Mad Men, Adland, and the Agency Model by Patrick Vogt

With the new season of Mad Men in full swing, it’s a good time to reflect upon how far the advertising agency business has come since the early 1960s. From the dysfunctional inhabitants of Mad Men, to the sardonic and witty tales from James Othmer’s recent book Adland, agency life is portrayed in the media as a high-octane, creative profession with a pathological dark side. In other words, it’s fun to watch. At the fictional Sterling Cooper agency, viewers are subjected to excessive smoking, drinking, sexism, self-loathing and self-destructive behavior on a weekly basis. Yet there is something about the place that makes you really want to work there. Advertising, after all, is where the magic happens.

As Don Draper once put it, “Advertising is about one thing and one thing only, happiness.”

So what has changed in advertising over the last 50 years? Surprisingly, the basic DNA of ad agencies is largely the same. Madison Avenue is still trying to sell happiness to consumers who long for it. Brands are still trying to make us feel hopeful and happy so that we continue to consume. Advertising success is predicated on igniting creative sparks that flare into an increased share of voice within today’s fragmented audience.

In a more profound sense, however, the world around the advertising industry has changed absolutely. Agencies are facing shrinking budgets, widespread adoption of social media and new disruptive technologies. The lines between companies and customers are beginning to blur, as brands question the value of agencies as intermediaries. As advertising budgets are slashed, campaign return on investment is scrutinized through new audience measurement and ad performance technologies.

Metrics & Accountability Matter

“I know that half of my advertising is wasted, I just don't know which half." John Wanamaker

With performance data widely available, clients are now looking for revenue-based results. Brands have begun to explore alternative compensation models for their agency partners, signaling a potential shift in the traditional hourly pay model. While only about 10% of today’s advertising compensation agreements are value-based, that may increase as brands leverage more tools to measure advertising effectiveness.

Some media critics today estimate that up to 80% of ad dollars are wasted as a result of three factors; inflated media prices, a decline in the effectiveness of traditional advertising, and poor decision making. That is a bitter pill for brands to swallow considering how many billions of dollars are spent on advertising each year. Brand management can also be ambivalent about the important role that advertising plays in their business. A recent survey conducted by the Marketing Management Analytics (MMA) and the Association of National Advertisers (ANA) showed that 39% of senior brand management viewed marketing as an expense, while 43% viewed it as an investment in brand equity.

At the same time, leaders on the agency side of the equation struggle with the current business model as well. Advertising and media are complicated businesses that take years to master, and agencies don’t appreciate having to validate their contributions every few months. To make matters worse, navigating the new social media channels for clients can be challenging and time consuming. While social media can be a force for good when users champion a brand, it can also be destructive if users decide to wage war. Agencies have had to develop a new level of expertise in this area.

Another aggravating factor for agencies is that they are often required to spend considerable time and money developing full blown creative concepts for which they are never reimbursed. What’s more, clients often try to renegotiate fees after the work is already done. This creates tension in the business relationship as well. Roger Sterling of Mad Men puts it this way, “Being with a client is like being in a marriage. Sometimes you get into it for the wrong reasons, and eventually they hit you in the face.”

The Tipping Point in the Advertising Model

While assigning a value to advertising initiatives is difficult, finding new and better ways to reward agencies for their work can be even more challenging. We now appear to be at tipping point that could transform the role of advertising agencies going forward.

Some large advertising brands like Coca-Cola have recently adopted a “value based” compensation plan for their U.S. ad agencies. The company says that the objective is not to cut costs but to inspire creativity and efficiency (http://tiny.cc/wEgdV). Coca-Cola’s plan will cover all agency costs, plus provide a bonus of up to 30% based on sales performance metrics. Consumer-goods giant Procter & Gamble has also stated that they may abandon hourly fees in favor of a performance related fees for their agency partners. Other global brands like Unilever have recently adopted a performance-based model as well.

A few forward thinking advertising agencies have proactively moved towards a new business relationship where both the agency and client agree to certain key performance indicators (KPIs). Once met, these KPIs ensure that the agency is well compensated and rewarded for meeting specific corporate objectives.
Leo Burnett’s India Chairman and CEO Arvind Sharma, recently said that brands sometimes provide them with compensation incentives linked to sales. Mr. Sharma stated, "We love this model. Since 90-95 per cent of our projects exceed success parameters, the model benefits us.” (http://tiny.cc/6ELgQ). Similarly, the chief executive of Crispin Porter + Bogusky Jeff Hicks has said that a value-based approach has helped his agency work more closely with clients by aligning the agency’s compensation with the advertiser’s profitability (http://tiny.cc/wEgdV). This kind of progressive thinking may allow advertising agencies to get into the driver’s seat to initiate real change throughout the industry.
The New Normal

As time goes on, the economy will no doubt rebound, and social media, blogging and micro blogging will all be seamlessly integrated into strategic marketing plans. Meanwhile, the demand for hard data and ROI metrics will continue until reaching critical mass, at which point full accountability for advertising will be expected as the new normal. That is when the truly creative agencies will find ways to reinvent themselves in order to take advantage of the new advertising paradigm.

Great agencies are in the business of creating real and lasting value for their clients, and I believe they will become the designers of the new agency model. Their contributions run much deeper than simply increasing brand awareness to drive sales. An agency’s work enhances a brand’s reputation, and creates a deeper emotional connection between brands and their customers. An excellent advertising agency partnership is about so much more than the cost of a billable hour. It is about the true value of collaboration and the strategy, positioning, targeting and business intelligence that helps companies to grow and thrive. At the end of the day, we still want advertising to be about the magic.