Why your next agency is likely to be a consultancy

Funny thing.  Our phones are ringing again, for the first time in a long while.  I guess this means that the great recession of 2001-2004 is finally over.  Clients are starting to wake up from the big slumber, stretch, scratch themselves, and reach for the phone.  They’re calling us and folks like us, not only to figure out where they should put their marketing dollars but also to help them find new sources of growth.  This observation has been confirmed by no less than the Harvard Business Review (HBR) which recently wrote a nice article about the merits of outsourcing certain marketing functions to folks like us.

“A discipline that was once principally creative has become increasingly analytic, as the old workhorses — print and television advertising, and direct mail — become less and less effective.”  — Gail McGovern and John Quelch, Harvard Business Review March 2005

The HBR article validates what we’ve been doing for the past 32 months, which is building a consulting practice that focuses on the chief marketing office (CMO) as the person at the company in charge of getting customer insight and using that insight as a launching pad to find growth opportunities for the business as a whole.  The HBR article is remarkable because it uses the “O” word – “O” as in outsourcing.  Turns out marketing people have always outsourced major parts of the marketing function. Who knew? Well, we did, actually.

Advertising agencies – for example – are typically hired to oversee branding, positioning, and messaging work as well as create advertising and place it in specific media. 

Agencies have long been considered strategic partners.  Unfortunately, the last 3-4 years have seen clients significantly decrease the compensation they are willing to pay their agencies.  Prior to the year 2000, a profit margin of 15-20% was the norm for an agency.  Nowadays, most agencies consider themselves lucky if they can earn a profit margin of 10-12%. 

Some of this is the agency’s own doing.  It used to be that agencies marked up the services, media and people they provided to clients by 17.65%.  Today, most of the major agencies no longer plan or purchase their own media, instead working through one of handful of media buying companies such as Carat¹, Initiative, Mediacom, Mindshare², OMD³, Starcom⁴, Universal McCann⁵, or Zenith Optimedia and give the agencies no latitude for markups.  It is as if one day agencies woke up and found that half of their revenue stream had suddenly vanished.

The other half of the agency’s fee structure is likewise under attack by clients who find themselves struggling to compete in today’s hypercompetive⁶ global market.  As a result, the 17.65% markup that use to be the norm is normal no longer.  Major clients like Microsoft and Charles Schwab typically end up paying much less than this, in the neighborhood of 10%. Nice neighborhood to be in if you are a client, but close to the poverty line if you are an agency.

To survive, agencies have to cut their costs, and anything that clients won’t pay for is gone. Most clients pay for advertising to be developed, so of course creative functions like art direction, copy writing, print production, and the like stay. Strategy was typically something agencies didn’t charge for in an explicit way.  It was a freebie. But in professional services, you are what you bill for.  And increasingly that means that agencies are firing senior staffers, particularly those whose roles were strategic, and replacing them with more tactical players who are a) less expensive people and b) spend the majority of their time managing projects vs. building strategies.  This leaves the agencies leanly staffed and profitable within the confines of a 10% markup.

Recognizing this situation for what it is — agencies are no place to go for strategy — savvy and forward-looking clients are beginning to turn to consultants to help them build strategies to accelerate growth.  One way to accelerate growth is to look at the various types of customer you sells to, their wants and needs, and how exactly your company satisfies these wants and needs.  In other words, do a needs-based segmentation.  When we do segmentation work, we rely on heavy-duty statistics, build models based on multiple variables, and make sure the segments we find are actionable from a marketing perspective.

Depending on the assignment, we may even expose various segments to different pricing scenarios to discover whether some segments are more or less price-sensitive than others.  Additionally, we’ll test different value propositions with different segments. This way, we can uncover entirely new business opportunities that the client didn’t even realize existed.  Once we find a handful of price and/or value propositions that look like winners, we will test them in market by developing an appropriate, statistically-based test-and-learn plan.  We’ll work with the client and their agencies to ensure the execution of the test-and-learn plan is “clean” and will result in data that we can use for decision-making purposes. 

