In this episode, GALE CEO Brad Simms and author of “Madison Avenue Makeover,” Michael Farmer, discuss the flailing agency business model, the challenges and opportunities agency leaders are facing today, and the keys for developing successful relationships with clients in an evolving market.

They discuss:

• (1:28) Historical shifts in the agency business model
• (5:44) Commodification of work and rethinking scopes
• (9:00) What’s exciting about leading an agency today
• (14:30) How holding companies have contributed to industry challenges
• (23:45) Keys to building successful relationships with CMOs
• (27:18) Performance metrics vs. long term brand growth

We’ve included the full transcript of the conversation below for easy reading, plus have a listen on Amazon, Apple Podcasts, Audible, iHeart, Spotify, Stitcher, TuneIn, or wherever else you get your podcasts!

TRANSCRIPT

Brad (0:39)
Knowing that we were chatting today, Michael, I did a little Googling on your first book, “Madison Avenue Manslaughter,” and it’s interesting. I think it was really a critical book that helped a lot of ad executives kind of reframe where agencies sat in the arc of development. Whether it was major flaws around remuneration, or scoping, or a variety of other kinds of challenges. I think it would be great just to start there. It was 2017, I know you've done a few updates there, but could you take us back to that moment and just share with me and share with our listeners here: What were those highlights that you uncovered back then?

Michael (1:28)
Well, I wrote the first draft, or the first edition of the book, Brad, came out in 2015. And by that time I had been consulting to ad agencies and their clients for about 25 years. I felt that I had accumulated a lot of experience in seeing so many different things between 1992 and 2015 that were relevant and needed to be shared because, you know, just giving PowerPoints to small audiences, or to individual agencies, wasn't really getting the message out.

I think the key finding of the book, and of course, in my own consulting experience, was that with all the changes that had occurred in the industry, and most particularly, the change from media commissions to labor-based fees on the one hand – and then after 2004, the incredible fragmentation and expansion of scopes of work to take into account digital and social advertising – the one thing that was a feature of the industry is nobody was keeping track of how much work they were doing.

It was almost as if we were remaining back in the commission era where you didn't have to worry about the work, you only worried about how much which clients are spending on media to figure out how much income you were going to get.

But, of course, as soon as things shifted in the 90s, almost 100% to labor-based fees, then you had to say, “Well, if we're being paid by the head or being paid by the hour, how much work are we doing for what we're being paid?”

And no one had really made the transition from the commission era to the fee era by saying, “We have to start keeping track of scope of work.”

So, as a consultant, for me to understand agencies, I, of course, had to develop an understanding of what the workloads were, how much fees they were being paid, and how many people they were putting against it. And I realized that every year, the fees were coming down and the workloads were going up – which equates to a declining-price business.

And I was thinking, when I wrote the book “Madison Avenue Manslaughter” in 2015, I was trying to describe a business that was a very rapidly-declining price business that was being dealt with through downsizings of people – in a way, through a liquidation of talent. And I just thought: that might work in the short term, but it isn't a good long-term strategy. So that was the message that I was trying to get out.

Brad (4:30)
It's interesting, last week, I had the opportunity to attend the Forbes CMO Summit and one of the conversations that was happening there was around: Is there a view across the c-suite that creativity drives growth for businesses?

And as I listened to you kind of walk through it, that kind of logic chain, one of the things that occurs to me – and I jotted it down here – is it almost feels like we're commoditizing the agency/client relationship.That's what happens, I think, when we view something as a commodity. Then we start to really focus on the price, and we start to drive that down, but want more out of it – whether it's my toothpaste or my laundry detergent.

Do you think, as you've spent time in and around the space, that the c-suite generally believes that creativity drives growth? And if they do, how do you think that they right those two ideas,  which is really a commoditization of what they're buying versus the idea that creativity can or cannot drive growth for businesses?

