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Creating Value - Issue 12

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The "Creating Value" series from Ignition Consulting Group explores how advertising agencies and other professional services firms can innovate in pricing and compensation.

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Creating Value - Issue 12

  1. 1. creatingVALUE Issue 12: 4Q creatingVALUE Does your agency need a second brand? 4th Quarter 2009 creatingVALUE
  2. 2. 3 creatingVALUE 1 Issue 12: 4Q 1 2 3 Section 1 Does your agency need a second brand? When major brands face a situation where low-cost competitors are stealing share, smart marketers don’t try to fight low-cost competition head on; instead they develop a second brand -- a “fighter brand.” Unfortunately, countless agencies are attempting to make their brands stand for two very different things. In fact, they’re operating two brands whether they know it or not. Section 2 Designing Agency 2.5 It’s been said that it’s more important to have the right questions than the right answers. What are the questions marketing commu- nications firms should be asking themselves about the future? Section 3 Another view of the perils of the hourly rate. Even among agency executives who are inclined to make the trans- formation from cost-based to value-based compensation, there is still a strong tendency to want to keep timesheets as a means of “knowing” which employees are performing and which aren’t. But consider this question: How do you know it now? Creating Value is a quarterly exploration of the ways marketing communications firms are transforming themselves to become more valuable and competitive in the new multi-channel, media-neutral marketing environment. In This Issue Published by Ignition Consulting Group, Inc. Copyright 2009, all rights reserved. creatingVALUE Page 2 Page 16 Page 12 creatingVALUE
  3. 3. Differentiating the Agency Brand 2 creatingVALUE 3 Issue 12: 4Q & Gamble are among the first of the major companies to establish their own roster of production companies with whom they have negotiated “preferred pricing.” Agencies who work for these clients are no longer able to select their own production partners, but rather must use those preselected by the client. This includes service providers in pre-production, production, and post-production. The driving force behind this change isn’t marketing, but rather the increasingly powerful function of procurement, which is operating with a mandate from the CEO to slash expenses. Behind the scenes is a new breed of production- cost consultancies such as Ernst-Van Praag, Bird Bonette Stauderman, and Adminiax Consulting Group. A recent Adweek article quoted one source as saying “The agencies are on board with this plan because they have to be. But they hate it.” The heads of production at agencies, said another source, are “just going to have to deal with it.”1 Media as competitors instead of providers On the media side, media conglomerates are now going directly to clients not only with proposed media placements, but with proposals to produce the content as well. Major marketers such as P&G, Johnson & Johnson, Kimberly-Clark, Clorox, Hewlett-Packard and Verizon have enlisted media providers not just as communications channels but also as co-creators of programs. The problem is these marketers now sometimes bypass their usual media and creative agencies in the process. “We’re going to pilot a number of different relationships where we go direct with media companies,” says Gary Recently an agency leader wrote this response to the question “What are the major challenges currently facing your firm?’ “Clients have so many more options now, and they have no trouble in locating those options. The options actually contact them. The options are local, always cheaper, and provide quicker turnaround time, so in most cases, the client feels they are a better value. Clients are also now willing to go direct to save money on printing, media, design, production, web services, and leave the bigger, more important things to us.” This no doubt sounds familiar to agencies ranging from multinationals to small independents who increasingly feel pressure from their clients to reduce costs. But the constant march toward “faster and cheaper” -- greatly exacerbated by the economic downturn -- now has a new dimension both upstream and downstream. The decoupling of production Let’s begin with the advent of “production decoupling,’ which effectively takes decisions about production away from agencies. Global marketers Reckitt Benskiser and Proctor Does your agency need a second brand?
