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‘You can’t just cut a little bit’: Why this moment could force agencies to accelerate necessary changes to their business models

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If you’ve spent any time talking to agency founders or industry leaders you’ve likely heard that the agency business model is broken. Of course, this isn’t a new realization brought on by the coronavirus pandemic, as agency leaders have long bemoaned the fee-based payment model that agencies still use today. 

The problem is that those same leaders haven’t figured out or implemented a different business model to replace the fee-based one. At least, not en masse. In recent years, as clients have pushed out payment windows and switched to more project work over agency of record arrangements, the problems of the fee-based model have become clearer. And now, the coronavirus crisis — as it has done with most preexisting problems — has accelerated and exacerbated these issues. 

To survive, agencies have to change how they do business instead of making cuts here or there to manage for the next quarter. As the New York Times reported last week, there’s “a big correction” coming for the agency business. The trouble is this correction of sorts has been staring agency leaders in the face for years. But without an emergency to push them, leaders didn’t make significant enough changes. That’s not to say agency leaders could’ve predicted the coronavirus, but that the need to transform the business was already obvious. 

“Most of the time, agencies can do a little nipping and tucking,” said Allen Adamson, brand consultant and co-founder of Metaforce, adding that the two biggest expenses for agencies are talent and real estate. “But this is such a dramatic drop in the economy that you have to do a reset on how you do business. You can’t just cut a little bit.” 

Cutting a little bit had been the go-to move. During the financial crises of ’08 and ’09, ad agencies were among the many businesses hit hard. With marketers reducing ad budgets to reel in spending and mitigate risk amid a pending recession, agencies naturally had to cut back too. They did so with “hefty layoffs,” said Nancy Hill, founder of The Media Sherpa and former 4A’s president, but “didn’t change the infrastructure, way we work or way we were getting paid, which is what needed to change.” 

This time around, agencies are cutting their headcounts once again. For example, during the second quarter IPG culled 1% of staff across its agencies. Omnicom, meanwhile, cut 6100 jobs. It’s not just holding companies — independent shops like Wieden + Kennedy have also recently cut staffers. Per Forrester research, the industry average for staff reduction is 12%. 

But they’re also cutting real estate. Typically, due to unwieldy long-term lease agreements, agencies are more likely to cut staff than office space during a downturn. Now, with the coronavirus forcing the vast majority of employees to remotely, holding companies are cutting both. During the second quarter, for example, Omnicom trimmed one million square feet of space and IPG got rid of 500,000 square feet of its leased office space across the globe.

Doing so sends a “loud signal,” said Jay Pattisall, principal analyst at Forrester, that agencies are “accepting and embracing that there will be fewer people in less office space” going forward. 

But industry analysts and agency execs say that cutting headcount or reducing space won’t be enough.

“Agencies need to change the economic model,” said Pattisall. “We started 2020, which was supposed to be a pivotal comeback year for the agencies, with most of them hovering around 3% growth. When you’ve got tech companies and consultancies well into double digit growth, it underscores the people-based services economic model has not worked for agencies as they intended it to. This is an opportunity to embrace that change.” 

Some believe that change will be realized in the new agencies that will crop up in the wake of this large disruption. Per Hill, it’s common during economic downturns to see new agencies founded as laid off creatives often start their own shops. It’s already happening: Former BBDO CCO Greg Hahn was cut from the shop in April and announced he was co-founding a new shop, Mischief, by June. 

Still, no matter their size or age, it’s clear that agencies can no longer make incremental changes to deal with the fallout from coronavirus especially since ad budgets are not expected to return to 2019 levels until mid-2021 or even 2022, noted Pattisall. 

“This disruption will force many agencies to rethink how they are structured and how they go to market, not just put a top spin on what they are currently doing,” said Adamson. “It requires starting with a clean sheet of paper.”

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