Michael (5:44)
Well, I definitely think that highly creative work should drive growth for businesses. There's no question about it. But I think that there are other things going on that leaders of agencies haven't considered. Let me give you just one simple statistic.

When I analyzed my first client back in 1992, it was still sort of the commission era. It was TV, radio, print. The agency had 50 creatives and they were doing about 360 deliverables a year – all original work, you know, TV, radio, print. And the average creative was doing 7 deliverables per year, if you do the math. In 2019, I did a study of a different office in the same agency and the average creative was doing 311 deliverables per year. In other words, from 360 for 50 creatives to 15,000 for 50 creatives.

And so I don't think it was management that was commoditizing the business, I think the scopes of work have become commodity. Because if a creative is doing 300 plus deliverables a year, that's one per day, and that is not receiving a lot of scrutiny from executive creative directors. You just argue that that's kind of factory work; that's kind of just getting the stuff out the door because there are Instagram things to be done, or online videos that have to be placed, et cetera. And there's not a lot of thought behind them, we just have to fill the pipeline.

So I think that it isn't to creativity that we need to look – it has more to do with what kind of work does a client need to drive sales, and is that part of the equation when scopes of work are being put together?

And I don't actually think there is enough attention placed on: What kind of deliverables do we really need to move a specific brand that has specific circumstances? Instead, I think that many of the people that are designing scopes of work at the clients are just thinking, “Well, we've got to be represented in all media types because maybe we'll find something that works.”

I just don't think there's enough brain power behind that.

Brad (8:33)
So, I mean, you’ve spent a lot of time, you recently published a new book, “Madison Avenue Makeover,” right? Which is, I suppose, a different take – kind of a longitudinal advancement from the first one. What do you think the draw is to folks that are in agencies, running agencies? Because it sounds like a little bit of a grinder of a business.

Michael (9:00)
Well, it is a grind of a business, but I think the untapped opportunity is if you – let's shift away from the agency world and think about the advertiser world. Advertisers have had a tough time of it themselves since everything shifted from digital to social. If you look at publicly quoted major advertisers, the top 50 advertisers, 20 of them actually did not grow at all – did not grow their sales, in real terms – between 2009 and 2022. And in fact, the economy grew by about 36%, at least that's what GDP figures would show, that the economy grew by 36%. But 20 of the top 50 advertisers in the country actually grew at less than 1%, which meant that they were shrinking in physical terms.

So, I think that the excitement of being in any service business is helping clients solve problems. And I think that any new chief executive who wants to take over an agency and reposition it – we need to be in the business not of promising creativity in the hope that creativity delivers results. We need to be in the business of promising that the work we do is designed to deliver results. And we will muster our creativity and our technology and our ability to put together scopes of work that have that gold. In order to do so, we need to understand the nature of the problems that the brands have in performing in the marketplace, that's very specific.

Those are problems that – those are the kinds of problems that consulting firms have traditionally focused on. I know because I spent the better part of 15 years at Boston Consulting Group and at Bain & Company. And I know that whenever we got involved in a new engagement, our first port of call was to understand what does the client need in terms of improved performance. I don't think that's where agencies have been for the last 20 years or so. I don't think that they start on a new engagement by thinking, “We need to understand the brand performance problems so that we can put together scopes of work that will make an impact on their performance.”

So I still think that that is an untapped opportunity and, ironically, the fact that clients have been so aggressive in cutting fees over the last few years, I think, is not the source of a problem for agencies. I think it's the outcome of the fact that they're not growing.

I don't think the market has really been tested in the digital and social era. I don't think it's been tested by having an agency stand up and say, “We're going to commit to improving your growth rate. We're going to pull together all the capabilities that we have, we're going to take an active role in designing scopes of work, and we think that we can actually do that if we both understand that's the mission.”

So I think the only thing to be discouraged about in the way things are operating today is the way agencies have run their business. They don't have a client-centric mission around performance. They do have a mission around delivering creativity, but without there being any promise of improved performance. And I don't think they take an active enough role in designing scopes of work. I think they pretty much service the scopes that clients put in front of them.

