Advertising Technology

The Elephant in the Room: Agency Compensation

pych260Earlier this month, during the Agency-Only Day at the iMedia Agency Summit, I gave a presentation on agency automation and streamlining the media planning process. It’s a complicated and expensive process still done manually at most agencies. It’s a process that’s clearly ripe for automation and the seventy media executives in the room were all in vigorous agreement that modern media planning tools can bring huge productivity benefits. So, I was feeling great about my presentation because it clearly resonated with this group of experts.

However, at the end of my presentation, one digital media veteran who will remain anonymous raised his hand and said, “There’s an elephant in this room. I’m going to ask the question that everyone is thinking but is afraid to ask: do we really want to be more productive? After all, we get paid for our time and the slower we work the more we get paid.”

He was talking about the standard practice of “cost plus” billing: charging your client your team’s all-in labor costs plus a modest profit margin. Despite scoring lowest on the Grossman Grid of agency compensation alternatives, the 4A’s reports that time-based “cost plus” is the leading media agency pricing method today; 91% of proposals are priced this way.

In days past, media agencies got paid a fixed commission on the media they purchased on behalf of their clients. However, the commission model broke down with the advent of digital media because of its extra responsibilities and complexities: optimization, reporting, reconciliations, etc. The typical commission did not cover the cost of digital buying and was unprofitable for the agency.

Instead of fixing the root cause by streamlining operations, many agencies treated the symptoms by switching from commissions to cost plus pricing. Now these agencies are addicted to charging for their time and have a negative incentive to invest in automation to streamline their operations.

My on the spot answer to the Elephant in the Room Question was that by eliminating the “grunt work” these same resources can be re-deployed to higher value activities. Instead of copying and pasting 600 placements from Microsoft Excel into an ad server, your employees can spend time on media strategy, negotiations, and client consulting. The agency could bill higher rates for these high-value activities.

Everybody would be happy, right? Employees would be happier with more meaningful work. Agencies would increase profitability. Clients would get better results.

Later that day at the cocktail hour, I met up with the person who asked the Elephant in the Room Question. He said my answer is a nice bedtime story, but the reality is that automation is scary because it threatens revenue streams and people’s jobs.

Guess what? That is completely true.

If you work at an agency and spend more than 50% of your time doing things that are really boring (copying and pasting to create multiple spreadsheets), or really repetitive (typing fields from a spreadsheet into fields in an ad server’s UI), or really pedantic (pulling out monthly delivery numbers from a plan, so you can reconcile billing for a client), then your job is in danger. However, if you are really good at working with clients or doing media strategy and analysis, then your job is not only safe but you’re in a great position for a promotion when your grunt work is automated.

David Kenny once remarked that “if you are using people to do the work of machines, you are already irrelevant.” He was comparing what is was like running Akamai, which had a lot of computers and relatively few people , to an ad agency, whose “inventory goes down the elevator every night,” as another David (Ogilvy) once said. In the end, computers always win the low-value, repetitive tasks, whether it’s welding bolts onto a car—or trafficking ad tags.

The question agencies have to ask themselves is, “will my clients continue to pay me to do this kind of work?” That’s the real Elephant in the Room.

Joe is a contributor to The Makegood and is the Founder and President of NextMark, a company that provides tools for media planning and buying industry.

  • Rob Weatherhead

    I think the comment about it being a nice bedtime story is broadly accurate but not for the reasons given. Whilst automation does provides us with the opportunity to do exactly what you describe, it rarely leads to this. Automation and efficiency savings more often than not lead to Agency heads thinking ‘great, we can make twice the money from the same amount of time’ and layering on more clients and more campaigns so where you save in some areas you lose by filling it with other work.

    This was pointed out elegantly by Linds Redding on his post on perspective having being diagnosed with Cancer: http://www.lindsredding.com/2012/03/11/a-overdue-lesson-in-perspective/

    Agencies should be doing the things you describe in reinvesting the time in strategy and adding real value unfortunately there is constant pressure to bring in new business and increase revenues and profitability which can often act as a barrier.

  • The real deal

    Ok Bedtime story yes.. But as a senior seller what i can tell you is that the level of intrest in the clients business is at about ZERO. These agencies would be better served in teaching there staffs how to engage partners and have serious discussions about how we can move a clients business further as oppse to a scheduling Lunch & Learns (WASTE OF TIME) or having the teams vote on what brands will come into present (yes this really happens)

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