The other day I was chatting with a top executive from one of the advertising conglomerates about the current pressing topics in the advertising industry. Executives’ top-of-mind issues center on clients’ perception of value creation by agencies, which has continue to erode over the last years. Specific symptoms include pricing pressures from a procurement mentality, increasing competition from adjacent industries such as the new digital media companies and strategy consulting firms, and a drive to the commoditization of advertising creative within the array of services offered by the advertising and marketing communities.
I recalled that in 2000 I had written an article on the future of advertising for BOSS magazine which discussed all of these issues. It is often instructive to look back at the state of the industry to gain a better understanding of where it is today and where it’s going. Here’s the article, originally published in the July 2000 issue of the Australian Financial Review BOSS magazine. What it covers seems to be just as relevant and topical today as it was seven years ago.
Chasing the Play
If a potential client goes to London advertising agency St. Lukes and asks them to go away and create an advertising campaign, they refuse. Yet last year their billings increased 64%, more than twice as much as any of the other top-20 UK agencies. “We only co-create with our clients,” says St. Lukes chairman Andy Law. St. Lukes as a matter of course works closely with its clients to result in campaigns that have been created by the joint efforts of both parties.
The global advertising industry is in the midst of a dramatic transformation, and St. Lukes is one of the agencies at the vanguard of these deep shifts. Through the 90s traditional advertising agencies were squeezed hard both by new competitors and by clients, who often saw them as providers of commoditised services. Now the dramatic explosion of media and communications driven by digital technology is resulting in massive opportunities for agencies. However only those firms that adopt new ways of working with their clients and develop new skills will be able to take advantage of these opportunities, while the less dynamic firms will struggle at best.
In my recent book Developing Knowledge-Based Client Relationships: The Future of Professional Services, I describe the difference between black-box services and knowledge transfer. A black-box service is one in which a service is rendered to clients, but they do not know what is goes on in performing it, and are literally none the wiser as a result. In contrast knowledge transfer requires rich interaction between client and supplier, usually draws on the diverse skills, experience and knowledge of both, and often results in greater knowledge and capabilities for the client, not just a service performed.
The traditional black-box view of advertising is that the agencies’ job is to go away, and in some creative miracle come up with brilliant ideas to present to their grateful clients. This no longer works, not least because in this model there is no true relationship with the client-just the briefing and final presentation. Agencies sometimes wonder why they are not getting respect from their increasingly sophisticated clients; many of them desperately need to lift their game.
Sydney’s Brown Melhuish Fishlock (BMF), established in 1996 and last year declared “Hottest Ad Agency” by BRW, endeavours to actively involve all its clients in the creative process. “If we accept that we need each other, then partnership is the only way to go,” affirms managing partner Matthew Melhuish. Based on this belief, BMF was the only agency out of eight bidding for the National Tobacco Campaign’s anti-smoking campaign that didn’t put forward creative ideas during the pitch. Instead, it acknowledged that it didn’t have the answers on its own, and presented a detailed process of how BMF would work with medical experts and researchers to conceive and develop a campaign that would have a real impact. The National Tobacco Campaign recognised the value of this collaborative approach, and the result was the highly successful Every cigarette is doing you damage campaign.
Of course a collaborative approach only works if the client is willing to engage actively with its agency. Some clients are placing strong pressure on their agencies, notably on fees, while unethical practices such as stealing ideas presented in pitches are still sometimes seen. Interestingly, the agencies that focus on collaborative approaches tend to find the most sophisticated clients. “I’ve never met a client who’s smart who doesn’t want more involvement from their agency,” says Melhuish.
What is likely to happen is a growing divide in the industry. The best agencies will be in a position to choose as their clients the most sophisticated companies that want to work in highly interactive processes, while not only will the other agencies be left with the rest of the clients, but the clients who treat their agencies as providers of commoditised services will find they can only find second-tier firms to work with them. “Clients do not always understand the implications of how they deal with their advertising agencies,” says Lesley Brydon, executive director of the Advertising Federation of Australia. “Change needs to happen on the client side as well as the agency side; we need to work together to change the culture of advertising.”
Clearly the development of digital communications is fundamentally shifting the nature of the advertising industry. The greatest paradigm shift is moving from ‘mass media’, which targets large aggregated groups of consumers, to ‘personalised media’, which allows messages to be customised to highly targeted groups or individuals, and the potential for direct interaction with consumers. This results in vastly greater complexity to branding and advertising, and the necessity of integrating brand campaigns across new and old media channels.
Creating and developing brands has always been central to the advertising industry, however rapidly increasing commoditisation driven by the Internet is making brand even more important to consumers confused by the plethora of choices confronting them. “Brand is the central organising principle of business,” notes Julian Martin, chief executive of Love.