Now, by the way, I'm speaking for everyone except GALE because I know that you run a very different business. In fact, you run the kind of business that I'm talking about. But very few people do, Brad – you know what the rest of the industry is like and the fact that they downsize every year.

Agencies can't afford to lose clients and then try to get into the business of being great at client development to replace the clients that go away every 3 years or so.

I think agencies have to commit themselves to saying, “We want to work for you forever and we're going to earn the right to do so, and we're going to use all our capabilities to help you perform better.”

That has been the formula of the consulting firms, but they can't do what agencies can do at all because they're not in the communications business.

Brad (14:03)
Do you think that a little bit of the way that agencies are structured, in the way that the holding company structure has come out, is problematic in the mix here? Or do you think that's an irrelevancy in this outcome? Do you think that's just an organizing construct and not necessarily a contributing factor to the challenges agencies have?

Michael (14:30)
Well, I think holding companies have been a real problem. I'm not saying that they're wrong, but holding companies came into existence – IPG came into existence in the 60s and with agencies that were public – but the others really started to flourish in the 80s and I think what WPP did under Martin Sorrell, at the time, was brilliant because Martin, having been a finance director at Saatchi for a number of years, knew that agencies were very overstaffed coming out of the commission era.

In fact, he knew that agencies could run much leaner than they did and the only reason that they were so overstaffed coming out of the commission era was that they didn't want either their shareholders or their clients to know how colossally profitable they could have been under the commission system. So what agencies did was they staffed up, they had double the number of people they really needed so that they only had to show a 15% margin instead of the 30 or 40 or 50 that they could have. And his concept for WPP was, I'm going to buy these overstaffed agencies, I'm going to cost reduce them, because they can afford it, that will drive up my share price and therefore, WPP will flourish, and so will I as a major shareholder.

Now, by 2005, the surplus resources were gone – and that was true for everyone. And yet the holding companies continued to use downsizing as their principal strategy and that's what they do today. So, that's where I hold the holding companies guilty; I think a continuation of downsizing strategies to make their numbers has crippled the talent, has crippled the quality of the work, so that now relationships don't last as long as they used to. And it gets harder and harder every year for agencies to do a good job when their job number one, for the holding company, is to make their numbers.

They could have recognized that they were a force that could have helped their agency subsidiaries deal with the pricing problem that they had to help them change their mission to help them become more consultative, to train them how to put together better scopes of work that would actually deliver improved results. So I think that holding companies could have played a major role in helping agencies transform, but I don't think that that has been the case.

So yeah, I hold them pretty guilty. And I think it's tough for any agency that's owned by a holding company to want to go in a different direction than making the numbers for the holding company as their job number one.

Brad (17:50)
Yeah, I mean, it's really interesting because one of the things that consulting firms do a great job at is they really align the c-suite around the mission. So they might be selling it to the CEO, but they're working with the CCO, they’re working with the CFO, they're working with the CMO, et cetera. And I think that, at their best, the consultants are basically creating a north star and creating alignment.I'm not saying there's not friction there, but they have a capability to do that.

And it's interesting because I think one of the things the holding companies have done, and frankly, marketing agencies have done to themselves, is by creating fragmented offerings, they really move themselves down the funnel, right? So there's not a holistic marketing partner. You have a CRM partner, and a PR partner, and a media partner, and then you have the creative partner, right? And back in the day, a digital partner, right? And now you might have an influencer partner.

And so I think one of the challenges in getting upstream and really committing to driving growth is agencies don't have the holistic offering to then align the c-suite around the growth agenda because they are just one component of nine that the CMO needs in order to make that outcome happen.

And so, from a function that specializes in communications, one of the challenges is we've really created fragmented offerings that makes it difficult to be that partner, that then makes it difficult to have performance-based or different pricing arrangements, because you're just one of nine agencies that the CMO needs to bring in order to achieve his mandate. And so then that makes it difficult to drive that alignment across the c-suite when you're just one of nine.

