ANA Agency/Client Forum: Agency Performance Isn't Based on Results

I spent most of yesterday at the Association of National Advertisers (ANA)’s Agency/Client Forum. The agenda covered a range of timely topics including digital advertising and social media. But I think it’s fair to say that most of energy was focused on the pocketbook issue of agency compensation.

In particular, the question du jour was value-based compensation or its cousin, pay-for-performance. I would have thought those were pretty much the same thing, but as Coca Cola’s Director of Worldwide Media & Communication Operations Sarah Armstrong set out in a detailed description of Coke’s own process, value-based compensation works largely by estimating a reasonable cost in advance, while pay-for-performance is based on after-the-fact assessments. (Coke’s process incorporates both – a base fee that is intended cover agency costs, plus up to 30% bonus based on performance.)

However, as several speakers made clear during the day, most pay-for-performance measures are based on agency behaviors such as innovation, strategic thought and execution, rather than business results such as sales, market share or even communications activities such as media cost savings. Specifically, an ANA survey that will be formally released in mid-October found that 56% of agency performance measures were based on qualitative metrics, vs just 19% on business results and 25% on communications metrics.

My initial reaction to this survey was pretty dismissive – either you pay for results or you don’t. But the fundamental rationale, mentioned by several speakers through the day, is that business results are affected by many factors beyond the agency’s control, so it really wouldn’t be fair to penalized or reward them purely on that basis. The analyst in me says it’s still worth trying to isolate the agency's contribution to results, but this is definitely a valid point. So including the subjective measures does make more sense than I initially thought.

A related question that ran through several presentations was whether agencies are commodities. One presenter flashed a survey that showed 80% of respondents thought they are (I didn’t capture the details of that survey, but think it was an informal online poll, so it’s probably not very meaningful). But both the clients and agencies among conference speakers felt strongly that they are not.

What was interesting, though, was the sorts of distinguishing features that speakers cited – strategic insights, brand stewardship, creative genius, etc. Those are based largely on the skills and chemistry of the individuals working on an account. As the cliche says, those assets “go down the elevators every night” – that is, they are individuals rather than property of the agency itself. So it’s possible that the agencies themselves are pretty much commodities (i.e., have about the same processes and technology) even if their people are different.

And even when it comes to people, I find it hard to believe that any one agency can really have people who are on average much better than any other agency. There are, in fact, plenty of smart and creative people in the world. Yes, there are occasional true geniuses, and clients lucky enough to find them working on their accounts may indeed gain a strategic advantage. Perhaps some of those geniuses are even so clever that they can build an entire culture around themselves to leverage their skills. But I'd say that level of genius is very much the exception.

In general, then, I suspect that once a quality agency comes up to speed, it would produce roughly similar results to another quality agency. This doesn't mean that you could immediately switch from one to another. But over the long term, agencies probably are something close to a commodity.

This relates back to the performance measurement questions. The value of an agency really does lie in its strategic, creative, and execution contributions, plus its ability to work closely with the client. In theory, most agencies should be able to do these equally well. But in fact, there will be variations based on the individual team members as well as (to a lesser degree, I think) differences in agency processes and culture. So it makes sense for performance evaluations to focus on those factors, even though they’re subjective. Marketers must measure those factors to identify areas needing improvement, either by changing performance of their current agency partners or switching to new ones.

When All Marketing is Internet Marketing, All Agencies are Internet Agencies

A little press notice this week reported a January 20 announcement from Ogilvy North America of “strategic alliances” with marketing automation software vendor Unica and marketing database integrator Pluris. On its face, this seemed to suggest a change in strategy for all three firms, moving towards a database marketing agency approach that combines technology, marketing strategy, data and analytics. But close reading of the press release shows this is just an agreement to make referrals. When I asked one of the players involved, they confirmed that’s all there is.

Nevertheless, the announcement prompted a little flurry of speculation in the Twittersphere / blogosphere (we need a new term -- blabosphere?) about changes in the role of traditional advertising agencies. Even though the database marketing agency model has been held a relatively small niche for decades (pioneers like Epsilon were founded in the late 1960’s), the thought seems to be that it will soon become the dominant model.

I’m skeptical. In some ways, the basic technologies for customer management have actually become more accessible to non-specialist companies. In particular, the hardest part, building a customer database, has largely been taken over by customer relationship management systems. Once that’s in place, it’s not much more work to add a serious marketing automation system. In fact, all you do is buy software like Unica’s—which is why a firm like Ogilvy doesn’t need to build its own, or to have a particularly intimate relationship with Unica itself. Yes, Ogilvy and other agencies need database marketing competencies. But all they really need to do is manage a firm like Acxiom doing the actual work. This takes expertise but much less capital and human investment than doing it yourself.

So, if database marketing has become easier, there is even less need than in the past for an integrated database marketing agency. Database marketing has remained a small part of the industry because its scope is too limited, particularly in dealing with non-customers (who mostly are not in your database). (Yes, the credit card industry is an exception.)

But the Internet is changing the equation substantially. Advertising agencies marginalized database marketing because customer management is not their core business. But advertising agencies exist to buy ads, and Internet advertising is now too important for them ignore. Plus, Internet advertising is much closer to agencies’ traditional core business of regular advertising, so it’s much easier for them to conceive it as a logical extension of their offerings. Even though many specialist agencies sprung up to handle early Internet advertising, the traditional agencies are now reasserting their control.

Now here’s the key point: managing Internet ads is not the same as managing traditional advertising. Ad agencies will develop new skills and methods for the Internet, and those skills and methods will eventually spread throughout the agency as a whole. Doing a good job at creating, buying and evaluating Internet advertising requires vastly more data and analysis than doing a good job at traditional mass media. It will take a while for the agencies to develop these skills and procedures, but these are smart people with ample resources who know their survival is at stake. They will keep working at it until they get it right.

Once that happens, those skills and methods won’t stop at the door of the Internet department. Agencies will recognize that the same skills and methods can be applied to other parts of their business, and frankly I expect that they’ll find themselves frustrated to be reminded how poorly traditional marketing has been measured. Equipped with new tools and enlightened by a vision of how truly modern marketing management, agency leaders will bring the rest of their business up to Internet marketing standards of measurement and accountability. It’s like any technology: once you’ve seen color TV, you won’t go back to black and white.

We’re already seeing hints of this in public relations, where the traditional near-total lack of performance measurement is rapidly being replaced by detailed analyses of the impact of individual placements. In fact, the public relations people are even pioneering quantification of social network impact, perhaps the trickiest of all Internet marketing measurement challenges.

So, yes, I do see a great change in the role of advertising agencies. I even expect they will resemble the integrated strategy, technology, analytics and data of today’s database marketing agencies. But it won’t happen because the ad agencies adopt a database marketing mindset. It will happen because they want to keep on making ads.