Back to the drawing board

The traditional business model of a media agency is dying. Where as income was generally based on the amount of buying, the changing market has forced them to think again to get more money out of clients, writes Ian Quinn

Media agency bosses often give the impression that they would be willing to do anything to boost their billings, except perhaps commit murder.

Actually, there may even be one or two who you would not put that past – such has the obsession been with figures and staying above bitter rivals in the billings league.

Not that the media industry is unusual in being obsessed by figures – the difference is that the figures everyone has been obsessing about do not actually belong to them.

A £5m, £10mor even a £100maccount win certainly sounds impressive and winning accounts is still the bread and butter for every agency. But traditional planning and buying on behalf of clients doesn’t always translate into the biggest bucks.

As one agency boss admits: “In which other industry would people be jumping up and down in delight when they get to pass millions of pounds of someone else’s money on to someone else again and keep only a fraction for themselves?” Especially when that fraction is getting smaller by the day, as procurement departments put such a squeeze on agencies’ buying functions they are in danger of getting squeaky voices. The reality is that a £10m account may only be worth £200,000 in agency revenue – and a bit less in profit.

Media agencies have increasingly taken a hammering from clients over their profit margins in what has always been their biggest source of income.

Meanwhile, the likes of creative agencies, direct marketing agencies, online firms and public relations companies have continued to get bigger slices of the cake, because their businesses are not seen as such a commoditised entity.

Had media companies stood still, they would be in serious trouble as a collective industry by now and for some, the prospect of operating at a loss would surely sooner or later have raised its ugly head. But before NHS nurses start writing in to sympathise over their plight, a significant shift has been taking place in many media agencies, which is turning the balance of power back in their direction, or at least improving their balances at the bank.

While billings have still hogged many of the trade-press headlines, agencies have been changing – in structure, type of people they employ and, first and foremost, in the breadth of services they are offering.

In fact, many have altered so drastically that several big media agencies now claim to make almost half their income away from their traditional planning and buying heartlands, with staff employed likewise.

While all the big groups have created pooled buying operations to go head to head with the growing consolidation of media owners and chase after the increasing number of accounts being awarded on a cross-territory, or even global basis – at local level agencies are getting broader and more self-dependent by opening up new P&L streams.

The long list of these includes the inroads taken into fields like direct marketing, online – which instead of being dismissed by agency sceptics is now making them money – and interactive television, which cannot be ignored for too much longer before they latch on.

Then there is the money flooding in to a plethora of agency research departments from clients desperate to find out how to market their products amid a technological consumers’ revolution going on in the era of the iPod and the PVR.

Meanwhile, several of the bigger agencies have moved to take on board the ideas of strategic communications. And no longer are mainstream agencies only talking a good game about this area; they are out there doing it – often charging on a project basis for their time.

All these new areas are making media agencies far more valuable to their clients than mere buying functionaries whose only point of difference is who has the biggest economies of scale.

And it is not as easy to send in the procurement team to kick ass when agencies hold the key information clients need when it comes to selling their products.

Whether agencies have done it through pure forward thinking, or partly out of necessity, remains a point for debate. But the fact they have transformed themselves into far more diverse organisations has certainly saved them from a far worse fate as a result of the squeeze going on other parts of their businesses – and, to a certain extend at least, is transforming the agency model.

“It’s not just about generating cash,” insists Nick Manning, chief executive of OMD UK Group, who says the change has been vital for agencies.

“You don’t generate cash unless you provide a service people want to buy. We are creating new services for clients as we believe they need them and are prepared to pay separately for them.”

Diversity of capabilities

OMD boasts the likes of interactive TV specialist OMDTVi in its line up, alongside other non-traditional specialist departments in areas such as econometrics and bespoke research.

“We’re going into higher-margin areas of business and only half of our revenues now come from our standard commission system,” says Manning.

He describes this system as “very, very outdated” and these days, as well as commission, agencies are attracting an increased proportion of payments based on so-called PRFs (profit related fees).

