New Models; Old Realities

23 January 2015

A common refrain from every passing marketing director and journalist is the need for the agency business to come up with a new business model. Sometimes this is expressed as amazement that the industry is still sticking to what’s described as ‘the old model’; sometimes the critics just keep repeating ‘need to reinvent’ over and over again whilst accessing their mental thesaurus.

For one thing, to suggest that agencies haven’t changed is absurd. It wasn’t that long ago (in industry time-scales) that we had full-service agencies charging a flat 15% commission.

First the flat commission rate went, then media broke away and we had media independents, still largely paid on commission and focussed almost entirely on media buying.

Now we have media agencies – looking nothing like the old model and I would guess generating the majority of their income from fees as opposed to commission.

So there has been change.

Sadly though the old realities keep butting in. And it’s largely the responsibility of advertisers that this is the case.

Many advertisers still, and I know it’s dangerous and probably misleading to generalise, see advertising as a cost as opposed to an investment. The IPA has done brilliant work, but speak to your average CEO, or CFO and this view still remains disappointingly widely held.

The media agencies have made great strides in terms of reinventing themselves and now offer a far fuller range of services than ever before. But where they have so far at least not succeeded is in shrugging off the old ‘media buyer’ descriptor. This is significant as it implies that ‘all’ they do, and certainly all they do that is worth paying for is buying.

Media agencies have failed to convince the mass of clients of the value of planning. This matters as planning is essential (all agree), and so it has to be paid for somehow. And that’s where we move into the world of kick-backs, rebates, and more recently digital deviousness.

If anyone doubts the evolution of the old model then a look through the holding companies’ public statements is instructive. This good piece from ID Comms quotes from the 2013 WPP Annual Report: “The Group receives volume rebates from certain suppliers for transactions entered into on behalf of clients”. It may not be new, but it’s now official.

The trouble is that even though clients may be aware of this principle, they’re generally not aware of the extent, nor of the practical benefit (or cost) to them. Making money in a less-than-transparent way is unsustainable. Clients soon find out what’s going on; and there are enough irritating consultants, and bloggers around to elucidate those that may not be clear. And once the whistle is blown, the agency is commercially on the back foot, having to justify something that might have been acceptable had they only come clean about it in the first place.

The first casualty in any model built around a lack of financial transparency is objectivity. How is the client to know whether or not the recommendation made by the agency is made from the stand-point of an objective advisor, or as a reseller?

It’s still January and so I think I’m still allowed to make a New Year wish. Wouldn’t it be great if the media agencies came together to illustrate the real influence and benefit of great planning, as the creative agencies continue to do via the IPA? And I don’t mean making the case to each other at awards ceremonies, but in the Boardroom of their clients.

And wouldn’t it be great to see advertisers acknowledge the value brought by their agencies’ planners by collaborating in the building of a new payment model within which objectivity took centre stage, and all buying was transparently focussed on delivering to the plan? Agencies would need to play their part in this new paradigm by not making money through arbitrage, and agreeing that any upfront buys are made to satisfy client requirements as opposed to meeting holding company short-term financial targets.

Clients for their part would need to face up to the financial imperatives that exist within their agencies. If money can be paid for services delivered, and if some of the crazy payment terms around can be rooted back in the reality of how agencies pay their suppliers then we might even get a new and better model, based on new realities.