'Agencies are at risk of becoming finishing schools for tech titans'

"Behind the generation of career-coasting marketers maintaining business-as-usual sits a frustrated, hungry, product-focused and purpose-driven generation of progressives." 

This was the stark warning that Jules Ehrhardt, the founder of FCTRY, the creative capital studio, delivered the industry in his seminal publication State of the Digital Nation.

It is a theme he continues to explore in his follow up to his much-discussed 2016 article in State of the Digital Nation 2020: Venture Road, which he published this week. He points to the growing impact a"‘new generation of entitled millennials who appear to value their own wellbeing over the company’s fortunes" are having on the creative industries.

He says this new generation of talent is triggering outrage with the "in my day" brigade, but are willing to make a stand to effect real change on the businesses they work for.

According to Ehrhardt, the "plague of agencies mis-selling their work" is creating unsustainable conditions for such employees. A trend which means leading agencies are increasingly serving as "finishing schools for tech companies" who can offer not only better conditions, but also 25% to 50% higher renumeration and superlative benefits.

Campaign caught up with Ehrhardt to find out more about the industry's brain drain, mis-selling and why by 2020 he believes the industry will be one holding company down. 

Q: You write that the industry brain drain is well underway. How can agencies address the talent crisis? Is the industry in denial about its ability to compete with the tech giants?

There is a talent crisis and agencies are finding it hard to compete. The one-way flow of talent from agencies into tech companies is growing with every year. Humans look for three things from their work life: a humane working environment, purpose, and the requisite pay. It appears as though the newer generation is increasingly willing to prioritise conditions and purpose over pay - the millennial rebellion on working conditions at PWC is to be noted and celebrated.

Working conditions are definitely a factor. At many agencies, they rely on 60 to 70-hour work weeks, late evenings, and even weekends at the worst. That’s neither sustainable or humane. It’s not a breeze working at tech companies either, but the conditions are generally better. So for many it’s be sucked dry by your employer and get paid less. To help cure children’s cancer, maybe, but not to help sell more fried chicken. People are doing the maths.

The growing trend of agency staff working on site with the client creates another challenge. Stationed at the client and exposed to the benefits and environment, they naturally wonder why they don’t work there directly doing the same job, but with the better pay and benefits.

You can’t run an agency poorly and complain about people looking for better options to practice their craft. So the solution is to improve working conditions and purpose, because you can’t compete on pay. The trap much of the industry finds itself in is that it relies on people working those 60 to 70-hour work weeks. That’s what you call a badly run business, as well as illogical, as there are only around five hours capacity of creative output in a human on the best of days. To adjust to a 40-hour work week, you would need to hire 33% more people, so your costs go up whilst your income remains level. Dentsu saw their profits hit by that particular conundrum after responding to the tragic suicide of one of their employees, who had been working illegally long hours.

A key area the industry could do better in is to support working parents, mothers in particular. People are scratching their heads about gender diversity at senior levels, whilst making it practically impossible for working mothers to balance work and parenting. That’s a simple and cost effective fix that people are missing. This is a huge problem in the US and one of the reasons we started the Pledge Parental Leave movement. 

Q: Mis-selling is a key thread in your article, whether agencies mis-selling their capabilities or technical abilities, mis-selling to clients or mis-selling their offering to staff. How can this issue be addressed?

The packaging and selling of creativity has in essence been my principal task in the industry. I’ve seen the full spectrum, and mis-selling is a rampant problem. It creates carnage throughout agency and industry, affecting working conditions and of course profits.

As creatives we love to believe we can boldly tackle new territory. Fake it till you make it is practically de rigueur. But that only works within a well-judged threshold, and more often than not it results in hubris. There is a lot of work that agencies should not be pitching for as it is beyond their capabilities. So those that mis-sell their capabilities but then fail to leap the gap between brief and capabilities end up tumbling. Those failed attempts have resulted in the loss of decades long held client accounts. It also results in burnt out staff trying to play catch up, unprofitability, and burnt bridges with clients.

