Increased marketer use of short-term project assignments has made advertising agency income less predictable. Yet fixed costs stay the same. Hollywood faced this problem and changed to a less risky and more rewarding business model. Here’s how what worked for Hollywood could work for advertising agencies.

1. What Agencies Can Learn from Hollywood
by
Mike Carlton
The Studio System
If you’re a classic films fan (like me) you know these five brands; Metro-Goldwin-
Mayer (MGM), Warner Bros, RKO, Paramount and 20th Century Fox.
At the beginning of each of those old films the studio logo was emblazoned
across the wide screen accompanied by a bugle fanfare or a roaring lion. There
was never any question who made the movie you were about to watch.
Those five were the core of the old studio system. They controlled movie
making. While there were some other operators, the big five were dominant.
They Did It All
Each studio owned everything that went into their movies. In business school
terms, each studio was vertically integrated. They owned the sound stages.
They owned the cameras. They owned the sets. They owned the props. They
owned the editing suites.
In addition, all the talent were their employees. The screenwriters, the
producers, the directors, the cinematographers, the actors, the costumers, the
musicians, the editors, the publicists, the grips. Everybody!
And an employee of one studio could not work on a film for another studio. They
were 100% committed to their studio alone. This had particular impact on actors
who had little say on the scripts or roles their studio thrust upon them.
Every Week
And in those days each studio, on average, released at least one new film every
week. Or looking at it another way, you could go to the movies every night for a
year and never see the same new movie twice. A remarkable output.
These studios were big creative factories. Their infrastructure was immense. Yet
they ran like well-oiled machines. Cranking out an unending array of titles.
With each movie different from the one before it. They never made the same
thing twice. They practiced continuing creativity on a grand scale.
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2. Staggering Overhead
The studios liked this business model. It gave them complete, absolute control.
But it had a big, big price. The fixed costs for each studio were unrelenting.
Regardless of whether a film was a box office hit or a flop, the costs kept rolling
in. Every month all those people and all those facilities had to be paid for.
And the financial success of any individual film often had very little connection to
the cost of making it.
Essentially the profits from the hit films covered the losses from the duds. So,
too many bad films could quickly put a giant studio on the verge of bankruptcy.
Conversely, a few mega hits could put a lot of money in the bank.
The problem, which is inherent in any creative endeavor, it was impossible to
predict with reliability which new film projects would be financially successful and
which wouldn’t. Each was a high stakes gamble.
This was an exceptionally risky business model. A business model that
eventually proved to be unsustainable. And that unsustainability ultimately
changed the entire landscape of Hollywood.
The Reinvention of Hollywood
Today, the business model for the movie making industry is dramatically different
from what it was in the heyday of the big studios. While some of them are still
around, what they do and how they do it has had a radical transformation.
No more owning all the resources and facilities. No more having everyone on
the payroll. No more enduring back-breaking overhead. It is a stunningly
different world.
The old big studio system has evolved into a free-form of entrepreneurialism.
Now to make a movie it often starts with an independent, basically self-
employed, producer with a story concept. He is the driving force. It is his baby.
The producer finds collaborators, arranges financing, engages the writers, rents
the production facilities and equipment. He retains the director, the actors and
the other necessary talent. All are essentially independent contractors or
temporary employees. All are obtained in an open, dynamic market. They don’t
have permanent full-time jobs. They come from a giant fluid talent pool.
All are part of a sort of free-lance market on steroids.
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3. Thus, almost everything needed to make the movie is sourced on a short-term
basis. And when the production is over, they can have a big party and everyone
goes their own separate ways.
Possibly to work on another film together in the future. Possibly not.
Project Focus
Today, each movie is viewed as a finite project. A project with a definite
beginning and a definite end. Its costs and its income can be linked with
precision. Fundamentally there is no ongoing overhead to be allocated to it.
It is a highly efficient and effective business model. One that is a far cry from the
factory-like crank out a film a week mentality of the old big studio system.
Frightening Similarities
At this point you might be thinking, “What does all this have to do with advertising
agencies?” Actually, quite a lot.
Making advertising and making movies have a lot in common. Each client
campaign or project and each movie (which is a project) is different from every
one before and after it. Each requiring a team of talented professionals. Each
representing a different skill set or different resources. With each bringing his
complementary skills to the successful completion of the work.
