Running or owning an agency is not easy. And it seems that these agency problems and challenges are getting tougher to face every year. Many agencies are watching their workloads grow while their fees and profits seem frozen in time.
My podcast guest Michael Farmer has been tracking the evolution of agency work for the past 25 years. He says that the challenges of modern agency owners can largely be traced to the industry turning a blind eye to the issues of scope creep while at the same time, not evolving their fees or payment structures.
While this issue can seem overwhelming, Michael has a proven model that will show you how to get a handle on your scope creep and a way to figure out the appropriate charges for that work. Michael and I will walk you through it all as well as:
- Some of the big problems and challenges agencies face today
- Why the future is bright for small to mid-sized independent agencies
- Why your agency needs a uniform approach for working with clients and an example of what that looks like
- The documented scope of work document: what should this look like?
- Why it’s harder than ever for agencies to make money
- Michael’s “price for the work” metric
- Creating accountability with client heads
- Why agencies probably will have an easier time fixing scope of work than they think
- What agencies can do right now to start fixing some of these mistakes
Michael Farmer grew up in the Midwest and was the first child in his family to go to college. He went to Princeton on an NROTC scholarship and worked at various jobs to pay the difference. After that, he spent 5 years as a naval officer, 3 years at sea, and 2 years teaching NROTC at Iowa State University. Then he was off to Harvard Business School and a one-year research assignment writing cases and teaching marketing in Lausanne, Switzerland. He then joined some consulting firms and worked all over the globe. Eventually, he ended up at Bain & Company where he spent three years in Boston, and then nine years in London, Munich, and Paris. Bain then started his own consulting firm, Farmer & Company, specializing on solving agency / advertiser problems. He stayed in London until 2001, and then returned to the States and continued his work. He wrote Madison Avenue Manslaughter between 2009 and 2015, and the book was published in 2015.
To listen – you can visit the Build A Better Agency site (http://buildabetteragency.com/michael-farmer/) and grab either the iTunes or Stitcher files or just listen to it from the web.
If you’d rather just read the conversation, the transcript is below:
Table of Contents (Jump Straight to It!)
I. The Biggest Agency Challenges & How to Deal with Them
II. Opportunities Smaller Agencies Have that Bigger Agencies Don’t
III. Creating a Process for the Scope of Work for Each Client
IV. The Misalignment with Fees, Resources and Workload in Every Agency
If you’re going to take the risk of running an agency, shouldn’t you get the benefits too? Welcome to Build a Better Agency where we show you how to build an agency that can scale and grow with better clients, invested employees and best of all, more money to the bottom line. Bringing his 25 plus years of expertise as both an agency owner and agency consultant to you, please welcome your host Drew McLellan.
Drew: Hey there everybody. Drew McLellan here with another episode of Build a Better Agency. Very excited today to welcome our guest, Michael Farmer. So let me tell you a little bit about Michael. He grew up in the Midwest, was the first kid in his family to go to college. Went to Princeton on a ROTC scholarship and then worked jobs to make up the difference. He then spent five years as a naval officer, three years at sea and then two years teaching the ROTC program at Iowa State. Then he went off to Harvard Business School and did some work there and taught marketing, actually in Switzerland as well. Joined some consulting firms, worked all over the globe and eventually ended up at Bain & Company where he spent quite a few years. Three years in Boston, a year in London, two in Munich, four in Paris and two back in London. That doesn’t sound like too bad a gig. Then he left Bain to start his own consulting firm back in the ’90s or early ’90s and started working with agencies and clients and decided to specialize in solving agency and advertiser problems. That’s where he spent the last 25 years of his career. He was in London until 2001 and then came back to the States to continue his consulting work in the States and 2015 was a big year for Michael. His book Madison Avenue Manslaughter was published. It is an eye opener and for many agency folks I think it’s…you sure are gonna be clutching your chest as you read it but it is a definite must read. So, Michael, welcome to the podcast. Thanks for joining us.
Michael: Drew, thank you so much for having me. It’s a great pleasure to be on this podcast with you.
The Biggest Agency Challenges & How to Deal with Them
Drew: So you have spent a long time, as I have, sort of digging into agency life and your book, it’s spot on. It’s frightening some of the biggest challenges agencies face but it’s spot on. So for the listeners who have not had a chance to pick it up yet, can you kind of give us an overview of some of the big issues and problems that are facing agencies today?
Michael: Happy to do so. The book describes, in a way, the experience I’ve had with agencies over 25 years. Now, the problems that they’ve had have varied from 1992 when I had my first agency engagement, you know, in the UK, to today, the relationships that I’ve got around the globe here. But one thing has been constant throughout the 25 years and that is, number one, agencies aren’t used to keeping very good track of what they intend to do for their clients, in scopes of work. They don’t document it. They don’t really use it to negotiate their fees. They don’t really think of themselves as organizations that make things and they need to keep track of what it is they make. You know, I won’t say that they’re ad factories because there’s the creative element, of course, but they are making an awful lot of ads. And that’s changed from, you know, from television all the way to websites and digital and social media. But they’re still making things and they don’t keep track of it.
