Sunday, November 30, 2008

The Death of the Mid-Size Agency and The Birth of Giants

Marketing, Money and More (Issue 9) 11/30/08


The New Economy
Value is the name of the game in a recession. If a company cannot provide high value, then it will not survive through 2009. Our economy has been crippled to the point where even OPEC is vulnerable.

Jumping the Curve
Guy Kawasaki (managing director of Garage Technology Ventures, an early-stage venture capital firm and a columnist for Entrepreneur Magazine. Previously, he was an Apple Fellow at Apple Computer, Inc.) speaks of a concept of "jumping the curve."



The long and short of it is that companies often fall victim to success and don't invest in the next evolution of their industry. One example Guy uses is the business of keeping food cold. Originally people had to go up to high altitudes to get ice for storing food. Then factories began to produce ice and delivered it to customers. Finally we had the home refridgerator which could freeze ice, eliminating the need for delivery. No one company survived all three stages of this evolution. Prior businesses died out and a host of new businesses emerged at each stage of the evolution. The moral is that your business is relevant one day and can lose relevance if you don't pay attention.

The Death of the Mid-Size Agency
Evolution just got a helping hand from a poor economy. Mid-size branding firms/ad agencies (30 -100 employees) thrived in the booming economy. Now faced with reduced budgets and an economy in recession coupled with a boom in online and mobile communications and you get a recipe for big change in the industry.

Not only is there an increased focus on online, but there is a resurgence in popularity of grass-roots strategies. Traditional agencies are falling victim to a lack of preparation and vision. Big broadcast buys (an area where traditional firms earn big commissions) will be scarce for the mid-size agency in 2009. Any medium that cannot be held accountable for every dollar in terms of ROI will be highly scrutinized by clients and perhaps eliminated from the budget completely.

Agency "Best" Practices
In case you were not "in the know" on common agency billing practices, then let me shed some light on what additional fees can be in your billing without your knowledge:
  • Production Management Fee - Usually 10% - 25% mark-up on all items not handled in-house (i.e. printing, subcontractors, production, etc.)
  • Media Commission - As a standard, media outlets have offered agencies a 15% commission for purchasing media. As time goes on , these agency discounts or commissions have been given directly to businesses and are much more well-known than years past.

These practices are more about "hoping the client doesn't notice" than a justifiable accounting. I have witnessed a client pay an additional $12,000 because they allowed their agency to print a direct mail piece that cost $2,500 in creative fees to create. This was a $90,000 mailing with 45,000 pieces. Had the client known, they never would have agreed to the mark-up.

Those firms that highly specialized, adapted to new technology and stayed flexible with their fee structure will have the best chance for survival.