Episode 41:

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 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 Farmer:

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, where 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 going to make any money? I mean, what is actually the situation going to be, because how much out of scope work are we going to do that we’re not paid for? What relationships are going to disappear?”

Because the other thing that’s happened is that time I’ve been in business, the relationships have gone from 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, are there going to 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 now 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, when an entire organization is feeling insecure, you don’t get the best work, you don’t keep the best people.

Drew McLellan:

I think 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, viola, for a plethora of reasons, now they own an agency, big, small, whatever it is, and I think they look at the wrong metrics. So, our industry trains everyone to look at gross billings, but you and I know that those are absolutely irrelevant, and 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 of 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 pocket.

So back to your earlier comment about agency owners being more motivated, 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 and metrics to look at to run their business well.

Michael Farmer:

Oh, Drew, you and I are so much on the same page. I’ve had a 40 year consulting career that really exploit 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, but I look at what I call price for the work. 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 that 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 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 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 did they do during the year? They did a certain number of SMUs.

So if you take the fees and divide it by the SMUs, you get a fee per S SMU or price for 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 per 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 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. The average is about 135,000. This is kind of crazy, and if it’s going down every year, then something to worry about, and that really does get attention, because this is the only price variable that people have these days is the price of a man hour. It’s $200 per hour or it’s 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 McLellan:

Yeah. One of the metrics that we use with the AMI agencies is we look at AGI per FTE and we have some metrics around that so that you know that you are right staff for the amount of work you’re actually billing for.

Michael Farmer:

Yeah, that sounds good.

Drew McLellan:

It sounds like we’re going 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 Farmer:

Yes, I agree. When we’re talking about the enterprise agencies, they only look at profit margin because they’re require deliver a 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.

Drew McLellan:

Yep.

Michael Farmer:

The thing they think about is what kind of work they’re doing that might generate creative awards, and I keep saying, “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 of work for creative rewards, you’re going to drive yourself out of business.” Because unfortunately, when you get into a low price environment, which is what we have today, then you’ve got to run things on a very tight basis. I don’t want to draw this too tightly, but there’s a big difference between the way you run a French restaurant and the way you 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.

Drew McLellan:

So let’s get back to what agencies need to do. So we’ve talked about having a uniform sort of scope document and sort of tracking 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 is something where you really can with some wisdom and insight, put a pretty good ballpark guesstimate of what that’s going to cost the agency to produce.

Michael Farmer:

Exactly.

Drew McLellan:

So that you and the client have shared expect that are in alignment. So let’s assume you’ve done that.

Michael Farmer:

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, and I’m going to 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 going to fix it?” Because what we’re going to 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 a 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 per SMU, for all the work we’re doing, how are we going to fix that? What kind of a discussion are we going to get into? What kind of a scope of work planning process are we going to have with them? How can we take that 27,000 and get it up to 50,000 this coming year and make it 75,000 the next year, et cetera? What kind of a path are we going to be on?”

First of all, that is a process or a dialogue that is creating accountability with the client head, which 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 if-

Drew McLellan:

Well, a lot of account people don’t understand agency economics.

Michael Farmer:

No, I know, and including the people in the agency for that matter. So I view the data as just the step one, 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 with a client. Are we doing the right work for them? Is it going to move the brands? Are we being paid appropriate 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 in a given client, 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. I can go back to my days at Bain & Company, run 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 didn’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, 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. 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 the one hand, and secondly, it used to make so much money that this kind of stuff didn’t matter. Now it matters.

Drew McLellan:

Yeah. 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 Farmer:

No, I think actually 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. Very few clients go through the process of think through the specific deliverables that are going to 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 going to happen is often pretty ad hoc. 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 effective improving brand performance.” That dialogue doesn’t go on either.

So if we first start to fill that gap by having the agencies more proactive on what should be done within the client’s budgetary constrain, 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 agency 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 mega hamburger sandwich concoctions, I won’t give it a name, but they shot original film. Everyone was an origination. They never reused any assets. They treated every brief as if it was something that had never been done before.