Drew: Well, even if they’re putting together strategy, it’s still an investment of hours of time into documents or recommendations. So even those agencies that don’t really actually produce a lot of assets anymore, are still making something.
Michael: Yes, they are making something. And, of course, what I have observed over the last 25 years, and is the major theme of the book, is that their workloads have been growing. And if you’ve got the right way of measuring what agencies do, and I’m not talking about the man hours they put in, I’m talking about the stuff that their clients want them to do. If you measure that in an appropriate way you see that the overall workloads have been growing compounded in the time I’ve been in business, about 3% a year. That’s huge actually, 3% every year really adds up. And at the same time, because procurement has taken over the fee setting function, procurement’s goal has been to drive fees down. And so they’ve been driving fees down while workloads have been going up. And that means that the agency folks are having to stretch an awful lot more to get the work out the door.
It’s become a much more competitive business. It’s harder to maintain quality when people are doing twice as much work today, per head, as they were when I first started. I view that the fact that workloads are growing and fees are declining and that agencies often are having to downsize to keep up with the fee declines, I find that to be a very fundamental strategic problem. And yet it is not anywhere near the top 25 problems that a chief executive or AG would say is his problem. Because workloads aren’t measured, people don’t say, “You know what our problem is, workloads are going up and fees are going down.” So there are a lot of other things…Yeah, excuse me.
Drew: Sorry, I do hear a lot of agency owners acknowledging that scope creep and all of those sort of things continue to be a problem and they have not really raised their rates or… You know, and again, most agencies aren’t really billing by the hour anymore but they still use an hourly rate to sort of figure out what that project fee or whatever that’s gonna be and haven’t been able to raise those rates in years. And so you’re exactly right, that they’re feeling the pinch even if they can’t articulate it.
Michael: Well, that’s true. And, of course, if you go back many years there were times when agencies were being well paid enough that they could afford to put multiple teams on things. They could do a lot of rework. They’d work until they could get it right. And there was a lot of pride in the industry that, “We will work, you know, to get it right. We’ll do whatever we have to do.” Well, that has sort of stuck around as the way people think about the business, we work until we get it right. But the truth of the matter is there isn’t the money anymore.
Drew: They can’t pay that way anymore.
Michael: The man hours that are dedicated to each execution have gone way down, even executions that are like the ones in the past, like TV ads or print ads and the like. So, I see agencies really being squeezed on the man hours. They’re having to put in fewer man hours for the typical deliverable because they’re getting less money for the typical deliverable, even though that isn’t the way they’re paid.
Drew: And, you know, that is in direct contrast to the reality of things have gotten a lot more complicated. There’s more channels, all those channels have to sort of be interwoven together so that you’ve got something that’s really integrated and working across platforms, both on and offline. So really, if it was working the way it should agencies should be making more money because the work they’re doing is more layered and complicated.
Michael: Well, if you look at other service providers like management consultants, they’re being paid double the rate that agencies are being paid to solve ever increasingly, more complex problems. And it’s gone the other way for agencies. So, I think that there are some failures, let’s say on both sides of the table. I think advertisers have a very naive view about the complexity of the agency world. They think that all costs can go down forever, all fees can go down forever and the agencies just have to suck it up and get the job done. But as you say Drew, you know, the media landscape has become so much more complex. We should mention to this, advertisers themselves are having a harder time in their own marketplaces. Look at the pressures that all the big legacy brands are having. You know, from McDonald’s to Procter & Gamble to Nestle to, you name it. Everybody is having a harder time getting growth and profitability. There are many more choices in media. There’s been a change from the type of sales message from what used to be the case to the content oriented stuff today. And so it’s just a much more complicated world and there’s less money to solve the problem. So understandably, there’s a lot of unhappiness in the industry and it’s making life tougher for the folks that you and I both work with.
Opportunities Smaller Agencies Have that Bigger Agencies Don’t
Drew: So from that perspective, because I think regardless of agency size all of that is true, how is the world different though, do you think, for the smaller independent, you know, agencies of 300 people or less that are privately held and owned. How is their world different and what opportunities do they have that maybe some of the big, sort of enterprise agencies, can’t really actualize?
Michael: Well, I’m very optimistic about the prospects for the smaller agencies, the independent agencies. In my own experience, they’re much easier to work with. The reason is that, if you think about how you solve the kinds of problems that you and I have talked about here, you need a senior executive understanding of the problem and then the mobilization of the organization to respond to it. The big enterprise agencies are actually much more worried about generating margins for the holding company than they are about almost anything else. They work hard to develop new clients, of course, and they do work very hard to keep the existing clients but behind the scene their principal objective is to make the margin for the holding company. That’s how they keep their jobs. That’s how they get their bonuses and that’s the major pressure in their lives. So it’s harder for them to mobilize transformational changes in the operations of an agency. In fact, I have found, personally, and I think it gets expressed in my book, a certain amount of frustration with the big enterprise agency CEOs who really don’t wanna hear about this problem.
