• by Jim Meskauskas , May 20, 2008

Kids who play with Silly Putty know this: There's only so far you can stretch something before the tenuous strands holding it together break. The advertising agency business, as a business, is in a tough spot. Tasked with everything from creating product and generating sales to producing global marketing strategies, agencies are now being asked to provide services that are far beyond their traditional range of responsibilities.

The part of the agency business that is in big trouble is, in fact, the business part: essentially, how the agency is being compensated for their services. They are doing more and making less, and no one seems to have a solution. It's like the industry's very own sub-prime crisis. But there will be no bailout.

Advertising agencies have never really been very business-minded. Rarely do those involved with creating a company's marketing and advertising plan have profit-and-loss management experience. Anyone who works in marketing for a company that is itself not focused on marketing can testify to the animosity that exists between them and the finance department.

Advertising agencies are focused on how to solve their clients' communication challenges. Sometimes that involves solving a business problem, but rarely does it translate into thinking about compensation. The people at the agency responsible for coming up with those communications plans are not usually responsible for thinking about how much what they do for a client is worth.

In addition, media has changed so dramatically at so many levels that nobody seems to know how they should be compensated. It's as though someone hung up a shingle that reads: BRIGHT IDEAS CHEAP.

Clients continue to require more sophisticated services while at the same time insisting on lower rates. The challenge agencies face in getting the compensation they deserve lies in the fact that the business has become primarily transactional: The agency is paid for what it buys, not for its ideas, strategy or creativity.

James Walter Thompson is the one to blame for this: He gave away his ideas for free and only charged clients for the media purchased on their behalf. But the model that worked so well for JWT is just stretched too thin these days.

It is imperative that agencies begin thinking of themselves as a business that has greater value to their clients than that which is reflected by most standard compensation models. With this in mind, agencies need to reposition themselves as centers of ideation. They need to be consulting firms, making consulting firm margins.

Because much of advertising product cannot be seen, heard or touched (creative services rarely have the problem of getting compensated for work done), there is some form of psychological impediment to paying for work that is not tangible. And yet companies willingly pay lawyers and consultants for intangible services all the time.

Agencies need to do a better job of presenting themselves as ideation centers and not transaction factories. Clients need to be shown where the intangibles take them.

In 2007, the top three holding companies (WPP, Omnicom and IPG) showed 7.5 percent, 7.7 percent and 2.0 percent profit margins after accounting for interest, taxes, depreciation and amortization. This is better than 2006. A 7 percent profit margin is average for the world's top 20 corporations, most of which are manufacturing.

Consulting firms, however, yield 20 percent profit margins on the low end, with some of them yielding as much as 50 percent. If marketing services could figure out how to position themselves as a source of profitable ideas rather than as factories for making advertising product, many of those companies' problems could be solved.

The cycle is plain as Garfield's face on a Silly Putty imprint. Once things move in the right direction, they will keep moving. Higher profits lead to more employees and higher compensation, which leads to less burnout and happier employees, which results in higher retention and people willing to work better and harder to give your company the best ideas.

Those in the business of marketing businesses need to get better at the business of marketing as a business.

Jim Meskauskas is vice president and director of online media at ICON International. (jmeskauskas@icon-intl.com)