The global advertising conglomerates such as DDB Worldwide, Interpublic, and Young & Rubicam long ago rebranded themselves as diversified communications firms, and today even small agencies are increasingly finding that ‘advertising’ fails to describe the scope of the work they do, which can include public relations, brand consulting, e-commerce implementation, strategy consulting and more. No doubt the term advertising will live on, however it is an increasingly poor description of what these firms do.
Just as through the 90s new competitors such as management consultants moved onto what had previously been the turf of the advertising agencies, the agencies are now broadening their ambit and poaching business from professional service firms in other fields. One of the key issues that agencies are encountering as they build up their online expertise is whether to apply that beyond the traditional scope of advertising. Some, such as Euro RSCG, nominated both National Agency of the Year and Interactive Agency of the year by AdNews, have decided that this is business they want.
“Our point of view is that we will increasingly compete in e-commerce,” says Euro RSCG managing director David Jones. “We have the expertise, and clients want it.” The agency’s work includes not only providing online templates for Optus’ mobile phone distributors to build their own ads within approved guidelines, but also developing online training systems for Intel and other projects that are clearly beyond the field of advertising.
It is impossible to implement online marketing for a client without encountering fundamental business strategy issues. Advertising agencies can either team with strategy consulting firms, or indeed become strategy consultants themselves. Some agencies have unambiguously positioned themselves to address their clients’ Internet strategy issues, at times putting them in direct competition with firms such as McKinsey & Co and Boston Consulting Group. While it is an obvious opportunity, it also requires not only developing a completely new style of client relationship, but also hiring an entirely new breed of executives, with an MBA almost a prerequisite for entry.
When agencies start to work with their clients in partnership relationships, pricing becomes a critical issue. How can agencies price their services in a way that reflects the value they create for clients, and aligns the interests of clients and service providers? Keith Reinhard, chairman and CEO of DDB Worldwide Communications Group in New York, is a leading proponent of ‘pay-for-results’. DDB has negotiated several major deals in which it gets paid a base fee based on its costs plus a small margin, with incentives paid based on agreed results which could include sales figures, brand awareness, customers entering shops, or other measures that reflect the client’s desired outcomes and the ability of DDB to create results.
Moving further, Reinhard says, “I want my business to become more like the music industry,” so that royalties are paid on an ongoing basis rather than a single fee. DDB has on a couple of occasions developed brands which it has licenced to clients. In a similar vein, Perth firm 303 has led the world in demanding ownership of the copyright on its creative work, and giving its clients an exclusive but limited duration licence to use the ideas.
You may think that information overload is a problem now, but it’s only beginning. Communicating messages effectively increasingly depends not just on presenting those messages to people through media, but getting them to spread them to others through word-of-mouth. This has led to a whole new field of ‘viral marketing’, which endeavours to get ideas and messages to replicate and spread in the same way as viruses. This is often implemented in guerilla PR or events rather than traditional advertising, in an attempt to create news that people will talk about. Effective implementation of viral marketing requires new skills, including an understanding of cognitive psychology and the nature of informal communication networks between people.
The future of the advertising industry will depend on how effectively practitioners can adapt and apply their existing competences in a rapidly changing business environment. The ability to create and understanding the dynamics of both old and new media are potentially incredibly valuable. In a world of ever-increasing media channels and choices, there will be an insatiable demand for content. Producing media programs may not be advertising, but it draws on the competences of the agencies, and allows them to integrate advertising into media production.
“We want to be one of the first in there,” states Rob Clarke, CEO of Leo Burnett Connaghan & May. Clarke’s vision includes applying his agency’s skills currently used in producing 30 second TV commercials to producing mini-series of 30 minute shows. They can then not only sell the shows to the TV and cable stations in direct competition to existing production houses, but also sell product placement opportunities to advertisers at the time of the show’s conception.
Leo Burnett has used online games to attract the attention of children, for example on its very successful Coco Pops site. Clarke says that they understand creating games, marketing and branding, so he sees the potential to set up an internal incubator and possibly spin off a new organisation that would focus on creating and marketing electronic games.
In a business world which is increasingly dominated by innovation and alliances, the core competences will be the creation of knowledge and ideas, and working with others to create value. The best of the advertisers are extraordinarily well placed to apply their expertise to their clients, working with them not only to help them develop ideas, but also to enable them to work more closely with their partners, clients and suppliers in creative processes. Clearly those advertisers that have come from a black-box mentality not only will find it difficult to implement this, but will increasingly struggle with their core business. However those that are effective at highly interactive client relationships based on the co-creation of ideas, and can apply these skills in new areas, will see immense new opportunities continue to unfold.