  4. 4. 4 creatingVALUE 5 Issue 12: 4Q Elliott, VP-corporate marketing of Hewlett-Packard. As rationale, he points to the fact that media companies already have relationships with the customers HP is interested in reaching. John Harrobin, senior VP-marketing and digital media for Verizon Communications, says such relationships are becoming the rule rather than the exception for top advertisers.2 Not just competition, but perfect competition Why is all this happening? The majority of agency services now fall into the world of what economists call “perfect competition.” Perfect competition exists when the following conditions are met: ■■ The customer is in control. (This is increasingly the case, evidenced by the rise of procurement.) ■■ Excess supply. (There are 12,000 agencies in America vying for client business.) ■■ Large number of small firms. (Most of these 12,000 are definitely small firms). ■■ A homogeneous product. (While the quality and inventiveness of agency work certainly varies, increasingly clients view agency output as similar. When it comes to production, clients view these services as identical.) ■■ Total access to information. (Clients demand -- and mostly get -- very detailed information about every dimension of the agency operations and cost structures.) ■■ Low barrier to entry. (The belief that “anyone can start an agency” is largely true. It’s also true that small agencies come and go with great regularity.) Agencies have spent the last few decades worried about their upstream competition -- marketing and brand consultancies. As it turns out, downstream providers and services will be the next big challenge in the agency business. The disaggregation of agency services While the cost pressure on agencies has certainly been intensifying, disaggregation has been happening in the agency business for decades. The separation of media started the breakup of agency disciplines into specialized units for everything from sales promotion to digital. It is in fact the advent of digital that is having the most impact on the economics of running an agency. Says Damian O’Malley, partner at the UK-based strategy consultancy OSR Partners, “The question agency management should now ask itself is not what functions, departments and disciplines it is possible to offshore, but Does your agency need a second brand?
  5. 5. 6 creatingVALUE 7 Issue 12: 4Q what aspects of the agency it is essential to keep in high- costs economies.”3 In other words, agencies can and should support high-value services, but need to rethink how they handle low-value services A strength becomes a weakness The production-intensive services that historically have been an agency’s greatest strength could now turn out to be a significant drag on their margins. All of this is only made worse by the recession. O’Malley argues that there are only three ways out of such a margin crunch: 1. Renegotiate current compensation 2. Reduce staffing on the business 3. Engineer a step-change in the cost base Option 1 still deserves some effort. Agencies must continue to negotiate better compensation -- or better yet, change the basis of compensation from cost to value. But the essential problem is that clients increasingly place lower value on much of what agencies do -- those services that can be provided by a global cadre of low-cost providers. Option 2 holds little promise, as agencies are already working their staffs harder than ever while paying them the same or less, which is making the entire industry less attractive for talented people. Increasingly, the third option is the only one left for most agencies. If you can’t get a better price and can’t cut staff any further, the only option is to implement changes in cost structure. Because agencies are so strongly resisting a change in their business model, the change is being made for them by their clients, compliments of the procurement department. And because agencies are being reactive instead of proactive, all the margin improvement resulting from changes in cost structure is benefitting the client, not the agency. What’s valuable? Clients perceive as valuable those things that they can’t do for themselves, and can’t easily find elsewhere. Based on these criteria, agency services could be divided as follows: Higher Value Lower Value Strategy Execution Ideas Production Specialized Knowledge Administration O’Malley also views this question in a slightly different way, arguing that virtually every agency service has some elements that could be considered valuable in a high-cost economy, and some that would be outsourced to lower-cost providers. Some services must also be “localized” -- readily available -- and others can be “off-shored.” On this basis, OSR Partners believes the following portions of agency services could be done “off-shore”: Does your agency need a second brand?
  6. 6. 8 creatingVALUE 9 Issue 12: 4Q The fighter brand option When major brands face a situation where low-cost competitors are stealing share, smart CMOs don’t try to fight low-cost competition head on; instead they develop a second brand -- a “fighter brand.” This allows the original brand to retain its customer base and its premium price. To protect the Budweiser beer brand, the lower-priced Busch brand was launched. To protect Pampers, P&G launched Luvs. To protect the Pentium chip’s premium price, Intel introduced the lower-price lower- performance Celeron chip. 3M protected the flagship Post-It brand with the “fighter” Highland brand. This strategy is perfectly suitable for professional service firms. It’s what Ogilvy did by developing “Redworks,” a separately branded unit that exists to produce and execute the work of the higher-value, higher-price Ogilvy brand. Because a brand is the customer’s idea of a product or service, there’s really no way the brand called “Ogilvy” can stand for both high-value and low-value. Production 25-35% Administration 25-25% Account management 10-20% Account planning 10-20% Creative 5 - 10% Part of the argument for off-shoring is that sophisticated clients are increasingly operating less on a model of local relationship and more on the basis of “centers of excellence,” wherever they can find them. If you can’t get a better price and can’t cut staff any further, the only option is to implement changes in cost structure. Here’s another way to make the decision about what to keep as a core competence: when the actual cost of providing the service exceeds the perceived value, you must either outsource it or provide the service through a company with a different cost structure. Does your agency need a second brand?
