Adweek 2000 Media and Technology: Fork in the Road

Agencies must alter their course if they plan to be competitive in the future marketplace At David Ogilvy's memorial service last month, one of his former protƒgƒs displayed no trace of nostalgia for the industry he had abandoned. He now happily makes a small fortune doing equity-flavored Internet consulting. "Agencies just can't seem to adapt to what's going on," he mused. "They aren't really valued as creative business partners anymore." Why? The irresistible rise of the Internet as both a medium and a cultural phenomenon has cracked the veneer of value that many agencies peddle to their clients. The Whole Egg has gone Humpty Dumpty. Put aside technical issues of bandwidth and bits; the World Wide Web is a superb vehicle for both brand advertising and direct marketing. The Web is integrated advertising incarnate. The irony? Traditional agencies that have long preached integrated marketing seem, once again, somehow unable to practice it. What made Ogilvy so brilliant and compelling, his protƒgƒ recalled, was that he understood how to build a brand--and create a response. He even preached that the best training for a copywriter was a stint at a direct response agency. In short, Ogilvy instinctively integrated. More importantly, Ogilvy understood that agencies had to identify, hire, nurture and reward people who could treat brand and direct as cultural complements rather than hostile rivals. Once upon a time, when a new medium, such as television or cable, came onto America's pop-culture scene, entrepreneurs and investors raided ad agencies for their best talent. The Internet explosion of the late-'90s, by contrast, exposed a painful truth: You didn't need Madison Avenue and spreadsheet-addled planners to create a media revolution anymore. Quite the contrary. The Internet succeeded in spite of--not because of--the advertising establishment. Pimply 27-year-olds who knew Java had nothing to do with Starbucks quickly acquired Net worths that dwarfed talented 45-year-old account supervisors who had labored at their agencies for 20 years. The edgy New York challenge--if you're so smart, how come you're not rich?--has never sounded more insulting. An accident of economics? A cruel joke of market forces? High-tech tulip mania? Hardly. The Web explosion has been the by-product of a real convergence in the media marketplace. Structural shifts in both the business of technology and the technology of business have rendered the business models of most agencies as anachronistic as the 15 percent commission. The proof? The bread-and-butter accounts of traditional agencies, such as Procter & Gamble, General Electric, General Motors, AT&T, IBM, McDonald's and CitiGroup, have asked firms that didn't even exist when this decade began to be their real marketing partners in an increasingly virtual marketplace. These giants are advertising on global networks and portals--America Online and Yahoo!--that are in their infancy. Indeed, companies are conducting e-commerce in ways that didn't exist five years ago. Thus, when a 30-year-old at an interactive shop claims he is building additional services for clients, rather than--just--creating ads for them, it isn't time for the ad industry to shake its collective head and marvel at the pipsqueak's hubris. It's time to get with the program. I mean, the software. When General Electric's Jack Welch, arguably the No. 1 Fortune 500 poster CEO for enlightened bottom-line leadership, publicly asserts that his firm will become an e-commerce company as soon as possible, it's clear that the nature of business--not just the nature of business processes--is changing. These ongoing transformations have made advertising, promotion and direct response more important than ever before. Paradoxically, they have also made advertising agencies weaker and more vulnerable than ever before. The Innovator's Dilemma--a look at how even the most innovative firms can collapse in the face of fundamental disconnects in the marketplace--has been one of the business best-sellers of 1999. Certainly, advertising agencies have a far better track record of acquisition than innovation. And for some agency holding companies, like Omnicom Group, which thanks to CEO John Wren tossed seed money at a host of interactive services companies several years ago, the Net has paid generous financial dividends. By and large, however, today's agencies have to cope with their diminished status; creating ad campaigns just isn't what it used to be. Witness the evolution of a new Internet advertising startup from one of Omnicom's own agency holdings, BBDO. Called tmosphere, its goal is to infuse Internet advertising with creativity. But given its backers, it's worth wondering how soon the fledgling company will realize that true Internet creativity isn't about innovating with animation technologies. It's about using new technology to build new businesses. That's why the advertising industry is under sharp attack from the Internet, the professional services sector and--most damning of all--clients. Of course, no one could rationally argue that advertising agencies are on the brink of collapse during one of the healthiest economies in postwar history. But it's easy to argue that in terms of value creation and market impact, ad agencies have been underperforming relative to the Internet or the professional consulting services sector. Just ask business-school students at the nation's elite: Harvard, Stanford, Dartmouth or Northwestern. They'll laugh in your face if you dare to suggest a career in advertising. Do these best-of-breed students want to create or build brands? You bet. Do they want to redefine and redesign relationships with customers and clients? Absolutely. Do they want to influence pop culture and the zeitgeist? Naturally. But the fact of the matter is, they don't believe that ad agencies are even close to being the places to do any of those things. David Ogilvy really is dead. Today's truth is that a McKinsey, Bain and Andersen Consulting now has as big an impact on the brand positioning and marketing strategies of Fortune 1000 firms as any global advertising agency. Top-tier consulting firms are happy to seize the advisory role in branding strategy that an Ogilvy or a Bill Bernbach once played. They're happy to turn agencies into junior partners. And they do. Similarly, a Goldman Sachs, Morgan Stanley and Merrill Lynch often play far greater roles in strategic positioning and corporate evolution than any PR or direct marketing firm. Smart merger-and-acquisition advisers understand as much about strategic positioning as a top agency account supervisor. Throughout the 1990s, professional-service firms worldwide have been capturing an ever-greater slice of top management mind share--and money share--from ad agencies that once prided themselves on being intimate partners with their clients. In other words, global-services firms with brains and brands even more glittering than the best agencies now offer marketing expertise as part of their value-added efforts. Does that render