Advertising Agencies in Decline

Advertising agencies are in trouble. At least that is the conclusion drawn by a recent Forrester Research study that says:

“… despite sales growth, their earnings per share lag behind the S&P 500 and profit margins are squeezed.”

As most of you know by now, I have worked for, managed and even established direct marketing divisions for general advertising agencies over the years. And if you have also worked for or with agencies, you probably share my love/hate relationship with them.

To begin with, agencies attract entrepreneurs who tolerate agencies’ lack of stability and low quality management in exchange for stimulating, intellectual environments that thrive on creative problem solving. But this freewheeling style also contains an Achilles heel.

In their unrestrained efforts to solve their clients’ problems, they neglect their own.

In a February 23, 2007 Forrester Research report entitled Help Wanted: 21st Century Agency, its author Peter Kim wrote this subhead. Firms With A Vested Interest In Traditional Media Models Need Not Apply.

His report summarizes the agency challenge.

"Agencies continue to influence the marketing function; however, they struggle to help clients capitalize on emerging channels and technologies. In the meantime, marketers are diffusing agency power by turning to a portfolio of players in search of specialized expertise. As marketers select new agency partners, they must revise their evaluation criteria to build an integrated marketing team."

Kim's client research analysis found the following weaknesses.

1. Advertising agencies overestimate the role they play

2. Customer-centric marketers stem agency power

3. Agencies must become client-centric — or perish

4. Lack skills in emerging channels

5. Overstate their role in marketing success. "Almost all agencies (93%) believe their contributions drive their clients’ marketing success, while only 63% of marketers [clients] feel the same."

6. Agencies must be held more accountable for results. "Despite the fact that agencies wield influence over a majority of the marketing budget, 76% of marketers [clients] do not measure the return on investment of their lead agency relationship." As one marketer admitted, “We are only now beginning to measure our return on programs we implement... Other interesting statistics show that "69% of marketers feel their ROI is too difficult to measure.“

What does all of this mean?

Simply stated, agencies are finding that the speed of change is outpacing their ability to keep up. They continue to hold on to the past and bemoan the emphasis going increasingly to sales results rather than continued wholesale adoption of sacred strategies such as awareness and brand building for their own sake.

For direct marketers, this channel integration and performance based evaluation trend took too long to happen.

But we can hardly sit on our laurels. The front line struggle has taken on all weak spots such as online analytics, reliable sales channel attribution, and balanced media integration.

What other trends do you see that are upsetting the apple cart for direct marketers?