They don’t wanna hear they’ve got a strategic problem about workload growing and they don’t even keep track of it and they don’t know how much work each of their clients are doing. They don’t wanna hear it because they think, “I’ve got other problems to solve.” And the biggest one is they don’t make their money. So the smaller agencies, I found, have much more responsive senior managements. They have simpler organizations that they can mobilize. And, I think, in a marketplace that’s very fragmented, you know, where the AOR relationships have gone away, smaller agencies can play a role now. They can play a role with the same kind of clients. They’ve got more organizational and managerial flexibility. So, I think, they’re sitting pretty. And, of course, some of the smaller agencies that I work with have proven this out. Senior executives say, “You’re right about this problem and we’re gonna do something about it” which is something I almost never hear with the enterprise agencies.
Drew: Well, I think your point about motivation is pretty critical to overcoming the biggest agency challenges because I think when you don’t own it and you have a set of metrics that you have to either deliver or you’re gonna lose your job and not get your bonus, then, you know, it’s human nature to do that. But from an agency owner’s perspective, when you own it and you know the people that work for you and you care about the people that work for you, the longevity, the health of your agency in the long run, even if it means in the short run you take a little less profit or there’s not as much left at the end of the year for you, you’re willing to make that investment because you know that your folks are looking to you to pay their mortgage and put their kids through school and it matters to you. I think agency owners, independently held agency owners, are very passionate, not only about the work they do, but about the people that work for them.
Michael: Oh, you’re so right. There is a completely different sense. You know, the enterprise agency world has become a corporate world which is driven by shareholder value. And, as you know, they downsize every fourth quarter because that’s the way they…
Drew: Get their bonuses.
Michael: That’s the way they generate the gap, the profit gap, between what they promised and what’s actually turned out. So I think that unfortunately for them there is a little bit less loyalty, a little less commitment to the employees. And they don’t have the same kind of fear that drives positive action. I think smaller agencies have always felt small. They’ve always felt, “Well, there are those big guys and we’re kind of small and what can we do?” Even though, over time, I think the scorecard’s getting a little more balanced. I think major advertisers are more willing to work with them. But that fear has been a good thing because they’ve never felt entirely secure about their position and it’s made them more open minded about what they have to do to fix things. So I think they’re optimistic.
Drew: I think that the most dangerous position of all is to be sort of sitting fat and happy and think that, you know, you’ve got it licked in an industry that is evolving. You know, you and I have been in the business for a long time. I’ve never seen the rate of change that we are experiencing now in my entire career. So, as for any sized agency, but particularly for the small and mid-sized agencies, they can’t afford to be complacent. They have to be nimble and ready to continue to evolve or they’re gonna be irrelevant in a hurry. But, I think, to your point, they’ve always felt that pressure and so they’re more willing to hear commentary that’s a little scary like what you’re talking about and go, “Okay, then what do I need to do?”
Michael: Now, that has been my experience. Since I published the book, the interesting thing is the best commentary I’ve had, which is, you know, people writing me about the book, has come from smaller agencies who say, “I wanna order…” I just had someone say, “I’m ordering a hundred copies. I’m giving them out to my people at Christmas. They have to read it. That’s their homework over Christmas vacation and I’m going to pay a thousand dollars to the individual who comes up with the best idea for the steps that we can take to transform ourselves in 2016.” That is a small agency. The big agencies, well, they say, “Well, yes. You’re right about it but, you know, life is very complicated.” It’s just a little less focused. So I think that there are a host of things that are gonna work in the favor of the small agency, provided the management is willing to, you know, take some of the operational steps that can deal with this fee reduction, workload growing problem.
Drew: Yeah. Well, first of all, it’ll be very interesting to follow up with that agency and hear…because even if nobody came up with the idea, if he’s got a staff of a hundred you have to think there’s at least 10 great ideas that, when you combine two or three of them, will get them where they need to go. I mean, I think that’s one of the things too that agency owners need to remember. This is not about perfection, this is about moving in the right direction.
Michael: No. It’s moving in the right direction and I don’t wanna minimize how difficult it is. But, since I have basically been in the business of finding a way to document scopes of work in a sort of a logical fashion and developing a measure so that fees could be calculated from it, since I’ve been doing that for so many years, I guess I don’t think it’s all that tough. It just means that the agency has to decide for itself that there are going to be certain uniform practices that they are gonna do across clients. And, you know, I think the legacy of the industry is, every client had an individual situation. We did different things for different clients etc., We have a different type of relationship, there’s a different briefing process, there’s a different ad approval process etc., etc. And so agencies have sort of adjusted themselves. Let’s say, a small agency has 20 major clients or so and feeling like they’ve got 20 different situations that they have to manage and each one of those is different. But, you know, in my recommendation for this I say, you need one way of keeping track of the work that you’re doing for all 20 of these clients. And you need to have an approach that represents who you are and how you operate and what you do and how you train your people so that there’s a uniformity in the way the agency approaches these things. I actually don’t think it’s all that tough to do once someone makes up their mind that that’s what they’re going to do.