But whenever services such as media buying can be benchmarked by clients’ auditors, they are vulnerable to the procurement squeeze.

And it is away from traditional services that agencies are catching up rapidly with their cousins in other areas of marketing.

The new fields media agencies are going into are less vulnerable because they are not based on a trading system going back 30 or 40 years, but often in areas of cutting-edge research and media thinking that only the agencies have access to.

While none of this is likely to make Omnicom any less intent on making OPera the biggest, meanest, hardest buying operation out there – or Group M or Magna for that matter – it is nevertheless a very different way of doing things from the past and should ensure that media agencies get rewarded for their creativity, not size.

“We think it’s what clients need and, from a purely commercial view, we recognise the commoditisation of the media buying process,” says Rob Norman, chairman of Mediaedge:cia, the WPP agency which also expects to soon be attracting more than 50% of its revenues from non-traditional areas, many of them in the communications strategy field.

“I have somewhere in the region of 150 people not involved in the process of media planning and buying,” he adds. “That’s 40%of my entire staff.”

There is a revolution going on, not least because the way people are consuming media is changing so fast, clients are finding it hard to keep up.

“Clients are screaming out for guidance as to how to navigate their way forward through this plethora of new opportunities,” says Manning, who says agencies are carving out a new role in areas such as the transforming nature of TV, where OMD , for example, has a department capable of doing everything from creating an interactive campaign to launching an entire channel (see previous page).

Shift in focus

“We have a much higher degree of versatility than we did in the past,” he says. “At the same time we are increasing our income and our margins.”

Areas such as sponsorship, event management and web development, have seen the proportion of money being earned by Norman’s agency away from planning and buying rise to 40%. And he says that agencies like Mediaedge:cia are now being rewarded for their creativity-and not inconsiderable investment.

Although recognising that winning accounts is a key part of the business, as an indicator of scale, especially in the ear of globalisation, Norman says such new areas will become more and more important because clients will continue to regard the sort of media planning and buying that was once agencies’ bread and butter as a commodity.

“It’s not as if they are going to wake up tomorrow and have some sort of epiphany and think ‘oh its not a commodity after all,’” he points out.

Although, understandably, agencies are reluctant to discuss the sort of money they are making in the new territories, they can hardly fail to recognise how much more profitable they are because of the value of the sort of intellectual property being developed.

Of course, none of this means that agencies are going to turn their backs on chasing account wins.

But they are becoming less dependent upon the traditional ways of making money and perhaps the importance of the billings league will eventually be a thing of the past. If nothing else, the system seems to be changing to one which rewards agencies for their time, rather than being based on who can nail the cheapest deal.

“Billings don’t indicate the scale of the company any more,” says Colin Mills, MD of Carat, who adds that the agency set out five years ago to become more diverse.

It has more than 50 people working on direct marketing alone and the same again working in digital.

“I don’t think that the client community is obsessed by billing,” he adds. “It’s quite rightly obsessed with outstanding people doing an outstanding job.”

Mills has a warning, however, for those who might view the development going on in agencies as an easy way ofmaking money.

Those, he says, who set up additional services for show, but lack substance, will soon be found out.

“An agency is only as good as its weakest link,” he says. “You can’t bluff clients.”

But maybe you can persuade them to treat your industry not as a commodity but as a vital source of information about a changing world and one that is well worth paying a premium for.

And maybe save agency bosses from a few of those murderous thoughts.

Case study:

London TV may not be one of the most-watched channels on the Sky Digital platform but it’s the only one so far to be launched by an advertising agency.

OMDtvi brought the channel to air in July having become masters of all there is to know about digital TV and interactivity.

The launch is testament to how far one of the Omnicom agency’s string of specialists has gone since its launch in 2000, coming on top of running successful interactive campaigns for the likes of Peugeot and Rimmel.

When it came to launching the channel, on behalf of London tourist board Visit London, they did the lot – from devising the concept to dreaming up the schedule.