traditional agencies obsolete? Of course not. Does that make it far more difficult for advertising agencies to command a premium from their clients? Absolutely. But wait, the problem gets worse. Pesky startups with names like Scient, Viant, US Web/CKS and Agency.com have materialized to bring e-branding and e-commerce expertise to companies with the richest marketing budgets. Do these young bulls bring direct marketing savvy or branding brilliance to their clients? Not yet. But they do bring an ethic of urgency and learning--along with the savvy that comes from swimming with schools of venture-capital piranha. That training gives them a Net credibility that most agencies are unlikely to possess. Web development companies have accomplished something that should terrify agency budget crunchers. They persuasively argue--and demonstrate--that the Web dissolves distinctions among marketing, sales, branding, promotion and fulfillment that used to matter in large companies. As such, a Web site shouldn't be funded from an ad budget alone; it should be funded with advertising, promotion and direct marketing dollars. You want the site to be an e-commerce gateway? Then funding should also come from information technology, sales and operations. Want to offer innovative one-to-one customized products and services? Then kick the engineering, manufacturing and customer support budgets online. This new breed of interactive service firms offers value propositions predicated on the notion that traditional client barriers among marketing, advertising, sales and operations can be profitably obliterated. But how many agencies can craft a credible argument--backed by a solid infrastructure--that lets them pick pockets across the enterprise? Technological convergence is producing a new organizational convergence. But conventional advertising agencies seem poorly positioned to capture the profits that emerge from Internet integration. In addition, creatives bred on producing 15-second network spots and account executives rewarded for persuading clients to toss an extra $8 million onto AOL do not reflect business cultures capable of managing how best to integrate a brand/direct campaign across multiple media. True story: a high-ranking creative executive at a major agency recently complained about how difficult it was to hire people who specialized in "writing banner ads" for the Internet. That said, the structural changes prompted by the pressures of digital technologies and professional consultancies are still less important than the client. The nagging question that haunts WPP Group, Interpublic and Omnicom must be: What do clients want? When a P&G finally opts for a pay-for-performance compensation formula, the answer becomes clearer. Clients want measurable performance and demonstrable returns on their advertising investments. John Wanamaker's famous--"I know that half of my advertising dollars are wasted; the problem is, I don't know which half."--is no longer regarded as funny. Clients want greater efficiencies as well as greater effectiveness. After all, firms that have not hesitated to lay off tens of thousands of workers during peak profit periods have little compunction about changing agencies. Clients have sharpened their rising demands with an edge of ruthlessness. Loyalty has become passe. As Net technology shifts and the ambitions of professional-services firms jostle for lower-level attentions, however, the very definition of advertising will change. Top management has begun to grasp the marketing opportunities--and trade-offs--that technology and strategy can demand. Unilever's Niall Fitzgerald asserts that Europe's largest consumer products firm must now cull three-fourths of its existing brands. He also acknowledges that his company will be marketing services as assiduously as it now markets products. Managing channels matters just as much as managing customers. Indeed, channels are customers. Examine Wal-Mart's relationship with P&G. Ultimately, the question shifts from What do clients want? to Who do clients want? In other words, who do clients trust their own customers and channel relationships to? What media and methods do they want to use to manage those relationships? Who is best positioned to be a partner and who a subcontractor? What the advertising industry has been experiencing is a profound transformation in the balance of power: Clients have become more powerful. In fact, clients now have far greater choice in the selection of technology and advice. What's more, clients are in a far more competitive environment than they were in 1990. Thus, they have a greater incentive to be more discriminating--and demanding--of their partners. One might argue--tongue-in-cheek--that the professional-service firms are to ad agencies in the '90s what Japan was to Detroit in the '80s. As for the pace of technological revolution, Agency.com and Scient are to WPP and Omnicom what an Amazon.com is to a Barnes & Noble. But these observations still don't answer the question of whether such changes--and more importantly, the ability within the agency community to recognize them--will make shops more agile competitors. Interestingly, this competitive crucible recalls the failed Saatchi & Saatchi acquisitions binge of the '80s, when Maurice and Charles sought to turn their agency into a global professional-services firm where advertising was but a part of the whole. Who was their young chief financial officer at the time? Martin Sorrell, now CEO of WPP. Perhaps WPP will be successful in stepping away from being an advertising and marketing-services firm and evolving into a professional-services giant that also offers clients management consulting, software development and venture-capital offerings. That evolution--or revolution--has yet to occur. Conversely, perhaps we will see a rise of virtual agencies and boutiques as technologies provide infrastructures that make scale and mass less important. Indeed, one of the major challenges facing global enterprise is that the cost of coordination outstrips the economies of scale. So will technology encourage consolidation? Or will it promote a fragmentation of the advertising/promotion industry? The answer to these questions will not be determined by agencies. If you want to know the future of the advertising industry, you need only look at the future of its clients. If the millennial trends are any indication, it's clear that agencies are going to change even more than their clients. Instead of turning a deaf ear to the relentless din of new competition, they have to hear and accept the clarion call. Technological convergence has rewritten the economics of business convergence for clients. That, in turn, is rewriting the rules of business convergence for agencies. Whether agencies are capable of playing within these new rules--let alone writing them--is the true millennium bug for advertising.

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Adweek 2000 Media and Technology: Fork in the Road

Michael Schrage

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Michael Schrage