So agencies were doing in my parlance high complexity, origination work for every TV spot that they did. Then they did it for the Hispanic advertising, they did it for African American advertising, they did it for Asian advertising and they did for advertising to the elderly and the advertising to millennials. Everything was completely original. Well, that added about 30% to the workload.

Drew McLellan:

Right. A burger is a burger is a burger.

Michael Farmer:

Well, a burger is special, their sauce is special.

Drew McLellan:

But you can show the same picture of the burger.

Michael Farmer:

They don’t need to re-shoot and rethink every time they do an ad, and this is an age agencies were 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 average, somewhat more simple, the agencies would’ve been entirely whole, no change in fee, a very big reduction in resources required.

Drew McLellan:

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 Farmer:

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 brief. 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 deliverable 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 the 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, and when you engage procurement people in a sophisticated discussion about workloads and the value of workloads and the measures of loads relative to fees and what resources are required, you’re speaking their language, and in many cases they find it eyeopening. I’ve had them say, this is what we’ve always been looking for or hoped for, but we never got, and so we did the standard, what’s your hourly rate? What’s your overhead rate? What you’re profit margin? Which doesn’t say anything about workload.

Drew McLellan:

Or the value of what you’re doing.

Michael Farmer:

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, that isn’t an aggressive statement to make with the procurement folks.

Drew McLellan:

Right. Right. Okay, 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.

Michael Farmer:

Yes.

Drew McLellan:

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’s 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 Farmer:

If I were the 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 going to 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 going to do it one way for our operation. After we’ve done that, we’re going to 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 judgements about whether we’re being paid appropriately or not for the workload that we’re doing.

Once that happens, we’re going to sit down one by one and figure out what kind of a dialogue we’re going to 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 going to get the best fees and have the greatest security in our relationships if-

Drew McLellan:

If we deliver results.

Michael Farmer:

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 two to a 2.2 multiple for carrying out a client driven scope of work. So 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 going to do about all the misalignments that we have in our business.

Drew McLellan:

Well, just the activity of identifying the misalignments would be insightful is I’ll get out.

Michael Farmer:

Oh, it is. It’s quite exciting, and believe me, there are surprises even in a small agency where people-

Drew McLellan:

No doubt. No doubt.

Michael Farmer:

Where they think they know what’s going on, when they discover in some cases that they did 300 ad banners last year and who knows what, and that was all couched under, that’s our part of our digital program, people have no idea how much work is actually going on even in small agencies, because agencies, they’re great at coping. That the one thing, 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 McLellan:

Yeah. Well, and I think in my experience, and I’m sure yours as well, when we dig into those kind of metrics with clients, a lot of times we find that they are literally paying for the privilege of doing that work for the client. The look in an agency owner’s eyes when they crunch those numbers and realize that they are paying to do that work rather than being paid to do that work, that is a painful realization.

Michael Farmer:

Well, 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 in this client, but it’s a great creative opportunity. There’s maybe some award-winning stuff here.” They get away with that as an argument because 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 we might win some awards out of the work.” If you start saying that on 80% of your clients, there’s something wrong, what are you in business for?

Drew McLellan:

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’m very grateful for your time. Thank you.

Michael Farmer:

Well, Drew, thanks so much for allowing me to talk about this and talk about the stuff that’s in Madison Avenue Manslaughter.

Drew McLellan:

So beyond going to Amazon or their favorite bookstore to find the book, if folks want to 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 Farmer:

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 at, @farmerandco, and I can be reached at [email protected]

Drew McLellan:

Perfect.

Michael Farmer:

And on LinkedIn and in the other usual places. But yeah, Amazon stocks the book, and it’s available online for the most part through other book sellers like Barnes & Noble. It’s available in electronic full through Apple Books and Google Books.

Drew McLellan:

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 family.

So with that, I’m going to 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’ve subscribed so you don’t miss an episode and I’m always grateful to hear from you what you like, what you don’t like, what you want to hear more of. You can reach me at [email protected] and I will catch you next week. Thanks much.

Speaker 1:

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