So it's a really interesting challenge when you do watch how the consultancies – whether the BCGs, the Bains, the McKinseys – bring a holistic package and then traverse the most senior parts of the organization to really get alignment and then drive to outcomes. And it's not always perfect – I mean, we've definitely seen that struggle occasionally also – but the model is just so radically different.

Imagine if the consultancies set up turned into: You have your spreadsheet folks over here, and you have your quant folks over here, and this agency is just a qual agency. Then, over here, I have my modeling agency. They would lose their gravitas in the conversation if McKinsey only did quant and business modeling and BCG did qual and supply chain considering. They would lose that holistic offering that aligns to driving growth. And I think that that's one of, I think, the interesting things that's happened over the last 20 to 30 years in the agency space that frankly has really hurt the relationships of agencies with brands. But, when it happened, served the holding companies really well in a short-sighted way because it allowed them to charge premiums for multiple different offerings. And it's like short-term has impacted long-term in a way that's making it very difficult to right.

Michael (21:08)
Oh, Brad, I think you absolutely put your finger on a fundamental difference. You know, I remember Bill Bain taking us off for a weekend retreat and saying, “Whatever capability our client needs in order to fulfill their growth agenda, we have to provide. And we have to get good at M&A.”

And it put a lot of pressure on us as partners to figure out how we were going to get good at things that we knew absolutely nothing about. But it was definitely a corporate strategy.

Now, let's fast forward. Let me come back to WPP, because Martin Sorrell wrote about this in the 2003 annual report. He wrote in the annual report that agencies that have a certain discipline – like those that are good at TV, those who are good at below-the-line stuff, etc. – love doing what they're doing and can't be expected to diversify into all of the new offerings that are coming forward. That's why clients have holding companies.

And in effect, in making a decision that his job was not about encouraging agencies to diversify in order to have the full media offerings in the different disciplines that clients might need to do marketing in the post-digital era – he was saying, you can just come to the holding company and we can give you everything. We can cobble together these different agencies. At the same time, each of those agencies is being measured on their profit performance and so they're competing with one another for the client’s revenue stream. I mean, you know, they didn't even have the motivation to actually work together because the financial motivation was to get as much of the revenue they could for themselves and at the expense of the other people that were working in the relationship.

So I think there were choices made, very important choices made back around 2004 when digital and social started to come in, and when the holding companies started offering holding company relationships, that absolutely doomed agency relationships to be highly fragmented, as they are today, rather than holistic, Brad, as you suggested is the right way to go.

Brad (23:45)
It is interesting. You know, I hear this, I heard this last week a fair amount, and I have an add-on which is: an opinion is not an insight. And further, a data point is not an insight. You know, coming up with an insight requires interest and time, right? You talked about that insight. And it's interesting for me because when I have an opportunity to meet a potential new client, usually it's a CMO. I have a few questions for them. I'm like, “What are the three to five items that are on the growth list of the CEO and the board this year?”

That’s the first question I ask them. And you would be surprised how many CMOs can't really off the top of their head answer that. And then I ask them, “How does what you're doing right now connect to that?”

So, how does the initiatives you have on your plate connect to the CEO and/or the board's agenda for growth for the organization? And a lot struggle with that.

And it's interesting because if you come full circle, every great relationship has two sides; you have an agency and you have a client, right? There's always two parts to a relationship. A relationship is never a single person.

And when I think about this and, as I mention, I was at this conference last week, and folks were talking a lot about the churn of CMOs and how their one of the shortest tenured c-suite. And in a room with potentially the 50 best CMOs in the world, they're operating in a little bit of a bubble because there's thousands and thousands of CMOs out there that frankly are not in that room. And I would say that in the idea that in order to create something great, it is a relationship. It requires a great agency that is often part of a holding company that has its head on straight. It also requires a client that understands what growth for their business is and how what they're doing connects to it – even if it's a brand, even if it's a Super Bowl commercial, if it's a Roblox concert, or if it's a search campaign. You need to be able to connect what you're doing to the short and the long term growth agenda of the company.

