealt with this by holding back on salaries and headcount growthamp160 The most telling fact is that agency creative headcounts have grown on average by only 11 despite the 34 increase in SOW workloadsamp160 This means that the average creative is more junior and very stretched in 2017 and this cannot be a good thing for agency creativity or qualityamp160 It has certainly accelerated employee turnover in the creative departmentHolding companies should note these figures and reconsider their strategiesamp160 Holding company profit growth cannot be maintained by continuing to squeeze agencies for lower costsamp160 Muscle rather than fat has been squeezed out for the past 13 yearsamp160 Further reductions of agency operations will only enfeeble agencies and encourage clients to invest further in their inhouse agenciesHow then does any agency CEO turn this around put a floor under prices and rekindle agency growthamp160 The most obvious step is to rethink remuneration and agency contracts especially for new clients to assure that agencies are paid for the work they do rather than for some client guesstimate of agency manhoursamp160 Is this an astonishing conceptamp160 Forget about quotvalue pricingquot or other sophisticated remuneration schemesamp160 Get paid for the workamp160 That would be a good startIf quotbeing paid for the workquot had been the policy from 2004 to the present agencies would have seen fees that grew in proportion to workloads less any quotdiscountsquot that may have been provided to meet competitive pressuresamp160 If workloads were growing at 23 per year according to my research but agencies had to discount their prices by as much as 1 per year they would have grown their fees by 18 in constant dollarsamp160 On an annual basis that amounts to 13 compounded annual growth in constant dollars or at least 24 per year in current dollarsamp160 This would have permitted investments in additional headcountsWhat is required as a first step is for agency CEOs to say quotWe can39t ignore our growing workloads any longeramp160 Across our agency as a matter of policy we will document measure and negotiate our SOW workloads in a uniform way as the basis for our feesamp160 Account Heads will be responsible and accountable for this their performance will be transparent and reviewed and corrective action plans will be put in place where workloads exceed feesquotamp160 CEOs need to establish this agency policy and roll out an offtheshelf SOW management system with an SOW metric like the SMUThe benefits of this should be obvious First agencies will be tying their remuneration to growing workloads and putting a halt to declining prices and headcounts Second agencies will develop a heightened awareness of what is actually in their Scopes of Work and it is hoped begin to recommend SOWs that have a high probability of delivering improved brand resultsamp160 Third account heads will become more accountable and motivated to run their clients in a responsible wayamp160 This is sorely needed there has been too much scope creep and unpaid outofscope work over the past decade or twoEvery journey begins with a single stepamp160 Agencies embarking on the makeover path need to begin by documenting measuring and negotiating SOW workloads in a uniform way as the basis for feesamp160 That39s the first and most logical step to rekindle revenue growth and halt the erosion in agency capabilitiesCartoon credit Mike Twohy The New Yorker The Cartoon Bank With permissionClick the social buttons above or below to share this story with your friends and colleaguesThe opinions and points of view expressed in this content are exclusively the views of the author andor subjects and do not necessarily represent the views of MediaVillagecomMyersBizNet Inc management or associated writers

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How Do Ad Agencies Rekindle Revenue Growth?

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Michael Farmer

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