What Agencies Can Learn from Architects
By Mike Carlton
What do they have in common with agencies? And, what can we learn from them, anyway? Surprisingly, there are some very interesting similarities. And, there are some just as interesting differences.
Differences we can learn a lot from.
What Architects Do
According to the dictionary, an architect is someone who, “Designs buildings and supervises their construction.” That’s simple enough. But that just covers the functional side. Good architects are expected to address the psychological side, too. Making the building more than functional so that it lifts the spirit of those who experience it, and in the process benefit the interests of the client, the building owner.
Frank Lloyd Wright believed, “Architecture is a great inclusive through which humankind adapts the environment to human needs and, reciprocally, attunes human life to its cosmos, making human life more natural and nature more humane.”
That’s a whole lot more than just designing buildings and supervising their construction.
What Agencies Do
According to the same dictionary, an advertising agency is, “A business that prepares and issues advertising.” That’s also simple enough. But, like the description of an architect, it just covers the functional side. The strength of good agencies is also on the psychological side.
A good agency creates and communicates ideas that change consumer perceptions and behaviors in ways that enhance their lives and benefit the client.
That’s a whole lot more than just preparing and issuing advertising.
Architects and agencies share similar responsibilities.
First, each is charged by their clients with creating a concept for a building or communication program that touches the spirit and changes the perception of those who will experience it. Of course, that concept must also be functionally effective, too.
This is the primary responsibility of each. It is the highest value that architects and agencies bring to their clients. It is in this conceptual area that outstanding architects and outstanding agencies differentiate themselves from mediocre practitioners of their craft.
But both do more than just conceptual work. Both take those concepts on to designs. These are the representations of what the final building or ad will be like. They transform the concept into a vision of what the deliverable will be like.
With client approval of the concept and design, the next step is supervising the fulfillment of those designs. Architects supervise the contractors. Agencies supervise the media and suppliers. Both have the same objective; assuring that the concept and design are faithfully executed.
Both are ultimately outcome based. Both are held accountable by their clients for the realization of those outcomes. This is at the core of the architect or agency compact with their clients.
Buying the Yet-to-Be
The clients of architects and agencies have a lot in common, too. Most are prepared to spend considerable amounts of money to achieve their building or marketing objectives. They expect to spend only a minor portion of that for the services of their architect or agency.
In both cases they are betting big time that their architect or agency will be able to deliver the outcomes, both practical and psychological, that they want. They know that the intellectual and managerial capabilities of their architect or agency are crucial to success.
Thus, they select their architect or agency largely on faith.
For they are buying an outcome that doesn’t yet exist. So the reputation and imagination of the architect or agency are the primary criteria in their choice.
So Much for the Similarities
With so much in common, there is one gigantic difference. And that is in their respective business models.
Agencies, as the name implies, act as agents for the client and usually buy all the media and production work necessary to implement the idea.
Architects, on the other hand, do not act as agents for their clients. They may select the contractors. They may direct them. They may audit their bills. But, they don’t pay them. They leave that chore up to the client.
This is a big, big difference. And one that needs to be explored.
A Look Back
Agencies are agencies because historically they acted as true agents for their clients. They bought media for their disclosed clients and were paid a commission from the media for doing so. The net cost of that media was paid for by the agency which rebilled the client the gross cost. The agency’s compensation was the difference between that net and gross media cost. All very simple.
This business model was supported by all the major advertising industry groups. In fact, for many years the 4As was a staunch proponent of “sole liability.” That meant that the media or suppliers held the agency solely liable for the client’s spend, regardless of whether the client ever paid or not.
After a number of agency catastrophes caused by client bankruptcies, that policy was changed to “sequential liability.” That means that the media or suppliers may look to the agency for payment only after the agency has been paid by the client. Until then, the client remains on the hook. Obviously, sequential liability is not very popular or well supported by the media. Or by other suppliers like talent, production houses, printers, web shops, etc.
What does it Cost?
Even though the commission compensation system has largely dissolved in favor of fees, most agencies continue to act as agents for their clients. They continue to buy media and materials for their clients, rebilling the clients and paying the media or suppliers. Today, often these transactions are at net, with no financial benefit for the agency in handling the transaction.
Yet, when acting as agent, the agency continues to issue purchase orders, incur liability, bill the clients for those items, collect the client payment, and pay the media and suppliers.
Lots of administrative paperwork, which is time consuming and prone to error. And the risk of continued financial liability to the media and suppliers.
Clearly, this bill-paying accommodation for clients has costs:
1. In People
The folks who buy the client media and production services, the ones who issue media and purchase orders, the ones who bill the client for that media and production, the ones who collect and receive the client payments, the ones who pay the media and suppliers and the ones who manage the cash flow. How many are there, how much time do they spend on this, and what does it cost?
2. In Systems and Support
To provide client bill-paying accommodation, agencies need specialized computer software to process the client’s purchases and financial transactions. They need more hardware and IT support, too. Agency banking relations are more complex. As well as continually dealing with complex sales tax issues and the increased cost of independent audit services.
3. In Risk
Managing money that belongs to others is not a responsibility to be taken lightly. The typical agency is responsible for client funds that are many times greater than the budget of the agency itself. Even with sequential liability, failure of the client to pay is a big, expensive hassle at best. And at worst, a financial disaster that can destroy the agency.
4. In Management Diversion
Client bill-paying accommodation is a big business tucked away within the agency. It is outside the mainstream of the intellectual value the agency brings to its clients. But, it takes management time and attention. Time that could probably be used more productively in the agency’s core business.
