Ad Age, reporting recently on agency new business trends for 2022, pointed out that, while there was an 11% increase in the number of global pitches, those pitches brought in 35% less revenue as compared to the year prior. In other words, the new business pool shrunk almost in half after the pandemic.
This has ominous implications for agencies. The impetus for this drastic phenomenon is that there are fewer big creative AOR (“Agency of record”) pitches, where a sole agency gets a retainer and is responsible for all the services that a particular business might require.
Instead of relying on these “traditional” AOR agencies and retainers, many clients now prefer to engage agencies on a short-term, project basis. As AORs decline, project-based work increases.
That is the most disruptive trend in advertising in years. The composition and the makeup of the fabric of the industry is completely upended, and agencies must rethink their model in light of this tectonic alignment.
The writing is now on the wall. The shift to a project-based ecosystem is threatening of putting agencies with legacy, out of date models out of business. These agencies are running on old business models, with high overhead and layered, unproductive staffing, are currently endangered.
The traditional AOR model is inefficient and has been for quite a while. It is overhead-intensive. Agencies care on optimizing billable hours and not at all focuse on client needs. In many agencies today, only 35% of the staff is directly involved in the creation of the advertising. There are whole layers of people whose job is to perform essentially administration and facilitation tasks.
Agencies definitely need to change to survive in the new era of project work. To compete they must simplify, streamline, and depart from the approach of hourly rates. They must reduce layers and maximize speed and efficiency, plus having the ability to scale staff up or down, and become profitable on smaller budgets.
Project work is a democratized format that allows agencies of any size to compete for the same business. It has created new opportunities for smaller agencies to compete with holding companies. Many small agencies now start building their businesses model around projects. They reduce cost, increase relationships with freelancers and fractional staff, and develop subject matter expertise.
The AOR model was, at one time, the bedrock for the agency business: it offered stability through guaranteed repeat business, and full control over client strategy and implementation. Now, fewer clients are willing to commit themselves to one agency for an extended period of time. This is especially true with new business pitches. Paying a retainer to an agency that you may not have worked with before, is a big risk because you cannot be not sure just how they’ll perform.
Most agencies could soon see upwards of 50% of their roster consisting of project-based work. The shift to project-based work comes around to as marketers’ budgets shrink, and agency tenure is short. There is no reason to think conditions will become more favorable for agencies. Clients will still want more for less. Less budget, and less commitment.
I’ve been very vocal about the wisdom of project-based work. I’ve championed it as a smart alternate route to pick an agency, compared to the failed RFP/Pitch process that consultants cling to. The idea of a paid trial with an agency, actually working together on a project, instead of hearing promises in a conference room, is compelling.
The out of date AOR/RFP takes 4-6 months of diversion and disruption for the client, and it is costly. It is an artificial and random process that does not remotely resemble the true real-life interaction between client and agency. 90% of the “winning” creative work never sees the light of day and 70% of the winning agency will be fired in 3 years.
It is an inconsistent process. The agencies are working in isolation during the pitch and therefore, the process doesn’t reflect just how agencies and clients will work together. The harsh reality is that the whole concept of the pitch is contrived, and client and agencies are kept apart, and, as a result, the pitch becomes a superficial beauty contest.
The best way to get to know an agency, and to understand if they are a good fit with your business, and your team, is to actually work on a project together before hiring them for more assignments.
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