The Wolf Of Madison Ave.

Moneyball: the agency industry isn’t as profitable as it used to be.

Last week I talked about how agencies perhaps need to radically reinvent themselves. I made that recommendation on the basis of studies from both the U.S. and the U.K. by the ANA and the IPA respectively, which showed that the marketer-agency relationship is so broken, it may be time to call it quits on the current model.

The day after my post, Gord Hotchkiss added additional food for thought by delivering a sharp analysis of the problem, concluding: “What was once an agency’s strength — its position as a bridge between existing networks — has turned into its greatest vulnerability. Technology has essentially removed the gaps in the market itself, allowing clients to become more effectively linked to natural customer networks through emerging channels also increasingly mediated by technology. Middlemen are no longer needed.”

And now we throw more oil on the flames, thanks to an insightful report from U.K.-based independent accountant Kingston Smith W1 analyzing the financial performance of Top 50 agencies across a number of different agency categories.

Apparently Kingston Smith has been doing this analysis since at least 2008. I know this because the company reports, quite shockingly, that operating profit margins for all agency types are at their lowest level since 2008. The average operating profit margin for the industry is now 10.6%, while the target is 15%. (It certainly was 15% when I worked in the agency business, but that was shortly after the invention of the wheel.)

For the agency industry to slip steadily toward single digits of profit is quite astonishing. Here is how the different sub-segments of the agency world performed, from highest operating profit margin to lowest:

— Media at 15.5%
— Branding and design at 11.8%
— Direct marketing and sales promotion at 10.2%
— Digital at 8.9%

All sectors are down versus the prior year, with the exception of branding and design, which crept up a paltry 0.8%. But at least it went up. With these numbers, you can see the really quite challenging agency conundrum in a nutshell: Marketers are buying less and less brand and design work as they move away from traditional media, where the most expensive branding and design content was traditionally placed. Instead, they are spending more and more on creating and placing digital media, which costs less to make and place. So as an industry, agency groups are facing a decrease in marketing dollars in their two most profitable sectors, and an increase in their least profitable sector. That’s gotta hurt.

Which might in turn explain agencies’ interest in supplementing their revenue and profit losses by other means. And by “other means,” I refer of course to less-transparent and in some cases, downright deceitful practices like agency volume media deals, digital hocus-pocus (viewability! bot views!) and so on. It also explains why agencies are so keen on implementing automation like programmatic, since that has the potential for eliminating, or at least decreasing, their highest cost: people.

The problem with this situation is that it is clearly not in agencies’ interest to truly address marketers’ unhappiness with the invisible and perhaps sometimes even dodgy new agency revenue sources. Because that would exacerbate the problem  — and Wall Street does not look kindly on decreases in profit margin and share.

By Maarten Albarda
Maarten has lived in five countries across three continents and honed his integrated marketing communication skills at JWT, Leo Burnett, McCann-Erickson, The Coca-Cola Company and AB-InBev. He now runs his own integrated marketing consultancy in partnership with Flock Associates, and has written the book “Z.E.R.O.” with Joseph Jaffe.
Courtesy of mediapost