  7. 7. 10 creatingVALUE 11 Issue 12: 4Q Unfortunately, countless agencies are attempting to make their brands stand for two very different things. In fact, they’re operating two brands whether they know it or not: Brand A Brand B Specialized knowledge and skills Widely available knowledge and skills Customized work Systematized work Approach tailored to each situation Repeatable process with predictable outcomes Premium pricing Moderate to low pricing Sells effectiveness Sells efficiency Almost worse than attempting to make your brand stand for two things is to launch a line extension; a “lite” version of your firm. A line extension is tempting because brand owners believe it will spare them the expense of creating an entirely new brand name. But experience shows that a line extension inevitably cannibalizes the sales of the “parent” brand. And it always produces confusion around what the brand name means in the first place. Imagine that instead of creating a separate second brand called Redworks, Ogilvy instead had launched a line extension called “Ogilvy Two.” Instead of solving a branding problem, this would only have made the problem worse. From problem to opportunity Rochester-based Partners & Napier turns perfect competition from a problem into an opportunity with what they call an “in-house outsource” approach where they create “fighter brands” for specific clients. For their client Constellation Wines they developed a unit called Vine Design. With a staff of only 17, Vine Design completes close to 2,000 projects a year. The agency has formed similar units for clients Sorrento Cheese, Bausch & Lomb, and Kodak. According to CEO Sharon Napier, “We didn’t’ want to stand by and watch our clients take that work in-house, nor was it in their best interest for us to try to force-fit it into our standard agency model. So we created a second model.”4 In this second model, there is no traditional agency “account team.” Instead, clients work directly with the people doing the work, who charge less and work in tighter time frames. The economic logic of redefining the agency business model is remorseless. The cost structure of the traditional agency simply won’t support both high-value and low-value services. Neither will the agency’s brand identify. And as procurement departments around the world have already show, if agencies don’t change, they will be changed. Does your agency need a second brand?
  8. 8. 12 creatingVALUE 13 Issue 12: 4Q 8. What’s stopping us from recommending more non- traditional solutions? What else can we do to be more channel-neutral? 9. How can we create more value for our clients in the purchase and post-purchases phases (not just the pre- purchase)? 10. How do we effectively deal with the increasingly blurred lines between advertising and PR? 11. What do we need to do to make digital part of the fabric of the agency instead of a specialized department? 12. How can we retool the production function to be more versatile and creative? 13. How can we demonstrate more accountability in our client relationships? People 1. How could we change the way we assign or organize teams to make sure we have our best people working on our best clients? 2. How can we flatten or collapse our organizational structure to provide better client access to our best people? 3. What are the disincentives for working collaboratively and how can we remove them? 4. How can we change roles or titles to better reflect what we really do? Is your firm pursuing “next practices” instead of just following the current best practices? To find out, get the senior management team of the agency together and ask these important questions. Product 1. What is the real value we need to deliver to become more relevant to our clients? 2. How can we make sure our clients are getting not only excellent brand management, but excellent brand strategy? 3. What do we need to do to extend idea generation beyond the creative department? 4. How can we break down the traditional department silos and get all functions engaged in developing cross-channel solutions? 5. What additional skills or capabilities do we need to effectively make the transition from mass communications to one-to-one communications? 6. How can we apply as much creativity to where message placement as we do message creation? 7. In a world of multichannel collaboration, who in the agency is the gatekeeper of ideas? Designing Agency 2.5
