Episode 41

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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.

 

 

What you’ll learn about in this episode:

  • Some of the big problems 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

 

The Golden Nugget:

“Agencies are doing twice the work for half the fee over the last 25 years.” – @farmerandco Click To Tweet

 

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Speaker 1:

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 McLellan:

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 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 [Rothi 00:00:49] 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, early ’90s, and started working with agencies and clients and decided to specialize on solving agency and advertiser problems, and 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. 2015 was a big year for Michael, his book Madison Avenue Manslaughter was published and it is an eye opener, and for many agency folks, you’re sort of going to 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 Farmer:

Drew, thank you so much for having me. It’s a great pleasure to be on this podcast with you.

Drew McLellan:

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 but it’s spot on. So for the listeners who have not had a chance to pick it up up yet, can you kind of give us an overview of some of the big issues and problems that are facing agencies today?

Michael Farmer:

Happy to do so. The book describes in a way, the experience I’ve had with agencies over 25 years now. Now, the problems that they’ve had have varied from 1992, when I had my first agency engagement 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. 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 television all the way to web, to websites and digital and social media, but they’re still making things and they don’t keep track of it.

Drew McLellan:

Well, even if they’re putting together strategy, it’s still an investment of hours of time into document or a recommendation. So even those agencies that don’t really actually produce a lot of assets anymore are still making something.

Michael Farmer:

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 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.

So they’ve been driving fees down while workloads have been going up, and that means that the agency folks are having to stretch and 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, and I view that the fact that workloads are growing and fees are declining and that agencies are 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 the chief executive of [Najix 00:05:37] would say is this problem. Because workloads aren’t measure. People don’t say, “You know what our problem is? Workloads are going up and fees are going down.” So there are a lot other things-

Drew McLellan:

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, 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 going to be, and they haven’t been able to raise those rates in years. So you’re exactly right, they’re feeling the pinch even if they can’t articulate it.

Michael Farmer:

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. There was a lot of pride in the industry that we will work 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 McLellan:

Right. We’re not getting paid that way anymore.

Michael Farmer:

The man hours that are dedicated to each execution have gone way down, even executions that are like 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 McLellan:

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 Farmer:

Well, if you look at other service providers like management consultants, they’re being paid double the rate at 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, the media landscape has become so much more complex, and we should mention to this advertisers themselves are having a harder time in their own marketplaces.

Drew McLellan:

Absolutely.

Michael Farmer:

Look at the pressures that all the big legacy brands are having, from McDonald’s to Proctor and Gamble, to Nestle, to you name it. Everybody’s having a harder time getting growth in profitability and 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 content oriented stuff today. So it’s just a much more complicated world and there’s less money to solve the problems. 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.

Drew McLellan:

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 independence? So agencies are 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 Farmer:

Well, I’m very optimistic about the prospects for the smaller agencies, the independent agencies, and 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 principle 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 are 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 a big enterprise agency CEOs who really don’t want to hear about this. They don’t want to 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 want to hear it because they think I 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, it’s very fragment. 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, have proven this out. Senior executives say, “You’re right about this problem and we’re going to do something about it.” Which is something I almost never hear with the enterprise agency.

Drew McLellan:

Right. Well, I think your point about motivation is pretty critical, 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 going to lose your job and not get your bonus, then 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 independently held agency owners are very passionate, not only about the work they do, but about the people that work for them.

Michael Farmer:

Oh, you’re so right, there’s a completely different sense. The enterprise agency world has become a corporate world and which is driven by shareholder value, and as you know they downsize every fourth quarter because that’s the way they-

Drew McLellan:

Get their bonuses.

Michael Farmer:

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 they’re those big guys and there 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 again, I’m quite optimistic.

Drew McLellan:

I think the most dangerous position of all is to be sort of sitting fat and happy and think that you’ve got it licked in an industry that is evolving. You and I been in the business for a long time, I never seen the rate of change that we are experiencing now in my entire career for any size agency, but particularly for the small to mid-size agencies, they can’t afford to be complacent. They have to be nimble and ready to continue to evolve, or they’re going to 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 Farmer:

No, that been my experience, and since I published the book, the interesting thing is the best commentary I’ve had, which is people writing me about the book has come from smaller agencies who say, “I want to order.” I just had someone say, “I’m ordering 100 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 $1,000 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 life is very complicated.” It’s just a little less focused. So I think that there are a host of things that are going to work in the favor. The small agency, provided the management is willing to take some of the operational steps that that can deal with this fee reduction, workload growing problem.

Drew McLellan:

Yeah. Well, first of all, it’ll be very interesting to follow up with that agency on and hear, because even if nobody came up with the idea, if he’s got a staff of 100, 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 Farmer:

No, it’s moving in the right direction and I don’t want to minimize how difficult it is.

Drew McLellan:

Right. Right.

Michael Farmer:

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 going to do across clients. I think the legacy of the industry is every had an individual situation, we did diff thing for different clients, et cetera. We have a different type of relationship. There’s a different briefing process. There’s a different ad approval process, et cetera, et cetera.

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, 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, and 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.

Drew McLellan:

Can you give us an example of what that might look like? 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 Farmer:

Okay, well, the easiest one is the thing that I always encounter, is the first order of business. When I’m involved in examining an agency operations, I ask for the scopes of work for each client. 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. It comes from the client and the client is saying, “In the coming year, we will do two to four TV ads, five to 10 print ads. We may update the website. We’re going to engage in several social media things, et cetera.”

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 going to 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 is 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 going to go on, that happens offline, that happens in telephone conversations and direct meetings, et cetera.

So the first thing that I suggest is that every client for the agency, and 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 going to make a best guess from that document is to how many deliverables that specific scope of work lays out, and in my system we keep it in Excel. We describe the media type, the media detail, like it’s a TV commercial, it’s going to be 30 seconds, or it’s going to be a web, it’s going to be a banner ad, and it’s going to 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 definite 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 up? 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 negotiation. 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 where the fees are actually being paid. Because believe me, it’s all over the map right now.

Drew McLellan:

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. 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. So if you only have a $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 want to hit these goals by the end of the calendar year $1.50 is not going to cut it.” If we want to do that, what we have to do these five things and that’s going to be $5, whatever it is. But agencies are afraid to have that conversation, especially with new clients.

Michael Farmer:

Oh, Drew, you’re so right. 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 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, 20, 25 years ago, and then how much work they were doing for it, and showing that they could easily afford to do anything. They could put three creative teams on that.

They could have eight rounds of research and rework and still make money, and what has happened over time since I’ve been in business, the first 50 years agencies were kind of getting rid of the surplus resources, they had, they weren’t putting three teams on things, it went down to two, and then they went down to one, and then they were down to zero, or 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 they’re 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, 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 McLellan:

On top of that, 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 of the candle, really, if