And I would say on the CMO side, often a lot of folks haven't sat down and really thought about that. When they thought about that and the idea that there's two parts to a relationship, they can bring that to the agency that then can change that growth conversation we talked about up front. I'm often surprised how many folks on the marketing side arent dialed into that conversation.

Michael (26:10)
Well, I wonder if, I mean it raises the question, whether the CMOs got seduced by all the marketing choices that began to exist after 2004/2005 and were under pressure to demonstrate that they were, quote, “relevant” – you know, yeah we're moving into search, yeah we’re moving into we're doing Instagram, we’re doing Facebook, we're doing Yahoo, we're doing everything – whether they didn't get seduced into that without thinking, “What is it that we really need to do so that I, as the CMO, am just as engaged as the CEO is in being concerned about long-term growth and profitability.

And I think you're right, if the CMO is disengaged or is not part of the team that worries about long-term performance, then certainly the people, and their team – and the teams are very fragmented too – well they're not going to be directed in the right way either. So you have kind of everybody worrying about just doing what is possible as opposed to doing what's right.

Brad (27:18)
You know over the last – 2009 to 2022, I think you said 2009 to 2022 – kind of the explosion of the social, and the advancement of all the media options out there, you know, I think one of the things that has also happened is the word “performance” has kind of gotten twisted a little bit, and we think about performance culture. So we think about very lower funnel media, that's very connected to performance actions, and I think that that's an important part of the mix, but I think a lot of CMOs and brands have over indexed on that.

And so the challenge with that is it works until the day it doesn't. And then you realize you haven't taken a long-term brand perspective on the world. And, you know, a percentage of your media has not been growing your brand. You've just been dumping it into that lower part of the funnel. And so, I think that's a catch-22 that a few of the CMOs are caught in today, which is they've grown up in this performance culture, which is good because we want to perform, but let's not confuse performance culture with driving long-term growth for the business because I think performance has to be a component of it, but growing brand and long-term LTV with customers also has to be a part of it. It's a more complicated mix, I think, then some appreciate and so you know the CMO has the toughest job potentially they've ever had to do in today's market.

Michael (28:39)
Yeah,well you're right about the performance thing and “performance marketing” is meant like sales promotion, or something of that sort. And when we talk about performance, we think about it with a big P, which is the performance of the brand in the marketplace, the market shares, the pricing, its overall growth. And the funny thing is, that the real heroes in advertisers are not CMOs – they’re the finance people that are busy doing all the financial manipulations that allow share price to grow even if sales is not growing.

I'm astonished when I look at public figures, I mean I'm talking about publicly quoted figures, and you look at sales growth over a long period of time, the last 13 years, but sales growth is low and yet share prices triple during this period. So the finance directors are increasing the dividend, reducing costs, doing share buybacks, changing the debt to equity ratio; they're doing all kinds of things to make the earnings per share grow. And the procurement people are stepping up to the plate by focusing on cost reduction everywhere they can to reduce margins. And unfortunately, marketing, which has not proven its value, becomes a target for that cost reduction and that's why agency fees both in media and in creative have come down so dramatically. They've been coming down at about, you know, at about 5% per year, real, over the last 30 years, at a time when the scopes of work are continuing to grow.

So, when I put my old consulting hat on, I'd say, the real untapped potential is to make a hero out of the CMO by getting them refocused on what needs to be done. And that probably means a simplification of the scopes of work, focusing scopes of work – we probably don't need to be in every single media. And, you know, manufacturers learned this lesson some time ago, that the way…that reducing complexity is a way of reducing costs and improving efficiency across the board. And I certainly know from my work with both creative agencies and media agencies that the complexity of what they have to do for their clients has been an absolute cost killer.

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