The worst examples always stem from where the sales team is dissociated from the humans delivering the work, compounded by sales people with limited technical or craft understanding. There is a tendency for the salesperson to disproportionately impose their will in order to meet their own-short term targets. When they mis-sell, they also sell their people down the river in the process. You’d fix that issue pretty quickly if the person selling the work was obligated to do the same hours as the people delivering the work (likely to be French labour law soon). If you look at Publicis and the Marcel announcement, they basically mis-sold to themselves, which is deliciously ironic.

My job at ustwo was always to reflect the expertise of the team delivering the work, to create the right space for the project to be both successful and profitable. The solution is always to get the right people in the room from the moment you consider a brief. Should we do this? Can we do this? What’s the effort? That’s as logical as speaking to users when you’re designing a product or service, isn’t it.

The ultimate agency mis-sell is when they sell the agency itself and tell everyone that everything is going to be the same but better. It is not, and everything will change. The failure to have a wake and celebrate what existed but will now end is culturally deeply unhealthy.

Q: You write that "by 2020 we will be one holding company down". Have the wheels come off the holding company model, and, if so, why?

The developing clash between ad holding companies and consultancies is fascinating to observe. The malaise of the holding companies is rooted at the agency level. Many of the major agencies in the groups are traditional "heritage" advertising and PR operations, whilst the world went digital. Furthermore, the "digital agencies" that the holding companies did own, have largely failed to transition from digital marketing into digital product work. Instead of repositioning, they have been cannibalising and commoditising themselves by offshoring their work to compete downwards on price. The example of Huge (big legacy marketing shop) and the emergence of Work & Co (digital product shop) in New York is an almost perfect illustration of both the failure and opportunity.

The ad holding behemoths were in such a fantastic position, enjoying the ear of the C-Suite. But they missed the signs, failed to act and develop a contemporary offering. Now Google and Facebook are taking 90% of the growth and the consultancies are in the mix. Look over the sales of digital product shops over the last four years. Nearly all of them have been snapped up by the consultancies, who are two to three times the size of ad holding companies with correspondingly bigger cheque books.

Now the ad holding companies are saying they are going to go into the consulting business, with at best tenuous credentials. It really reads like the Charge of the Light Brigade. They wasted their chance because too many were invested in maintaining the status quo and now they find themselves in a hot mess. Marketer, transform thyself!

None of this is new information. Everyone knows the emperor is stark naked. People do need to be asking their leadership what they are doing about it. I know I’d rather be Martin Sorrell on a yacht planning from a blank slate than Arthur Sadoun navigating a supertanker through a biblical cyclone.

Q: Behind the flurry of "bullshit word-salad press releases" do you believe the consultancies will attract and retain the talents of the very best of the "creative class"?

The consultancies are literally buying the creative class. So, yes, they are retaining their talents. Even though they can afford to slap on golden handcuffs, retaining them is altogether another challenge, as creatives tend to be more idealistic and want to practice their craft. There is also a culture clash between the "jeans and tats" and the "slacks and cravates" to consider. Another point of failure is the relative importance of creativity within the consultancy org. A $3m creative project, significant for an agency, might only represent 3% of that client’s account for a consultancy. Due to the significant empire building and paranoia that management consultants engage in to protect their fiefdom, they often internally restrict access to the client. It is hard to do good work in those conditions.

There is also an important question we need to ask about the homogenisation of design as giant design organisations are built. Where is the room for expression within that kind of structure? I do believe that in the coming years, with earnouts complete, that we’re going to get a second wave of nimble and agile independent studios emerging. It will not be under the old agency model though. It will be something new, which is my particular obsession.

Q: You touch on the epic Pepsi Kendall debacle. In reflection do you think the growth of the in-house model has been overstated?

It is a fact. P&G, WPP’s largest client, is halfway through reducing its annual $10.7bn budget by $2bn by 2021. They also slashed their agency roster from 6,000 down to 2,500. Unilever plans to cut 50% of its agency roster and 40% of its consultancy roster, and has cut its marketing spend by 30% by taking the work in-house. That trend is only going to continue, so it’s squeaky bum time for agency world as they "consolidate", which is a laboured euphemism. The gravity of the situation also means that holding groups are prepared to contort themselves into any insane shape they can to retain business. Cue WPP serving up a crew from 11 different agencies to secure BP’s business.