Creating a Process for the Scope of Work for Each Client
Drew: Can you give us an example of what that might look like? And I know it’ll be a little different for every agency, but what might that sort of uniformity, that sort of process-driven or methodology-driven model look like?
Michael: Okay. Well, the easiest one is the thing that I always encounter as the first order of business. When I’m involved in examining an agency’s operations I ask for the scopes of work for each client. You know, I have been doing this for a long time now. I have never seen such a variety of documents that supposedly describe what the agency is supposed to do and what serves as a basis for getting paid. You have Word documents, PowerPoint documents, Excel documents, cocktail napkins and sometimes nothing. And it comes from the client and the client is saying, “In the coming year we will do 2 to 4 TV ads, 5 to 10 print ads. We may update the website. We’re gonna engage in several social media things etc.” It is so unspecific that I don’t know how… First of all, from their standpoint, I don’t know how they can justifiably price it other than to say, “Well, last year we paid the agency a million dollars for fee. This year we’re gonna pay them $800,000.” That’s how they price it. But there’s no relationship between what they put in their scope of work document and what they agree as the fee.
The second thing is when the agency gets it, well, they know what work they’ve been doing and they’ve got a pretty good sense of what the campaigns are. They certainly don’t use that scope of work document as a basis for planning month by month what executions are gonna go on. That happens offline, that happens in telephone conversations and direct meetings etc. So the first thing that I suggest is that every client for the agency…I’m speaking from the agency standpoint, will have a documented scope of work in a uniform format and it will be kept by deliverable. So, for example, if client A is one of my clients, as an agency I’m gonna make a best guess from that document as to how many deliverables that specific scope of work lays out. In my system we keep it in Excel. We describe the media type, the media detail like it’s a TV commercial that’s gonna be 30 seconds or it’s gonna be a banner ad and it’s gonna be rich text format or something of that sort. So you’ve got the media, the media detail. Is it an origination? Is it an adaptation? Is it high creative complexity, average creative complexity or low creative complexity in accordance with some definitions that we have? Is it in scope, is it out of scope? Is it creative only, is it production only or is it a full op? And if you know all of those characteristics, the interesting thing is that I’ve got a computer model that can take that and figure out how many people it takes and what the fee should be.
So, if agencies could just start to keep their scopes of work by deliverable in a certain format and then keep it up to date. Update it every time they have a client meeting and something changes, they would always know what they were working on, what the timing of it was, what its characteristics were and how many people it ought to take and what kind of fees they should be getting for it. So the first thing is, I think, a policy that says every client will have a scope of work, by deliverable, in a uniform format, which will be updated regularly and used as the basis for annual fee negotiations. Now that’s a goal but it can be a policy that carries it out. And as soon as you get on that path, you are really in a completely different world because then the client heads are accountable for forecasting a scope of work and bringing into alignment the vast quantities of work that agencies are required to do, with the fees that are actually being paid. Because, believe me, it’s all over the map right now.
Drew: Well, I think most agency relationships start out with a client having a budget in mind and a shopping list in mind that have no correlation to one another. And, I think, especially post recession, but it was probably even before that, I think agencies sort of lost their swagger and lost the confidence to push back on a client and go, “No. You can’t have that list of 97 things for $1.50. And so if you only have $1.50, then let’s look at your list and figure out what you can have for $1.50 that will best deliver on your goals” or “Boy, if you wanna hit these goals by the end of the calendar year, a $1.50 is not gonna cut it. If we wanna do that, you know what we have to do is these five things and that’s gonna be $5” whatever it is. But agencies are afraid to have that conversation especially with new clients.
Michael: Drew, you’re so right. And, you know, the reason that we…I mean, it would be easy to be harsh with them because that’s a scary conversation to have. But what we have to realize is that this has been a problem developing slowly over more than a 20-year period. So when I was doing the research for my book I went back to what agencies were typically being paid via commission, you know, 20, 25 years ago and then how much work they were doing for it and showing that they could easily afford to do. They could put three creative teams on it, they could have eight rounds of research and rework and still make money. What has happened over time, since I’ve been in business, the first 15 years agencies were kind of getting rid of the surplus resources they had. They weren’t putting three teams on things, they went down to two and then they went down to one and then they were down to zero and then…one I should say, not zero. And it wasn’t until about 2004 that they were getting to the point where there was a balance between what they were being paid and their putting lean resources on it. It’s only in the last 10 years or so that I think they’re being underpaid for the work they do, the quantity of work they do and the resources taken. So, you know, if you had a cataclysmic change where all of a sudden a client wanted to double the work and cut the fee by 20% you’d say, “No way. Come on, what are you talking about? Look at what we did last year.” But the problem here is that thing has happened, the doubling of work and the cutting of fees by 50%, has happened but it’s over a 25-year period. It happened a little bit every year, they could always adjust to it. They never realized that it was cataclysmic.
