Why The Industry Analysts Are Wrong

For the past few years, analysts have been looking carefully at holding companies' migration to digital as an indicator of future growth.  Holding companies have raced to increase the percent of revenue derived from digital activities; the thought being that since digital is growing, having more digital would be an indicator of future growth.

But the big problem with agencies today isn't lack of digital capabilities; it’s their business model. Specifically the FTE (Full Time Equivalents) model. If your business is selling hours to procurement agents, then it doesn't matter much if you are making TV spots or web sites with those hours, you're still screwed. 

If I were investing in agencies, the only thing I'd look at would be the percentage of revenue from FTE's versus 'scalable' businesses based on technology. That's why the trading desk is so important to agencies. It’s another business model that is (theoretically) based on results rather than what it costs the agency to deliver those results, which is better for everyone. Regardless of what happens to trading desks, agencies have gotten a taste for life in a scalable, FTE-free world.  Over time, the big guys will figure out how to duplicate that model across their entire range of services. Perhaps that is the true promise of Publicom. 

If holding companies want to know which businesses are scalable, they might hang around the Venture Capitalists for a while. Try to sell them on a 100% digital agency that makes banner ads all day, and they'll laugh in your face. Because there is a big difference between 'digital' and 'technology'. All technology is digital, but all digital is not true technology.

And only technology is scalable, meaning you can get stuff done without people doing it. It’s automated. Making banner ads or even web sites is getting more automated, but are still largely people-driven businesses. Which means hello procurement and FTE's!  Digital is a meaningless word today. You won't even read about it in analyst reports 5 years from now.

The measure will be scalable, technology-driven businesses versus FTE-based businesses. Technology will be the word that counts; the word that separates high multiple businesses from low margin companies.  And compensation will be results-based because tech is generally more measurable compared to today's formula of salaries + overhead + profit, (with maybe a few nickels and dimes based on 'performance' for optical purposes). Once this change is complete, there will be nothing for procurement to do and they may have to go back to negotiating ball bearings (no tears please).    

(PS: Please stay tuned for my next column on the one FTE model that works. )

5 comments about "Why The Industry Analysts Are Wrong".
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  1. David Gutting from Barkley, August 12, 2013 at 11:31 a.m.

    I love pieces like this--totally on target. Bond makes a point that's been in the back of my mind for some time, "Digital is a meaningless word today..."

  2. Chris Verzello from Accordant Media, August 12, 2013 at 11:59 a.m.

    Provocative piece, and certainly a trend in media. I’m sure agencies are going to increase revenue per employee and margins on business. Technology has proven to be great leverage to make this transition.

    If agencies get too much in the performance based billing, could lead to conflict of interest and open new opportunity in the media attribution space. That said, who knows, maybe agencies will finally be incentivized to get away from the last click attribution game?

  3. Jim Lillig from Synergy Intermedia, August 12, 2013 at 11:52 p.m.

    I believe you are describing the Cost per Action model to a T here. Using technology to create scalable conversion models where the agency makes the majority of its money from actions being completed (i.e. sales, leads, clicks, views, downloads, shares, likes, installs, etc.). Advertisers are begging for it, but agencies are clinging to the FTE model because they have no idea on how to actually "sell". They are excellent promoters, but getting a user to complete an action is scary territory. This is where I believe companies such as MediaWhiz/Matomy and other CPA network/agency model companies will eventually become much sought after targets for "traditional" agencies to purchase and deconstruct. The technology you mention is already taking shape with companies such as who provides lead scoring/management SaaS, and that provides retail hyper-targeting via email, web, social media and email. These companies provide the technology agencies can use to achieve consistent conversions with a minimum of resources - or in other words - automation. Once you know you have the secret sauce it is not a gamble to get paid on performance.

  4. Anna Banks from Organic, August 13, 2013 at 1:22 p.m.

    The term "Digital" is like "Interactive" was 10 years ago. And will meet a similar fate.

  5. Michael Farmer from Farmer & Company LLC, August 14, 2013 at 9:19 a.m.

    Wonderful article. True, the FTE model is not scalable, but remuneration based on FTEs need not be a totally bad thing: lawyers, management consultants and others earn a much better living from the FTE model than ad agencies. Why? It's a question of price. Each dollar of agency cost is billed to clients at about $2.35. For lawyers, the range is $3.00 to $5.00. For management consultants, the range is $4.00 to $6.00. Worse, agencies are not even paid for all the FTEs they allocate, because so much of their Scope Creep is unremunerated. The problem is less the "FTE model" than low pricing and an illogical willingness to do any and all work the clients want, whether or not the work is paid for.

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