Given Pepsi was very vocal about stating that agencies needed to raise their game or risk losing out to in-house teams, I am sure that many in the ad industry were fistpumping at the debacle of the Kendall ad. However, the agency-created "Because I Can" Diet Coke ad is equally insipid, just in different ways. So there is little creative high ground in that debate. One needs to ask whether the drive towards in-house would be taking place if brands were comfortable with the value they were getting from their agencies?

Building effective, high performing, in-house teams is hard. So it’s not an instant fix. You could go and pick the best players from every team in a league and end up with the worst team in the league if you can’t get them to perform together. We’re going to see lots of in-house car crashes and agency schadenfreude along the way. Agencies offer a way for brands to hedge that risk, at a cost of course, so they need to demonstrate the value of that option to retain business.

Q: You say you were done with being paid for time. Has the industry effectively turned itself into glorified Uber drivers with the emphasis on inputs not outputs?

I do believe the paid-for-time client service model that rules the agency economy is its central problem. Somewhere in the mists of time we decided to sell creativity in units of time, and in doing so built ourselves a prison island we have never escaped. Expertise, craft, knowledge, and wisdom, have been arbitrarily abstracted and atomised into units of time — homogenised and commoditised, like ground sausage meat to be sold at market.

That locks you into a fixed odds business which linearly yokes effort to revenue. That’s a hamster wheel. The model used to deliver healthy double digit profits, and now it is getting dangerously close to single digits for many agencies for a variety of factors. It is a model with declining returns and negative economies of scale. A decade ago it made sense, but no one I have met with in the last few years on the topic says they would do it the same way again.

Is the agency model dead? Of course it isn’t. There will be agencies in the future. I’ve always believed in a very simple fact: there are more good projects than there are good teams. So if you are great, then you are going to get work, and you are going to be successful. It’s simply getting harder and it is going to get even harder and the "not great" 90% of the market is going to get crushed from the bottom up.

The agency life has been good to me. I’ve experienced tremendous privilege and literally seen the world. I am deeply thankful for that. But I am done with being paid for time and am focused on how to get paid for mind. That’s the focus of my work going forwards, how the creative class can deploy its expertise to forge new models specifically in the venture space.

Q: What can the "creative class" do to not just survive but thrive in an era of significant flux?

We, the atomic unit of the industry, need to recognise the forces at play and draw logical conclusions. At the very least that means accepting that business as usual is not a valid position. At that point you’re either a revolutionary or not.

At the agency level that means getting the people in the way, those holding back the forces of necessary creative destruction, out of the way. People need to ask their leadership what they are doing to address this seismic market shift. If the answers are not satisfying, then the next generation of talent needs to come at the industry with all the respect of a young title belt contender, which is all and none at the same time.

I believe we need to break the bonds of the paid-for time client service model, escape our prison island, and change the terms of business. For me that means exploring risk reward models and the world of venture. Those models need to be funded otherwise we’re missing the greater opportunity by the distraction of short term pipelines. In order to attract investment from seasoned investors, we need to demonstrate potential five- to 10-times value growth, not anemic single digits.

We’re about to freefall into the age of machine learning, automation and AI. The creative class is perhaps best positioned to flourish in that era because we’re focused on the only difference between us and the machine, human creativity. So we need to get creative about designing our businesses. Negotiate the upside, forge new models, explore and normalise all the "alternative" revenue models we’ve been playing with. Sure it would not get beyond 90% of procurement departments of big brands. But over time, the more we prove the more we normalise. It is therefore also imperative that we apply open source software development philosophy to the design of our new economic models. Share what works, share what doesn’t, to help us all get to a new normal.

I know I'm what The Day After Tomorrow is to climate change, but we really need to begin to figure this out fast. It’s time to burn the boats.

Jules Ehrhardt is First Human at FCTRY, former owner at ustwo, and author of the State of the Digital Nation series.

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