Drew: And on top of the other biggest agency challenges we’ve already discussed, not only are clients buying less media but they’re squeezing agencies on the commission of the media that they’re buying, so agencies are really getting bit from both ends, you know, of the candle really, if you will. I mean, they’re being burnt on both ends that they can’t make the money that they used to in commission. And clients are getting tighter and tighter with the fee budgets and still expecting the same volume of work that they used to get when both of those revenue sources were healthier.
Michael: Well, and on top of that, of course, there’s been a big change in the way production has been handled. Because in many cases agencies used to make money in their studio for the studio stuff that they were doing with their clients and in many cases that’s been taken away from them too or it’s gone to low cost production studios. So there has been a nibbling away of the agency profit margins in many, many different ways. So much so in production and in the disappearance of the AOR, the fragmentation of relationships, the decline in media commissions, the annual fee reductions. All of that has happened so much that I think it’s kept management’s head spinning saying, “When we budget for the coming year, how are we gonna make any money? I mean, what is actually the situation gonna be because how much out of scope work are we gonna do that we’re not paid for? What relationships are gonna disappear?” Because the other thing that’s happened is that, the time that I’ve been in business, the relationships have gone from, you know, a seven year average down to about a two to three-year average, so there’s no certainty. Even when new clients are won, and agencies always invest in that first year, it’s like are there gonna be any years in which they can reap some benefits by working in a more efficient way with a client that they know and have confidence in? So, it’s just become a very, very insecure environment. And, I think, and I’m speaking quite overall here, I think overall senior management of the agencies has not grappled with this particularly well. And they’ve not been able to transmit a feeling of confidence about leadership and the future to their organizations. So, you know, when an entire organization is feeling insecure you don’t get the best work.
Drew: On top of that, I think one of the things that I see is, I think a lot of agency owners grow up in the business and all of a sudden, voila, for a plethora of reasons, now they own an agency, big, small, whatever it is. And, I think, they look at the wrong metrics. You know, our industry trains everyone to look at gross billings but you and I know that those are absolutely irrelevant. When I teach some of the financial workshops that we teach to agency owners and start talking about AGI and how the metrics around AGI need to matter and sort of the ratio between salaries and overhead and profit, all of a sudden what I do see, and this is one of the things that makes me hopeful, is when an agency owner starts looking at the right metrics and again, I’m talking 300 employees or less. When they start looking at the right metrics and they’re starting to track that, they are all a sudden very motivated to kind of get their house in order because they see how much money is going right back out. And they recognize that whatever doesn’t drop to the bottom line doesn’t drop into their pockets. So back to your earlier comment about, you know, agency owners be more motivated, I do think that…so not only has this been going on forever but I think a lot of agency owners are ill-equipped in terms of knowing what sort of dashboards of metrics to look at to run their business well.
Michael: Oh, Drew, you and I are so much on the same page. I’ve had a 40-year consulting career that really used metrics, developed metrics in order to cast light on the nature of the problem. And in this industry, I kind of invented another metric which you might be interested in. I look at price, what I call price for the work, and I’ve got this methodology for gathering the scopes of work and turning them into a standard format and then modeling them. But one of the things I can do is, let’s say, for example, that an agency is doing about 500 deliverables during the year for all of their clients, different types of creative ads, doing strategic work as well. Well, in my system, I turn that into what I call a uniform workload metric, a scope metric unit, so that every different type of brief that an agency does has a value. That’s really based on creative man hours but the unit I use is a scope metric unit. So 500 deliverables might be something like 150 SMUs of work. And when you have a workload metric, just like if you’re a steel company and you’ve got tons of steel or you’ve got a car company and they know how many vehicles they sold, this is an agency. How much work they do during the year? They did a certain number of SMUs. And so, if you take the fees and divide it by the SMUs you get you get a fee per SMU or price per SMU.
And I’ve tracked this over the 25 years I’ve been in business working with agencies. And I take inflation out because it’s been a long time. When I first was in business and I was working with Ogilvy UK, and I figured out what their price for SMU was, many years later, it was about $450,000. That’s what they were getting per SMU of work. Today’s average is $150,000. And if I go into a given agency, they can have clients as low as $50,000 and as high as $300,000. In other words, the price for agency work varies all over the place but that price is chronically declining. And when I work with agency CEOs and we’ve done our analysis and I say, “Look here. Client A has a price for SMU of $27,000. That’s your second largest client and your biggest client’s paying you $400,000. Their average is about $135. This is kind of crazy and if it’s going down every year then it’s something to worry about” and that really does get attention. The only price variable that people have these days is the price of a man hour. Now, it’s $200 per hour or something less than that but that doesn’t tell you anything about how much work you’re doing and what you’re getting for the work you do.