  9. 9. 14 creatingVALUE 15 Issue 12: 4Q 5. In which areas do we need the most training and professional development or add to our knowledge or skills? 6. Could we use a talent management system for both internal and external human resources? Promotion 1. How can we use social networking and social media to market our own brand? 2. What can we do to promote ourselves in a way that violates the expected and goes outside the norms of agency self-promotion? 3. How can we create news about the agency in unconventional ways? Process 1. Which agency processes create the most value for clients and how can we invest more in them? 2. Similarly, which agency processes create the least value for clients and how can we invest less in them? 3. How could we radically streamline our critical processes to deliver the same benefits to clients? 4. What can we do to remove the parts of our processes that cause client frustration? 5. How can the agency adapt to the changing nature of our work (not finite and linear, but rather infinite and cyclical)? 6. What do we need to do to make pricing more of a core competency of the agency? 7. How can we make the move from cost-based compensation to value-based compensation? 8. How could the agency profit more from its own intellectual property? Place 1. Does our current office layout and working environment really allow people to do their best work? 2. How can we improve the virtual ways in which we work with our clients (beyond conventional e-mail)? 3. What other tools or resources do we need to work more effectively with one another and with clients? 4. How can we leverage technology to further differentiate the agency and provide more value to clients? Designing Agency 2.5
  10. 10. 16 creatingVALUE 17 Issue 12: 4Q 8. The more efficient we are, the less we make. 9. Distracts agency people with the persistent pressure of billable time. 10. There’s always someone who will do it for less. A nagging concern Even among agency executives who are inclined to make the transformation from cost-based to value-based compensation, there is still a strong tendency to want to keep timesheets as a means of performing a back-end evaluation of employee performance. The argument is that without timesheets, how do you know: ■■ Who is an effective employee of the agency and who isn’t? ■■ Which department is contributing and which isn’t? ■■ Who is pulling their weight and who isn’t? The real answer is: How do you know it now? At every session Ignition leads with agency executives on the topic of value-based compensation, we ask the question “What’s wrong with being paid by the hour?” Here’s a particularly thoughtful list from a recent seminar: 1. Centers the conversation on the wrong things. 2. Promotes a transactional view of agencies. 3. Promotes doing vs. thinking. 4. Limits the quality of the work to the hours available. 5. Time tracking is a big, expensive part of agency overhead. 6. Clients usually get the upside and agencies get the downside (agencies often spend more time than budgeted, but seldom go back to ask the client for more money.) 7. Assumes a static level of “value” provided by different agencies and different agency talent. Another view of the perils of the hourly rate
  11. 11. 18 creatingVALUE Issue 12: 4Q Another view of the perils of the hourly rate As creators of Best Buy’s successful Results Only Work Environment ask: “Do you have a mechanism in place for determining if the daily work that’s being done is driving actual results, or is it assumed that if everyone is there working hard then we must be getting it right? Don’t you personally know someone who isn’t pulling their weight or who gets credit where credit isn’t due? “5 Next time you find yourself vigorously defending the value of timesheets, ask yourself: should your people be judged or rewarded based on time spent or results accomplished? Creating Value is edited for senior professionals in the marketing communications business. All content is copyrighted by Ignition Consulting Group, Inc. and may not be reproduced or retransmitted without express permission. Creating Value is published by Ignition Consulting Group, Inc., a consultancy devoted to helping marketing organizations create and capture more value. For more information about Ignition, visit www.ignitiongroup.com, e-mail info@ignitiongroup.com, or call 801.582.7297. 1 Adweek, July 6, 2009 “P&G to Agencies: Use These Production Companies” 2 Advertising Age, November 3, 2009, “The Newest Ad Agencies: Major Media Companies” 3 Admap, 2009, “Agencies need to offshore to survive in the post-digital age” 4 Advertising Age, November 2, 2009, “In-house and Outsourced Aren’t the Only Options for Your Clients” 5 “Why Work Sucks and How to Fix It” by Cali Ressler and Jody Thompson “Fighting? in the schoolyard” by dok1 - Flickr - CC BY 2.0