Agencies would love to do this work – but they can’t, for two reasons.  First, the kind of project we are talking about is all “left brain” activity and agencies – at least the good ones – are “right brain” driven.

A few of the bigger advertising holding companies are trying to build ancillary businesses around consulting but few have succeeded.  The ad industry is still smarting from the debacle that was Ammirati Puris Lintas — a highly respected firm that hired Rick Hadala from McKinsey as its CEO — to disastrous results.  Ammirati Puris Lintas is now basically gone, disemboweled and absorbed into Lowe & Partners.⁷

People who followed the matter will tell you that the two cultures – consulting and advertising – simply did not mix. It’s hard to be creative. It’s hard to be analytic. It’s impossible to be both.

Agencies can’t do this work for a second reason — they simply don’t have the right people with the right skills standing by.  Nor do most clients.  Harrah’s has an ongoing investment in customer marketing and analytics and as such has stepped up hiring of analytically-based MBAs into its training program from 10 per year to 25 per year.  To which we say, Harrah.  GE is well known for worshiping at the altar of Six Sigma management.  As a result, all employees–not just some of them–receive hours of classroom instruction on how to collect and analyze data.⁸ (A popular saying around GE is this one:  “In God We Trust. Everyone Else Bring Data.”)

But both Harrah’s and GE are anomalies.  Most of the CMOs we talk with day in and day out don’t have a team of analysts they can rely upon.  CMOs are comfortable and know how to hire ad agencies.  They’re a lot less comfortable with hiring consultants.

Comfortable or not, the next set of resources CMOs are likely to need are not going to be found at one of their agencies.  A recent study sponsored by the ANA and Forrester Research found that CMOs are stepping up their investments in accountability, particularly when it comes to marketing mix modeling and understanding of customer profitability and valuation and for these kinds of tasks they will look to outside measurement firms (a.k.a. consultants) to do the work.⁹  The majority of CMO’s surveyed won’t be looking to outsource this type of initiative to an existing agency partner.  Doing so would be tantamount to asking the fox to stand guard over the chicken house.  Sure, you could do it.  But why take the risk?

It’s tempting to hope that you can sidestep the consulting phase and instead go directly to a technology solution.  As we learned with CRM, this is simply not possible.  No system for MRM or “marketing resource management” will make the marketing organization accountable.  Building accountability requires that you first understand what kinds of marketing activity matters at your company.  In practice, this is a lot harder than it sounds.  Considerable time and energy must be spent getting disparate types of data together in one place, integrating the data together in a useful way, and then analyzing the data to find underlying relationships and build predictive models.¹⁰  All of which sounds like – and is – a lot of work. 

 
So.  CMOs – next time you need to outsource some work, think long and hard about what kind of skills you really need.  If your needs are more analytic than creative, consider adding a consulting firm to your roster, one that specializes in customer marketing and analytics.  Our holiday parties may not be as much fun, but then again – we don’t serve rubber chicken. 

Notes

1. Unless otherwise noted, all the media buying and planning firms listed here are independent and not associated with one of the advertising holding companies. ↩
2. Part of the holding group IPG↩
3. Omnicom’s media buying arm. ↩
4. Part of Leo Burnett ↩
5. Supports McCann as part of the IPG group. ↩
6. SeeThe McKinsey Quarterly, 2005 Number 1 Extreme Competition ↩
7. Rick Hadala lasted 6 months from November 1998 to April 1999. APL was absorbed into Lowe 6 months later in November 1999. ↩
8. The Six Sigma process as applied to CRM is described here very well in this article ↩
9. Study cited is available here ↩
10. Typically, there are three types of data you’ll need: behavioral data about the customer, financial data such as revenue, contribution margin, by product purchased (to match to each customer), and marketing activity by time period and geography. ↩

Originally published on Firewhite Consulting site, 3.05.