Drew: You know, one of the metrics that we use with my agencies is we look at AGI per FTE and we have some metrics around that, so that you have the right staff for the amount of work you’re actually billing for. So it sounds like, you know, we’re going at the same kind of thing just with a little bit of different metric. But either way, I think it’s important that agency owners track the metrics that matter…that actually matter.
Michael: Yes, I agree. And when we’re talking about the enterprise agencies, they only look at profit margin because they’re required to deliver 15% to 20% profit margin to the holding companies. They know their margins. They forecast them for the year, they know what they are every month. They have a pretty good sense of what they are by client although that’s not perfect at all. But that’s the only thing they measure. And the other thing they think about is what kind of work they’re doing that might generate creative awards. And I keep saying, you know, “Listen, those two concerns and if that’s all you use to manage your agency, is to manage for margin and then invest in the generation to work for creative rewards, you’re gonna drive yourself out of business.” Because, unfortunately, when you get into a low price environment, which is what we have today, then you’ve gotta run things on a very tight basis. I don’t wanna draw this too tightly but there’s a big difference between the way you run a French restaurant and the way you would run a fast food operation. The fast food operation you have to measure everything because you don’t have enough margin to make mistakes. And that’s where the agency business has evolved for a lot of different reasons but that’s where it is today and that requires a different form of leadership.
The Misalignment with Fees, Resources & Workload in Every Agency
Drew: So let’s get back to what agencies need to do to beat the biggest challenges they face. So we’ve talked about having a uniform sort of scope document and sort of tracking of…and what I’m reading in your comments too is it’s not just about having a uniform scope document but actually having a real scope document that has detail. And it’s something where you really can, with some wisdom and insight, put a pretty good ballpark estimate of what that’s gonna cost the agency to produce, so that you and the client have shared expectations that are in alignment. So let’s assume you’ve done that…
Michael: Let’s assume we’ve done that and we’re the owner or the president of a small independent agency but we have a number of clients anyway and that means that we’ve got a number of relationships. We have…and I’m gonna assume we have many different situations, if we’ve got 10 clients, we’ve got 10 entirely different situations. That data is just a starting point to say, “How are we gonna fix it?” Because what we’re gonna find is there’s a misalignment among fees, resources and workload. And in most cases that means we’re doing too much work for the fee we’re getting paid. So all that stuff that we have, and again, I’m taking the position that I’m a CEO or president of this agency, is I have to sit down with each of my client heads and say, “Okay, for this client that we’re getting paid $27,000 for SMU for all the work we’re doing, how are we gonna fix that? What kind of a discussion are we gonna get into? What kind of a scope of work planning process are we gonna have with them? How can we take that $27,000 and get it up to $50,000 this coming year and maybe $75,000 the next year, etc.? What kind of a path are we gonna be on? First of all, that is a process or a dialogue that is creating accountability with the client head which, you know, in most cases client heads are accountable for getting the work out the door and doing great work and keeping the client but they’re not really accountable for the decisions that they may make or their clients may try to impose on them that affect the agency economics. In other words…
Drew: You know another one of the biggest agency challenges that we all face is a lot of account people don’t understand agency economics.
Michael: No. I know. Including lot of people in the agency, for that matter. So I view that data as just step one. Now, it’s not an easy first step for people to take but it is a necessary one so that they can start to create accountability. Client heads, as a rule, are not reviewed for what they are doing operationally with a client. In other words, I have never seen a case where an office head would sit down with a client head and say, “Let’s go over the scopes of work that you’ve got for your client. Are we doing the right work for them? Is it gonna move the brands? Are we being paid appropriately for it? Do we have the right resources on it? Let’s discuss that.” That doesn’t happen. In fact, in the enterprise agencies the only people that know what’s going on with a given client, is the client head. The client head is not measured, evaluated or reviewed for the nature of the scope of work or the size of the scope of work. And I can go back to my days at Bain & Company in a very different way, in which I was reviewed once a month on what I was doing for my clients because Bill Bain really didn’t want Bain & Company to be doing work that he considered to be second class work or stuff that wouldn’t have an impact on client results. So, we were scrutinized to death on what work we were committing to do, for how much money, taking how many people. That kind of thing needs to happen at an agency. So the scope of work data has to be followed up with some sort of management review and then corrective action plans to deal with all the misalignments that exist. And, you know, in any other industry, in any other business, this would be kind of a natural way of thinking about a management process for operating things. But it’s an entirely foreign way for agencies to think about things. And, I think it’s because it’s a creative operation on one hand and secondly, it used to make so much money that this kind of stuff didn’t matter. Now it matters.