The advertising maker and the movie maker both live on their creativity. They
must constantly be innovating. Never the same thing twice. And each
campaign, project or film requires a different set of skills or resources. Each
needing a team of complementary professionals.
And both are fun endeavors. Attracting bright, energetic, highly creative talent.
But unlike Hollywood, the advertising agency industry is still using a business
model developed decades ago. A business model that may no longer be in
keeping with the times.
Shifting Sands
No one doubts that marketers are rapidly changing how they use agencies. It
used to be that clients retained agencies for most if not all of their market
communications needs. And expected an enduring relationship. It wasn’t so
long ago that the typical agency/client relationship would last for years, even
decades.
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4. That continuing relationship assured the agency of a reasonably consistent
income flow. A source of funds to enable the agency to invest in the facilities and
full-time permanent employees that would be required to serve each account.
That foundational support is now collapsing under the traditional advertising
agency business model. Whether we like it or not, marketers are moving away
from long-term agency relationships to increasingly retaining agencies for
discrete projects. This poses a basic business model challenge to agencies.
A challenge that agency leaders can ignore only at their great peril.
The assurance of a predictable and reliable income flow from projects is radically
different than the income flow an agency of record receives. In an ongoing
agency/client relationship the agency can generally depend on a certain level of
reoccurring monthly income. A continuing income stream that you can count on.
Project work is quite different. First, each project can have significant sales and
up-front costs. Sometimes it takes as much work to win a project as it would to
win an ongoing relationship. So right from the start the cost structure is different.
Jump Ball
To make matters worse, an increasing number of marketers are using the “jump
ball” technique in which they routinely ask several agencies to compete directly
for a single project. Knowing full well that the losing agency cannot recoup any
of its up-front cost from that project. Its only hope is to win a future project from
that client. Jump ball again.
Then, the agency that is assigned the project knows that the income stream from
that work will probably last only a few months, or even in the best case, maybe a
year. Then it is right back to trying to find other projects to fill that income void.
Possibly another jump ball.
No wonder so many agency leaders don’t sleep well at night.
An Impossible Situation
Agencies have gotten (or are quickly getting) themselves into a crazy position.
Because of the client movement to project assignments, away from ongoing
relationships, the volatility of agency income flow is significantly increasing. In
big project months agency income may be great. In slow project months income
can be terrible. And there is little predictability about what lies ahead.
At the same time agency costs are remarkably stable. Salaries are fixed and
continue regardless of the work available. So are the costs of benefits, rent,
equipment, etc., etc.
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5. When you stop to think about it, stable costs were no big problem when income
from relationship clients was reasonably constant. Sure there were some ups
and downs but usually nothing very violent. And it all balanced out.
But now many agencies are caught in the trap of having wildly fluctuating project
income. Income that can increasingly bounce around with project work. Yet at
the same time having fixed committed costs that reoccur unremittingly every
month.
This is a crazy business model. Surely not a smart way to run a business.
A Fundamental Change in Thinking
Like the big movie studios of old, agencies have almost always staffed with
people who were full-time employees. Employees who expected an ongoing
employment commitment from the agency. This model required a wide variety
of skills so that the agency could “do it all.” Folks who were permanently loyal to
the agency. And in turn, expected the agency to assure their fixed pay along
with continued employment with periodic raises and bonuses.
Marketers liked that model, too. At least they used to. Or perhaps they still
would like it, but are just no longer willing to pay for it. In any event, it is a model
that is rapidly becoming unsustainable.
This means that agencies need to seriously rethink their business model. And
ultimately bring income and cost into ongoing alignment. Either they both must
be stable or variability in income must be matched with variability in expense.
Anything less is a denial of what the marketplace is telling us.
Looking Ahead
First, there is no going back to “the good old days.” It is unlikely that marketers
will revert to a universal embrace of the long-term agency of record model. And
in viewing the future no magic pill is on the horizon that will work for all agencies.
But, that doesn’t change the imperative that if future income is to be highly
variable then costs must become variable and closely aligned with the income.
Here are some initiatives that pioneering agencies are taking today in moving
themselves in that direction:
1. Protect Core Staffers
The brand value of every agency is usually built around relatively few core
staffers. These are the passionate, committed, big idea generators who
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6. drive the vision and values of the agency. They are also the ones that
form the bond between the agency and its clients. They are the ones that
are ultimately responsible for the agency’s perception in the market place.