Toby Hack, head of interactive TV at OMD, said: “In 1981 there were three channels. The whole landscape of the business since then has fundamentally changed.”

Not least, in that clients can now go to the agency for expert advice on digital and get a lot more than the general cynicism that seemed to be around many media agency offices until a few years ago, when many seemed to think digital TV was the next dotcom bust waiting to happen.

Faith in the medium has paid off for OMDtvi which, as well as working with existing agency clients, does much of its work for clients outside the agency’s list of accounts.

Hack says: “We didn’t do it so we could charge clients extra money.

We did it because an agency’s whole premise is to offer clients whatever services they need to make the most effective communications.”

Undoubtedly, however, OMDtvi has become a lucrative jewel in the crown for OMD.

As David Campbell, chief executive of Visit London, puts it: “What I like about them the most is that they don’t mess about and debate for hours on end, they just get on with it"

The Source

One of the biggest trends in media agencies over the past year has been the move to muscle in on the territory claimed by the strategic communications specialists, foremost among them Naked.

Several mainstream agencies now make big play of their strategic credentials and, when these are married with the buying clout of the major networks, an ingredient obviously absent from the independent specialists, they can be a powerful and money spinning proposition.

OMD’s The Source, headed up by former Trinity Mirror sales boss Neil Hurman, who is also managing partner at MGOMD, is one of the highest-profile attempts by the big boys to move into the territory ambushed so successfully by the likes of Naked.

Its first big initiative – entitled the Living Room of the Future – saw the company transform a room at its offices off London’s

Baker Street
into what it considers to be a fair prediction of the average consumer’s living room in the next few years.

Complete with enough PVRs, fancy mobile phones and computer technology to keep a technology geek with a box of tissues happy for weeks, the agency will also be making OMD happy if, as it hopes, it can persuade clients to pay over and above the agencies normal income stream for such insights.

Hurman has similar initiatives up his sleeve and he described The Source as “an integral part of the agency” but one which is capable of working externally on a project consultancy basis.

“The truth is we don’t belong in any box,” he says.

Certainly, if mainstream agencies can successfully crack strategic communications – and there are those which claim that being media neutral is impossible when you are aligned to a big agency group – it could not only provide them with lucrative opportunities but hammer a nail in the coffin of the specialists.

Case study: MediaCom Effectiveness

MediaCom has about 32 different profit centres, which goes to show just how much media has diversified over the years.

And such a sea change has also transformed the type of people who you are likely to find in your average agency office. No longer is being savvy and street wise the only essential quality to get on– these days you need qualifications too.

MediaCom’s fastest-growing department is its effectiveness team, which this year achieved a massive 70% year-on-year increase in income.

Using various bespoke tools to give clients information on return on investment of their media strategies, the unit attracts existing clients and consultancy work and is mostly manned by graduate boffins whose credentials would put many in the industry to shame.

“It’s a totally different skill set,” explains the agency’s director of effectiveness, Jeremy Griffiths.

“We don’t just employ statisticians. The whole point is to employ people who want to go in front of marketing people.

But they do have to have that statistical bent.

“If you rock in and you’ve done a bit of business studies, you’re not going to cut it.”

In fact, the unit describes its modus operandias “clever stuff done by clever people”, although it’s at pains to point out that all the knowledge in the world is hopeless if you don’t have the communications skills (and technology) to pass it on the clients.

Clients like Direct Line – whose sponsorship of Channel 4’s Better Homes proves it has been mightily effective – have paid handsomely for the econometrics capability offered by Griffiths and his team but, in turn,MediaCom Effectiveness claims to have saved clients over £50min the past year by helping them to optimise their decision making.

Little wonder with that sort of claims that MediaCom doesn’t keep its specialists locked up behind their own four walls but makes great play of having the resource when it sets out to win new business.

As Griffiths says: “We’re very much front of house in new business pitches.”

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