Yet few agencies get paid to cover these costs. They become just obscure overhead items. Lots of small line items that in total are quite significant.
On close scrutiny, these costs are usually much, much greater than agency management realizes. All to provide client bill-paying accommodation.
A Little Secret
Many clients don’t realize that there are some agencies that finance their operations with client bill-paying accommodation cash flow. This is the flip side of bill-paying accommodation. They do this by billing and collecting quickly and paying slowly. They use the float as agency capital. This can be a dangerous and more expensive practice than it initially appears. It can take only a small hiccup in cash flow to cause very major liquidity problems.
In reality, more conventional ways of capitalizing an agency may be not only a lot safer, but also less costly as well as providing more operating flexibility.
What Does the Client Want?
At this point, it is not clear what value clients place on bill-paying accommodation by agencies. Sure, they all expect it. It is the way agencies have always worked and what they are accustomed to. Most client internal systems are set up to accept these bundled bills.
However, since few agencies have figured out what this bill-paying accommodation costs, fewer still have asked their clients how much they are willing to pay for this service.
We suspect that the value most clients would place on this service would be considerably less than what it costs the agency.
What Business is the Agency In?
The basic truth is that intelligent marketers hire agencies for ideas that will change consumer behavior. Clients need ideas that will move their customers. And, that is where agency value lies. It’s as simple as that.
Sure, clients need ads and commercials and brochures and websites and social media and lots of other stuff. And sure, they need management of the entire program. And stewardship reports on how things are progressing and how their budget is being spent. And, they need to get bills and they need to pay them.
But, who has ever heard a client say she selected an agency because of the way they bill or pay? Or the fact that they aggregate all the media and supplier expenses so that it easy for her accounting department? Or that because the agency acts as an intermediary, they can get more float in their cash flow?
Smart marketers understand that there is little intellectual value in this sort of thing. They accept this business model because it is traditional. But, it is really questionable if they really need it.
If that is the case, and since every client has its own internal bill-paying capability, would it make sense for the client to just pay the agency to manage the relationships with media and suppliers, and then let the financial transactions flow directly through their own accounting/finance department?
Back to Architects Again
Architects don’t provide their clients bill-paying accommodation. They have unbundled services in which the client can pay one fee for the concept and design. And if the client so chooses, the architect can supervise the construction for another fee. The architect can also select contractors, scrutinize their contracts, supervise their performance, audit their bills and pass them on to the client for direct payment.
All of this is done under a defined scope of work. All of it is compensated by fee. Now, that fee may be related to the total cost of the building or related to hours, or in the best cases, related to the value the client receives.
But the architect does not act as agent. The architect does not buy bricks and mortar and rebill them to his client. The architect does not pay the craft labor.
As a result, the architect avoids a significant risk and back room cost that the agency blissfully accepts.
And, we wonder why it is so hard for agencies to make a fair profit!
Against this background there are the beginnings of an unbundling process within the agency industry. For some time industry thought leaders have been advising agencies to spin-out their strategic services into marketing consulting firms. And act like marketing architects. A number of agencies have done this successfully.
More recently, start-ups driven by former agency talent have been specifically describing themselves as marketing architects. They develop the insights and concepts and then will separately supervise the implementation. Often using traditional agencies for the execution, as well as all kinds of other specialized service providers.
Their compensation is linked to the strategic value they provide. And, they don’t provide client bill-paying accommodation.
This business model may well be a harbinger of the future. These kinds of consultative organizations can be much more nimble than big agency ad factories. They don’t have as many mouths to feed. Nor do they have big traditional infrastructure to support.
And, some leading edge clients are beginning to embrace the benefits of this approach.
What’s an Agency to Do?
If exploring unbundling looks like it might make sense to you, here is a step-by-step way you might want to proceed:
1. Determine Your Back Room Costs
What does it cost you to provide bill-paying accommodation for your clients? This requires looking at your people costs, computer hardware and software, space, cost of money if you are financing client payments, outside auditors/advisors, management time, etc. In short, all the costs that you wouldn’t have if you did not act as an agent for clients.
This number will probably be bigger than you expect. But if it is not, that is good news. And how you proceed from here, if at all, may be altered.
Note: You might want to be careful about who does this evaluation. It would be unfair to ask your people who make a significant portion of their living providing client bill-paying accommodation to conduct this evaluation.
2. Find Out What it is Worth to Your Clients
Here, it gets a bit trickier. The best way to approach this is one client at a time. Start with the client you feel has the most reasonable approach to business. And, one you are also doing very good work for. Figure out what their share of the above back room cost is.
Tell him what it is costing you to provide him with bill-paying accommodation. And, that you don’t believe that this is the best way for him to invest money with you.
Tell him that you would prefer to put that money into improving the quality and quantity of work you are providing. This would mean that he could get more media, better production and improved strategic agency service all without paying a penny more. And, you should get a share of this savings, too.
3. Begin the Weaning Process
It is unlikely that you will be able to get out of the client bill-paying accommodation business overnight. But by approaching it one client at a time, with particular emphasis on new clients and new people at existing clients, you should be able to phase out smoothly over time. This approach should also enable a more humane way of addressing the back room staff reductions that should come with this change.
What’s in a Name?
Agencies have been called agencies since the inception of the category. But what we are talking about here is getting out of the business of acting as an agent. What does that mean for the category name? If you make this change should you still be called an agency?
Good questions. But since the marketplace primarily equates the term advertising agency with the creation and implementation of ideas that will influence consumer behavior, the term agency for this category will likely endure, albeit with an altered meaning.