These folks must be identified and protected. They will be responsible for
the agency’s future success. They should be permanent full-time
employees. And they should grasp and value their unique position. And
they should enjoy the entrepreneurial challenges they will be facing.
But remember, these folks probably represent only a fraction of your total
head count. Possibly only one in ten.
2. Expand the Use of Outside Talent
The agency layoffs of the past few years have created a large pool of
specialized free-lance talent. Many of these people have exceptional
skills. And many of them have decided that they don’t really want to be
anybody’s full-time employee again. They like their freedom.
On the flip-side an agency may not be able to use their skills full-time. Or
beyond an immediately foreseeable project. In the past it was not
uncommon for agencies to hire before they had a demonstrated ongoing
need for specific talent. It was kind of a “if you have the skills, continuing
business will come” mentality. That has become a dangerous siren song.
As the Great Recession recedes, there is a temptation to rehire full-timers
against anticipated needs. This is a risky approach which has
questionable viability today. So, many smart agencies feel it just makes
sense to establish the staffing policy of “when in doubt, source it out.”
3. Link Individual Compensation to Business Success
An agency cannot pay people with money it doesn’t have. Conversely,
when times are good everyone, but particularly the core staffers, should
be very well compensated.
This can be done by establishing modest base salaries with a very
generous upside potential. Usually in a program that is more formula
driven than discretionary. A program that the core staffers and the free-
lancers understand and trust.
And one that continually ignites their entrepreneurial spirit.
Remember too that the free-lancers bring specific talent and capabilities to
the table. Talent that may not be needed all the time, but when it is, it can
be crucial to project success.
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7. Also remember, that the typical free-lancer, like the typical Hollywood
actor, is frequently out of work between jobs. So, the hourly or project
cost when you are using a good free-lancer may be high. But you only
have to pay that when you need them. While their rates may seem hard
to swallow, this is a much better business deal than having to pay them
when there is little or no work for them to do.
4. Nurture Talent Pool Relationships
In the past building agency relationships with free-lance talent had often
been sort of an after-thought. Very little attention was paid to them until
the instant they were needed. This will probably not be a very satisfactory
approach in maximizing the agency’s benefit from the available talent.
Going forward, agencies that embrace the Hollywood model will need to
continually cultivate and nurture the talent market just as they do the
market for new clients. Ideally, an agency would like to be perceived by
available talent as the most desirable source of project work. Creating
and maintaining this perception will take continuing attention, time and
effort. But it will be worth it.
It is also important to keep in mind that the Internet has dramatically
expanded the geographic size of the free-lance talent market. With
today’s technology there is no reason why an agency anywhere cannot
access the best talent in any specialty a great distance away.
A couple of other points to consider:
1. The Role of Agents
In Hollywood, the better talent is represented by an agent. The agent’s
role is to find work for the talent after they complete their current gig. It is
not unreasonable for the better free-lance advertising talent to begin to
use agents themselves. This should not be viewed as a threatening
development, but rather a normal function within this business mode.
2. Available Office Space
Recently many agencies reduced their staff size. Sometimes this left
them with more office space than they needed but committed to in their
lease or real estate obligations. In some cases, agencies moving to the
Hollywood model are dedicating that space to the use of free-lancers.
Thus, giving the free-lancers a place to work that is easily accessible.
3. Non-Compete
Your agency’s relationship with its clients should be crystal clear to any
free-lancer you use. You’ll want to make sure that you are protected so
that you don’t find yourself competing with one of your free-lancers at one
of your clients. And that their prior client relationships are protected too.
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8. 4. Legal Tidiness
Defining the difference between an employee and an independent
contractor can be tricky. Laws and rules in different countries and taxing
jurisdictions may be complicated and confusing. So, you’ll want to make
sure your legal and tax advisors are confident that you’re on solid ground.
The Hollywood Model
Long-term success demands that if agency income becomes more variable then
agency cost must be aligned with that variability. That’s a pretty simple concept.
But change is never easy. Embracing the Hollywood business model, or any
other new approach, can be wrenching. But it appears that agencies have little
choice but to address this issue proactively and creatively.
Hollywood successfully changed its business model. Smart agencies can, too.
Copyright 2010 Carlton Associates Incorporated
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