How to fix advertising's broken business model

The Blueprint has some recommendations for agencies following its Truth About Talent report.

Most agencies today argue that creativity is their single most important asset, yet many have a business model that actively prevents them from delivering great creativity.

This was the prognosis delivered by business design and talent consultancy The Blueprint as a follow-up to its Truth About Talent report. That initial research lifted the lid on the challenges of leading agencies in the face of seemingly constant cost-cutting and restructuring. The study, which anonymously surveyed the top 1% of advertising leaders, underlined how the industry’s broken business model is breaking talent.

Following the publication of Truth About Talent, The Blueprint ran a series of breakfast events in London and New York in partnership with The Business Model Company to provide tangible action points on how agencies can move away from legacy business models. Their recommendations include a shift towards a more sustainable, value-based pricing model and ending the charging of creative services on an hourly rate.

Building a new business model

According to data from Kingston Smith, average agency profit margins have gone from 30% in the 1960s to 9% in 2018. This reflects the commercial pressures agencies face and the frailty of the existing model of time-based pricing.

Caroline Johnson, co-founder of The Business Model Company, said: "The industry has gone from denial to disaster in the last 10 years whilst completely failing to address the problem and do something."

According to The Blueprint, progressive clients actively encourage a new agency business model and ways of working, because it enables the agency to bring creativity to the fore – something that such clients are keen to emphasise.

While recognising that it's difficult to achieve, The Blueprint stresses that business model transformation is the single biggest issue facing industry leaders today.

The weight of legacy models

Discussions at the breakfast events underlined that agencies accept the need to transform and progressive, creative businesses are already beginning to shift their business models – and therefore their margins.

Frustrations with the shortcomings of existing ways of working were at the top of the agenda. As one global chief marketing officer quipped at one session in London: "We are currently engaged in a dance till death with all our agency partners."

In light of this, The Blueprint urged agencies to take action. The company believes that simply responding to disruption by cost-cutting does not address the fundamental structural and pricing challenges thrown up by the legacy model: underutilisation of agency capability, inability to fully monetise specialist talent and inverted commercial and pricing structures, where an agency makes more margin by engineering more people to work on longer projects.

Tyranny of charging by the hour

The events centred on how embracing change is fundamental to survival and the fact that creative leaders need to adapt to disruption in a different way. At the top of the recommendations for change is for agencies to move away from charging by the hour and adopt what The Blueprint calls an "output pricing platform".

The Blueprint urged agencies to instead focus on creating value for clients. In practice, this involves organising the business around client challenges and highlighting the agency's capability at the very beginning of the relationship. It's a shift that The Blueprint believes will help agencies "master creativity, supported by a consulting model".

Simon Wylie, chairman of The Blueprint, explained: "Transformation is, of course, a complex challenge. With it, however, comes opportunity, sustainability and margin gain." These opportunities, he believes, remain unattainable for agencies wedded to outdated business models. According to Wylie, changing structures will lead to greater parity and mutual respect between client and agency partners.

Action points: What do new leadership models look like?

The challenge facing most agencies in 2019 is to create a new business model and one crucial element of this is leadership.

Sam Brookes, global managing partner at The Blueprint, says that the industry is already seeing a desire for new leadership qualities to instigate change, transformation and drive transition.

In line with this, The Blueprint is urging agencies to empower people for their potential and hire for aptitude and attitude. There are five key types of leaders it believes will drive the future:

Actionable visionary: Attitudinally embraces the opportunity that change and disruption bring. Characterised by boldness and driven by clarity, not persuasion. Lives the vision and inspires the agency to follow willingly.

Inclusive change agent: By nature instinctively collaborative and inclusive; walks the floors. Drives and supports transition by bringing everyone together on the journey.

Commercial creative: Understands and champions the power of creative excellence to solve business challenges. Driven by effective creative solutions, not awards.

Creative commercial: Embraces new ways of working to generate sustainable growth, whether via new business models and pricing, start-up partnerships or the application of technology.

Beautiful business designer: Holistically embeds new capabilities aligned to the agency’s growth seamlessly to enable teams to work fluidly together.

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