Drew: So do you think most agencies can fix that kind of a problem with an existing client or have they basically trained those clients to expect, in essence, a lot of free time and work for the fee and that the amount of work done is not in alignment with the fee and that typically those clients are going to go away as you tighten up? Because I think that’s what a lot of agency owners are afraid of. If I tighten up the reins on the work we do for the fees, those clients will go away.
Michael: No. I think agencies might have an easier time than they think. First of all, today, the work is being given to the agency more or less on an ad hoc basis as the year progresses. You know, very few clients go through the process of thinking through the specific deliverables that are gonna be in the marketing program during the year. They figure out a budget. They figure out an agency budget, a media budget and a production budget but what specific work is gonna happen is often pretty ad hoc. And they’re not getting much…they’re not asking for or getting much input from agencies themselves about an agency saying, “Here’s what we think the scope of work should be for this coming year. Given your budgetary constraints, here is the best scope of work by media type, by deliverable, that we think will have the effect of improving brand performance.” That dialogue doesn’t go on either. So if we first start to fill that gap, by having the agencies be more proactive on what should be done within the client’s budgetary constraints, then you’ve got more or less two equals sitting at the table rather than having the client dictate the scope of work and the agencies say, “Oh, okay”, which is kind of the way things are today. So it’ll take a while but I have found there are a couple things that are the low hanging fruit here. First of all, somewhere between 10% and 20% of the deliverables that get done really add no value in any way to the program and they can be eliminated.
The second thing is, both the clients and the agencies have a slight tendency to over-egg the omelet, to make the work more complicated than it is. I remember I did some work for a fast food hamburger chain one time. It was actually the client who hired me to take a look at what they were doing with their different agencies. And I discovered, in the process, that every time they advertised one of their, you know, mega hamburger sandwich concoctions, I won’t give it a name, but they shot original film. Every one was an origination, they never re-used any assets. They treated every brief as if it was something that had never been done before. And so agencies were doing, in my parlance, high complexity origination work for every TV spot that they did. And they did it for, you know, Hispanic advertising, they did it for African-American advertising, they did it for Asian advertising and they did it for advertising to the elderly and advertising to the millennials. Everything was completely original. Well, that added about 30% to the workload.
Drew: Right. A burger is a burger is a burger.
Michael: Well, you know, a burger is special. Their sauce is special.
Drew: But you can show the same picture of the burger.
Michael: They don’t need to re-shoot and re-think every time they do an ad and we could have cut 30% and this is…agencies are quite underpaid. If we had re-engineered the scope of work by first taking out the 10% to 20% that didn’t need to be done at all and then re-engineering the other 80% so that it was on an average, somewhat more simple, the agencies would have been entirely whole, no change in fee. A very big reduction in resources required, you know.
Drew: So, I am telling you that every agency owner that’s listening to us is saying, “If I reduce the scope of work, if we stop doing some of the things we’re doing now, the client is going to assume that the fee is also going to be reduced. So what’s that conversation look like because that’s the fear.
Michael: Well, what you need is a brief is not a brief. I mean, you can take 15% of the briefs out of a relationship and only affect the fee by 5%. Or you can take 15% of the deliverables out and affect the fee by 40%. It just depends what you’re taking out but you need some way of measuring the workload value of the different types of briefs. And listen, I’ve done this enough. I’ve worked with agencies where they’ve asked me to sit down with their clients and explain to them what the relationship looks like when we actually measure the number of deliverables and the workload value of those deliverables. I have done that on many occasions and actually the interesting thing is, I was pushing on an open door with procurement. Because good procurement people grew up in manufacturing and they grew up knowing that the way you save money with suppliers is you get rid of non-value added activities and non-value added processes. When they are only talking to agencies about man hours and overhead rates and profit margins, that is not the same thing as talking about the deliverables that are being done. When you engage procurement people in a sophisticated discussion about workloads and the value of workloads and the measures of workloads relative to fees and what resources are required, you’re speaking their language. In many cases, they find it eye opening. I’ve heard them say, “This is what we’ve always been looking for or hoped for but we never got so, you know, we did this the standard, you know, what’s your hourly rate, what’s your overhead rate, what’s your profit margin, which doesn’t say anything about workload.”
Drew: So what value…?
Michael: I don’t think it’s as impossible to re-engineer a scope of work downwards. First of all, if you convince the client, “We’re doing an awful lot of work that has a certain workload value and the rate at which we’re being paid on a price standpoint is below the industry. What we propose is no change in fee but a reduction in the workload in a sensible way to help to make us whole and allow us to do higher quality work for you.” Now, you know, that isn’t an aggressive statement to make with the procurement folks.
Drew: Right. So we’ve got better scope documents that are uniform. We’ve got a better understanding of the value of the time spent both to the client and to the agency.
