By: Mike Carlton
Can the Architects’ Secret Help Your Agency?
by
Mike Carlton
Architects’ Secret?
First, what do architects have in common with advertising agencies? And, second, what’s their secret and what can we learn from it, anyway?
Surprisingly, there are some very interesting similarities between architects and agencies. And, there are some just as interesting differences. And therein lies the importance of their secret.
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.
Thus making the building more than just functional. So that it lifts the spirit of those who experience it and benefits the interests of the building owner as well as society as a whole.
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 built on the psychological side, as well.
A good agency creates and communicates ideas that change consumer perceptions and behaviors in ways that enhance their lives while benefiting the client, humankind and our planet.
That’s a whole lot more than just preparing and issuing advertising.
Parallels
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, and ultimately the behavior, of those who will experience it.
Of course, the proposed concept must also work functionally, too.
Perceptual and behavioral change 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.
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 producers, 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. Typically no more than ten to twenty percent of their total spending. The rest is for construction or media, etc.
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 something that doesn’t yet exist. So the reputation and imagination of the architect or agency are the primary criteria in their choice.
Here Comes the Secret
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 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 their secret. It makes a huge difference. And one that needs to be explored.
A Look Back
Agencies are called agencies because originally they acted under common law as “true agents” for their clients. Under the true agent business model agencies were authorized to buy 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 had billed the client for the gross cost. The agency’s compensation was the difference between that net and gross amount. Usually 15% of the total. All very simple.
From its origins in common law, in the true agent model the disclosed principal (the client) was responsible for the actions of the appointed agent. And thus bore full legal responsibility for liabilities incurred while the agent was acting on that principal’s behalf.
As time went by, a slightly different business model gained support by all the major advertising industry groups. It was called the “sole liability” business model. For many years the American Association of Advertising Agencies was a staunch proponent of sole liability.
That meant that the media or suppliers held the agency solely liable for the client’s advertising spending, regardless of whether the client ever paid the agency or not.
The attraction of sole liability was that it made it easier for the media to authorize credit, thus making their sales process faster and cleaner. As well as helping to justify the commission the medium paid to the agency.
This approach worked well for agencies, media and clients for many years. But after a number of client bankruptcies, which were catastrophic for their agencies, that policy was changed by the 4As to the “sequential liability” business model.
Sequential liability 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. Significantly reducing the agency’s financial risk.
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.
From this confusing background, determining liability today can be a murky picture, at best. With each situation generally controlled by the specific agreements between the client, the agency and the media or supplier. Agreements that can often differ between each client, agency and medium.
This means that any collection problems can quickly escalate into a big mess.
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, it is not uncommon for these transactions to be at net, with no financial benefit for the agency handling the transaction.
Yet, when acting as agent, the agency continues to issue purchase orders, probably incur some level of liability, bill the clients for those items, and 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:
- 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?
- In Capital
If the client does not pay the agency before the agency’s payment to the media or supplier is due, the agency must have the money to cover that time period. Now this capital can come from a number of sources. But most often it is in a working capital line of credit from a bank. And the bank must be paid, sometimes handsomely, for making those funds available to the agency.
- 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. As well as continually dealing with complex tax issues and the increased cost of independent audit services.
- 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 resources 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.
- In Management Diversion
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 greater than agency management realizes. All to provide client bill-paying accommodation.
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 blogs and websites 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 no intellectual value in this sort of thing. They accept this business model because it is traditional. But, it is truely 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 agency approved media and supplier payments be made directly by the client’s own accounts payable people?
Back to Architects Again
Architects don’t provide their clients with 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 well 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 reasonable profit!
Marketing Architects
Against this background there are the beginnings of an unbundling process within the agency industry. For some time Sanders Consulting has 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.
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, an increasing number of leading edge clients are beginning to test 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:
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
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.
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.
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.
A Sobering Thought
As this is written, Chrysler and General Motors are in bankruptcy. It is reported that together they owe their agencies between a quarter and a third of a Billion Dollars. It is also reported that much, but not all, of that money is for media and promotional materials the agencies bought for their clients.
And now who gets paid what is ultimately in the hands of a Bankruptcy Judge.
Those agencies did not cause their client’s bankruptcies. Those agencies played by the accepted rules. Yet a judge’s decision can determine their very survival.
Is that a position you or any advertising agency would ever want to be in?
About the Author
Mike Carlton has spent most of his life in and around advertising agencies. For over a quarter of a century he served in various agency functions, including general management and ownership in a 150-person shop. Along the way he held offices in the American Association of Advertising Agencies, agency networks, and became a frequent writer and speaker on agency issues.
In the 1980s he founded Carlton Associates Incorporated, a consulting firm that focuses on agency business and leadership challenges. He was also a founder of World Systems, a first generation accounting system supplier for agencies, and 600 Monkeys (now a part of Computer Associates), a provider of new technologies for agencies and other professional service firms. In addition, he founded Centre for International Business, which has assisted advertisers and agencies globally.
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