The advertising industry is facing declining prices, declining headcounts and growing workloads, which means it’s pushing more work onto its staff for less money than ever before, said Michael Farmer, author of Madison Avenue Manslaughter.
In addition, he said, the industry is shedding senior people and replacing them with junior people who aren’t qualified to solve real client problems, which is partly why clients are changing agencies more rapidly and going in-house.
This cycle is what Farmer described as a “doom loop” for ad agencies.
Farmer, who is also the executive chairman of management consulting company TrinityP3, was speaking in Sydney to a packed room of agency bosses from TBWA, The Royals, Cummins&Partners and more, following the launch of his second book Madison Avenue Makeover.
“Ad agencies are drowning in deliverables,” Farmer said, adding that the economics of advertising agencies are broken and they need to remodel how they charge for their services to survive.
Between 1992 and 2015, Farmer concluded that the average price paid for agency services had dropped 62.5%. During the same period, output per creative has risen 128%.
There are a few reasons for the disparity between price decrease and workload increase, which Farmer said largely comes back to the “Mad Men” model of advertising still being in use.
“Agencies used to make so much money on commission it didn’t need to think about keeping track of workload. It didn’t matter how much work you did because all that mattered was how much money was spent on media,” Farmer said.
“The industry developed a lasses-faire attitude about workload when it was commission based and now it has its back against the wall because the workload has exploded in volume and no one is keeping track of it.”
As well as bad habits carried on from advertising's heyday, Farmer recognises there has been major shifts in the industry that have led to the self-destruction of agencies; the end of 'agency of record' relationships, diminishing respect for agencies, commodity pricing, endless reviews, in-house agencies, depressed salaries, client cutbacks, and money and growth drying up.
“Everything we are seeing is a symptom of a business concept that worked a long time ago when the world was a different place,” Farmer said.
While holding companies could once acquire agencies to keep their bottom line afloat, Farmer said there aren’t many independent agencies left, which is leading to holding companies putting more pressure on agencies to perform.
“Holding companies are squeezing agencies that have nothing left,” he said, adding that agency margins have reduced two-thirds since the 1980s.
It wasn’t all doom and gloom from Farmer, with him predicting that there’s hope for agencies if they can adopt a better scope of work management, negotiate better fees and communicate their value better with clients.
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