The demise and rise of the industry, part one

I recently asked a senior team at DDB for a show of hands. Who, I asked them, would be willing to do their job for half their current salary?

Unsurprisingly, there were few takers.

Yet the question wasn’t asked out of idle curiosity. It is an increasingly likely scenario, given the challenges facing the business model of advertising. The situation is so severe, in fact, that in my view, the current collapse of the advertising business is likely in just five years.

Every year agencies are faced with demands for a ten per cent reduction in the Full Time Employee (FTE) rate, we think we’re doing well if we settle at eight per cent. The multiplier effect our industry has relied on for so long is also slowly being withered away.

To ease the pressure, agency managers have cut costs to meet these demands. But there is a point at which savings can only come by reducing people. And you can only cut so far before your ability to deliver is compromised, after all we are meant to be in the people business.

We are facing a vicious circle in which cost-cutting will lead to a decline in performance, which will then be used to justify further cost-cutting. And in an industry that relies on talent as its USP, this is concerning.

Clients either don’t seem to understand this or they are ignoring the problem. Unilever, for example, has publicly stated its desire to cut ‘non-productive’ marketing investment, and it includes agency fees in this bracket.

Why is there such a disconnect between clients and agencies? The industry has put forward multiple cases and explanations. Some argue that the rise of the procurement function has led to the commoditisation of creativity, with clients believing they can buy creative ideas, as they would stationery. Others point to an oversupplied agency market, which has led to ruthless price competition. And some still claim that agencies have failed to sell a solid case for their services to client-side executives, particularly to finance teams.

There is truth in all of these. But they are all reflections of a broader truth. The issues the agency world faces are rooted in the changing priorities of the marketing function within client organisations. In fact, they are rooted in the failure of marketing to fulfil its full potential.

The age of invention to the age of consolidation

When marketing was climbing the corporate agenda ladder three decades ago, we were in a very different business environment. It was an age of innovation, with new product categories being introduced to consumers. Marketing had four ‘Ps’ – price, promotion, place and product. By influencing these four elements, and interpreting consumer demand, marketing was at the centre of the business.

In the business environment of the time, promotion was key – brands needed to build awareness of new products and services, and advertising helped drive the education of consumers.

Marketing, then, started to become synonymous with ‘promotion’, or communication. And advertising agencies became adept at providing it. In fact, they became specialists in it. As the marketing services industry fragmented, the creative agencies retained a prime role (they created the communications), alongside the media agencies that placed it.

But today our clients have different business challenges. There are few real ‘new’ products – we have moved from an age of invention to an age of consolidation. Today’s business environment is about gaining share in very tight markets.

The role of ‘promotion’ is also very different. In many organisations marketing is basically marketing communications. The remaining three ‘Ps’ have been taken over by other departments or by consultants.

I think part of our problem is we don’t often talk about the context of our industry with relation to context of our clients’ business. We tend to think an ad is an ad, whenever it was made. But if you want to fully understand the mess the advertising industry is in, we should start with the role of client-side marketers within their own organisations.

The One P Marketer

Dr Philip Kotler, one of the most influential thinkers about marketing and S.C. Johnson & Son Distinguished Professor of International Marketing at Northwestern University's Kellogg Graduate School of Management in Chicago, has been warning of the rise of the ‘One P Marketer’ for over a decade.

Marketers, he argues, are often under pressure to meet short-term sales goals, and that has become their chief role.

This means marketing has in many firms failed to reach its potential. In classic definitions of the discipline, it is the ‘voice of the consumer’ within organisations, and should be playing a key role in guiding areas like product innovation. Instead, it often plays a secondary role to manufacturing, promoting products that have already been created. Or as Kotler put it: “senior management tells marketing what it expects the company to sell, rather than listening to marketing's ideas of what can be sold.”

The result is a department with less influence internally, and less connection with the actual drivers of the business. A study by Adobe, for example, found that 80 per cent of CEOs do not trust marketers, 70 per cent of CEOs believe marketers are disconnected from business results, and 69 per cent of CEOs believe marketers like to stay too much in ‘their creative and social-media bubbles’.

You could argue that this is unfair – marketers have ended up focusing so much on promotion in part because they have been put under pressure by CEOs to generate short-term sales. But, rightly or wrongly, it is the situation the entire marketing ecosystem faces. It means agencies are supplying solutions for a non-core business unit – and if agencies are only there to drive short-term sales uplifts, their work will never be viewed as a long-term driver of business performance. 

Creativity is a luxury – let’s focus on the money

The rising influence of procurement reflects this transition of marketing to a secondary department. Procurement is a process function. It reports to finance, and is focused on the efficient management of money. It is not about the effectiveness of the work relevant to the business goal. In too many cases, procurement has shifted the emphasis onto efficiencies (namely, minimising the amount of cash leaving the business) away from effectiveness (maximising the cash coming into the business).

There is, of course, good evidence that creative advertising can work far more efficiently than non-creative advertising, and that investment in creativity pays dividends over the long term. But on the whole marketers (and their agencies) have not sold this case properly to finance directors. The finance department likes predictability of performance, so their default option is to view investment in creativity as a luxury, compared with the necessary investment in media exposure. Media spend can be controlled, modelled and predicted in a way that creativity cannot.

So that is why agency fees are now seen as ‘non-productive’ investment. We can see this trend manifesting itself in a number of ways. A recent study by the Association of National Advertisers in the US found that a growing number of clients were building in-house agencies – from 42 per cent of brands in 2008 to 58 per cent in 2013. Of these, 56 per cent said that the in-house unit had taken on duties that were previously handled by an external agency partner. The main reason, unsurprisingly, is cost efficiencies.

And last year, there were news stories of a number of clients seeking to extend payment terms for agencies. It’s very concerning, as it appears there is no knowledge of the implications, nor the value of what could be gained by taking a different approach.

And yet, things may be changing again. Paradoxically the collapse in the advertising business could take place at a time when the concept of ‘marketing’, as it is traditionally understood, is becoming more relevant than ever before. Ironically, at a time when creativity is being commoditised, brands need it more than ever before. Is marketing on the cusp of its full potential?

Tune in for part two tomorrow.

John Zeigler is chairman and CEO, DDB Group Asia Pacific, India, Japan.