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Wednesday, October 20, 2010

Mid-Sized Malaise

The agency world is changing faster than ever before. Some people are adapting to it beautifully and are thriving. Many are not. This begins a series of posts that will cover current issues with mid-sized ad agencies. We define mid-sized roughly as 40-120 employees and independently owned. Some of what we say will apply to companies that are smaller and somewhat larger.

Over the last several weeks, I have interviewed 43 professionals. They included agency CEO’s, creative directors, writers/art directors and media directors. On the sales side, I spoke with cable, TV and radio salespeople as well as several media research sales executives who call on mid-sized and mega agencies. Finally, I talked to executive recruiters, consultants, former CEO’s, and a few clients. The cooperation rate was over 90% and people tended to be VERY candid. I covered my tracks quite well and I doubt if you can figure out who said what. Here are my findings:

Overview

In broad terms, there are three types of advertising agencies:

1) Mega-shops (giant holding companies)
2) Mid-sized agencies
3) Boutiques


Almost everyone agrees that the mega-shops and the boutiques will always be with us. The giants are beautifully positioned for the future. If you agree with me that there will be a massive relative wealth shift from the West to the East over the next decade, the holding companies are in great shape. Most already have beachheads throughout Asia, and a major study released two weeks ago projects that Asian advertising spending will surpass that of North America by 2014.

Boutiques will always bubble up. Disgruntled writers and artists will hang out a shingle and form a firm and some people with entrepreneurial zeal just have to be their own bosses. Many small players are specialty shops that are helping greatly as we move in to a digital age. Others can grind out work quickly. It may be a bit down and dirty at times but they are experienced pros who are dependable and capable of turning out very workmanlike creative on a moment’s notice. For many small advertisers and for special projects by larger ones, these firms are essential.

Agencies in the middle are in a very different place. These shops, largely regional in nature, had several things going for them for a long time. They did not have the resources of the giants but they could give more hands on service. Clients got a lot of attention from the mid-sized players. The CEO was not someone with whom you played golf once a year, shook hands with at an agency visit, or dined with every holiday season after a new contract was signed. He or she was someone who was actively involved in your business, guided strategy, and showed up for all big meetings. If you were not a large advertiser, he might actually serve as your de facto marketing chief.

Their creative was often fresh and fit your needs. A good media team at a mid-sized shop would take the time to craft a plan that took into account your unique needs and geographic coverage.

In recent years and especially since the financial crisis, things have gone south for scores of mid-sized shops. This post and a few to follow will delve into these issues in great detail.

Let us start by looking at the situation analysis from some existing and former mid-sized agency CEO’s. Here are some remarkably candid verbatim comments from several people whom I know and respect:

“Guys in the middle with no niche in our new world have no way to stand out. They can no longer afford to hire really good people. Over the years I have learned that strong people do not like to work on crap business. If you bring someone in really good, he/she will not stay as he sees that little progress can be made. The result is that the agency business is in for a very hard time for many years to come.”

“I built this agency from nothing. For over 30 years, it has been my baby. Fifteen years ago, I dreamed of selling out to Omnicom by now, collecting big dividends and dabbling a bit here and there. Today, I am working harder than ever just to keep even. I cannot sell the place to a major shop and my staffers cannot afford to buy it. And these days, they can never get a loan from a bank to buy me out. If I let them take over and give me a note, I know that I will never get my money back. This may sound arrogant but I remain the glue that holds this place together. If I get out, the place will likely break into a few boutiques and some out of town shops will grab my two remaining big accounts. It breaks my heart.”

“I can last maybe four more years. Each year, I cut my compensation sometimes by deep five figures. A few staffers get nominal raises but most have been frozen for the last several years. I feel a bit guilty because some are trapped here. There really is no other place in this city where they can work. Several are getting past the age where relocation is a good idea. We pitch less new business of any meaningful size as the cost of pitching is getting way too high for us. And, our existing business is not growing much. We had a nice bank that was sold a few years back and our auto business has bounced back a little but is still weak. I have never been more discouraged, but I am comfortable financially. None of my staff is.”

“For years, package goods were the lifeblood of mid-sized shops. Now, most are sold to big household products companies or food processors who take the business to a New York giant. My attitude is to believe that our salvation is in maintaining great relationships with clients. That can keep you going along with never stop learning new things” (I mentioned the average marketing director lasts approximately 19-22 months and he sadly nodded. One has to re-pitch a lot of existing business and you are always struggling to build a relationship with a new player). He added that there is growing tension between digital and conventional media people. Neither knows the other's discipline so plans are often badly integrated.

“We are totally faking our digital capability. A young enthusiastic kid in media comes in to meetings and says a few buzzwords and we have a halfway decent designer whom we call our digital creative director. It is nonsense. Our clients are not all that sophisticated so, for the moment, we get away with it. We are hundreds of miles away from an advertising hub so our people do not talk with anyone. I know we need to address this soon. But say “Facebook” in a meeting and everyone smiles and nods.”

A consultant and very astute observer says: “all the mid-sized agencies say the same thing—we are media agnostic, have insights into social platforms, our team has specific skills in digital, and we do not sell. We create a conversation with the consumer”.

He goes on to say: “there was a time when agency people were the key to consumer insight. That is not true today. Insight rests almost completely with the client. The people entering advertising today are not as good as those we saw years ago. They have little business training; there is little understanding of financial structure and even operating income.” He conjured a great quote often attributed to Keith Reinhard of Needham—“At one time the agency was the architect, now they are the carpenters.”

Another chief says “Everyone thinks that they are a great negotiator. So they squeeze us on fees. Some young kid is a newly minted marketing director. He is worried for his own hide (average tenure of 19-22 months) so he puts the account into review. If we are to truly look at a fully integrated plan blending conventional and digital we need more money and more people. But someone that we are competing against drops his pants and offers to do the work for $250,000 less than we are willing to take. They get the business and the young hotshot tells his boss he saved him a quarter of a million. A year later the kid is gone and so is the new agency. We told the truth and still are out of a nice account. It is so unfair. We have tried incentive based compensation which worked well once. With private firms, they can fudge numbers and say that you did not quite hit the agreed upon guidelines for a bonus. It is hard to prove and we have been burned a few times.”


To be continued. Look for the next installment in about 48 hours.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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