Drew: So I’ve got agency owners that are listening to this and I’m sure are absolutely engrossed in what we’re talking about. But they also are busy and they’ve got a lot on their plate and how does an agency, because we need to sort of wind this down, how does an agency start this process? What are one or two things an agency owner could do soon, in the next week or two, that would allow them to begin to go down this path?
Michael: If I were a president of an independent agency, I would get my client heads together in a room with my most senior project manager, on behalf of the agency, and I’d say, “Look, we’re gonna come to grips with this workload fee problem this coming year. I’ve tasked the project manager to take your scopes of work for 2016 and get them in a uniform format and entered into our project management system in a uniform format. Now, I know you’re each doing something special with each of your clients in this respect but we’re gonna do it one way for our operation.
And after we’ve done that, we’re gonna take a look at the number of deliverables that we’re doing, deliverable by deliverable, it’s in our project management system and the fees that we’re getting for it and we’re going to make judgments about whether we’re being paid appropriately or not for the workload that we’re doing. Once that happens, we’re gonna sit down one by one and figure out what kind of a dialogue we’re gonna have with our clients over what period of time in order to get a better alignment between our fees and our workloads. At the same time, I think it behooves us to ask the question, are we in any case doing the right work for the client? Are we doing the most highly leveraged work that is likely to have an impact on brand performance? Because at the end of the day we’re gonna get the best fees and have the greatest security in our relationships if we can deliver results. And we should take a page from the management consulting firms who are paid a five times multiple on the cost of their people because their specific mission is, we deliver results as opposed to a typical agency who’s getting a 2 to a 2.2 multiple for carrying out a client driven scope of work.” So I would, you know, as a CEO or president of an agency, I would be working with my client heads and my project manager to start documenting our situation. And then having a dialogue, having some working sessions to figure out what we’re actually gonna do about all the misalignments that we have in our business.
Drew: Just the activity of identifying the misalignments would be insightful as you work it out.
Michael: Oh, it is. It’s quite exciting and believe me there are surprises. Even in a small agency where they think they know what’s going on when they discover in some cases that they did, you know, 300 ad banners last year and who knows what and that was all couched under, that’s part of our digital program. People have no idea how much work is actually going on even in small agencies because agencies, you know, they’re great at coping. My hat’s off to agencies because every year gets tougher and every year they cope. And they’re pretty amazing and flexible at getting the work done under the most difficult circumstances. But, you know, that’s not a basis for making money in the long run and people will cope to their dying day and they may be out of money by the time it all happens.
Drew: Well, and I think, in my experience and I’m sure yours as well, you know, when we dig into those kind of metrics with clients, a lot times we find that they’re literally paying for the privilege of doing that work for the client. You know, and the look in an agency owner’s eyes when they crunch those numbers and realize that they literally are paying to do that work rather than being paid to do that work, that is a painful realization.
Michael: Well, you know, I can speak for some of the enterprise agencies. That’s almost explicit because I’ve had client heads say, “Well, yeah, we don’t do too well. We don’t make any money with this client but it’s a great creative opportunity. There’s maybe some award winning stuff here.” And they get away with that as an argument because, you know, there’s still so much living in the world of creative awards that they think that there’s a high economic value to be put on that. So they can say, “Now, we’re not making any money on this client but, you know, we might win some awards out of the work.” And if you start saying that on 80% of your clients, there’s something wrong. You know, what are you in business for?
Drew: Yeah. Crazy. This has been awesome, Michael, as I knew it would be. Thank you so much for sharing your insights and your experience with everybody listening. I am very grateful for your time. Thank you.
Michael: Well, Drew, thanks so much for allowing me to talk about this and talk about the stuff that’s in Madison Avenue Manslaughter.
Drew: So beyond going to Amazon or their favorite bookstore to find the book, if folks wanna track you down or learn more about you or read more of your thoughts, where is the best place for them to find all of that?
Michael: Well, I have a website, www.farmerandco.com, F-A-R-M-E-R-A-N-D-C-O.com, standing for Farmer & Company. I’m on Twitter @Farmerandco and I can be reached at [email protected] and on LinkedIn and the other usual places. But yeah, Amazon stocks the book and it’s available online for the most part through other booksellers like Barnes & Noble. It’s available in electronic form through Apple Books and Google Books.
Drew: Awesome. Thank you very much. Everybody, I hope this was insightful. I hope it fired you up to go and crunch those numbers in a different way and make sure that you are maximizing the opportunity. I think you need to remember, you are delivering incredible value to your clients and you deserve to be compensated for that value. And it’s time to really take claim to that and make that happen for you and your agency and your families. So with that I’m gonna wind down this episode. We will be back next week with another guest and more insights in how you can build a better agency. As always, I hope that you subscribe so you don’t miss an episode. I’m always grateful to hear from you, what you like, what you don’t like, what you wanna hear more of. You can reach me at [email protected] and I will catch you next week. Thanks so much.
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