Agency leaders are quick to blame all their money troubles on purchasing managers who squeeze the agency. But it’s much more complicated than that.
Procurement came late in agency relationships and, tellingly, when relationships were going through a major transition. The last two decades of the 20th century saw the gradual commodification of agencies, fueled by the rise of holding companies. When purchases began to train their eyes.
on advertising, they discovered a pretty unruly field with huge amounts of money and no backing from solid data, measurement or ROI.
In the wake of a tense environment created by the financial crisis and subsequent recession, buying has been urged to pay particular attention to cost savings in advertising. While companies have quickly transformed and adopted a more efficient and lean business model, agencies have been slow to align and have resisted the pressure to streamline.
This meant having frequent discussions about lowering agency fees between purchases and agencies, sometimes leading to acrimonious disputes.
The emphasis on negotiating agency fees adopted by many clients has not always been the most productive way to optimize the client/agency relationship. On the one hand, margin reductions are often compensated by exaggerated personnel proposals. Fee reductions may result in de facto service levels and quality reductions, but not efficiency improvements or greater productivity.
Instead of boiling the dialogue over financial relationships solely with compensation, agencies and clients should look at another, much more important area of potential savings: the agency work process.
To increase their profitability, agencies invest in human resources and technology, as well as other activities, through acquisitions. However, they often overlook the biggest source of untapped savings: their own work process, whether it’s how they develop ads, write media plans, or build a website. It is an important hidden financial asset.
There is relatively little focus on the work process despite its impact on the bottom line. We have seen cases where the efficiency of traditional agencies has been improved by up to 20%, contributing to 3.5 margin points. The savings were even more dramatic with digital agencies, where efficiency was improved by up to 33%.
These cost savings can be shared with clients while allowing agencies a high margin. It’s a win-win.
By streamlining the process, agencies may have the ability to become more agile, minimize work reviews, and speed up cycle time. A streamlined operation would result in faster expansion of their business, improved level of service and increased retention.
And, most importantly, improved efficiency has been shown to be directly linked to working more efficiently.
There are 25 “pain points” throughout the ad development process, from bad briefs and frequent revisions to redundant meetings and client billing, that limit the effective use of agency time and hinder best in class solutions. Even agencies that have opted for a less ambitious and more targeted approach than those we cite above have realized efficiency gains.
In the digital age, ROI and brand impact are increasingly becoming the defining indicators of value for marketers. Improving effectiveness now in a sustainable way will help free up resources that can be invested in activities that improve campaign performance.
I’m not against investing in people or technology, of course. But in terms of return on investment and in terms of speed of return on investment, they are much less effective than focusing on process improvement.
A more efficient agency work process will reduce the pressure to focus the financial aspects of client/agency relationships solely on agency fees. This would mean that both parties, clients and agencies, could have a more efficient business model when it comes to advertising operations.
It’s about getting everyone in the agency to focus on what they do best for the client. The ultimate goal here is to generate profitable growth for businesses. It’s not just about driving growth and generating profits, it’s also about generating profitable growth. To drive profitable growth, agencies must manage accounts profitably. To run accounts profitably, they need to deliver profitable service.
Avi Dan is the founder of Avidan Strategies, a leading agency search and compensation consulting firm.