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The Advertising Industry Today.

Think the advertising industry is full of innovative ideas and future potential? Think again. How did America’s darling Mad Men go from rolling in it to barely holding on? by Keenan Beasley, Forbes.

According to Michael Farmer, CEO of Farmer & Company and 25-year veteran advertising consultant, what was “once one of the most fulfilling and glamorous of industries has become a grim sweatshop for the people who do the work.”

Thus begins Madison Avenue Manslaughter, Farmer’s new book that outlines—in unrelenting, painstaking detail—the decline of the advertising industry and the tone-deaf agency executives that are leading their own businesses to the chopping block.

Last week, Farmer and I were on a panel for Mediapost, discussing how fragile agency-client relationships have become. It was one of the most candid discussions I’ve been a part of. It’s not often people shoot straight about the reality that exists behind the well-groomed facade of Madison Avenue.

So how did this happen? How did America’s darling Mad Men go from rolling in it to barely holding on?

An Outdated Compensation Model Is Driving Down Costs
“In the old days,” Farmer explains, “agencies were paid a 15 percent commission on media.” (That meant they could direct their clients to the most expensive media and make a killing.) However, in the 1980s, when that got out of control, brands wised up and agencies began earning a flat fee for the same work. Often, that fee was calculated based on the number of people assigned to the client. Add up their salaries and benefits plus a little cushion, and agencies could continue on with business as usual.

Only things didn’t continue as usual. “Any time you’re buying man hours,” Farmer says, “there’s a chance to buy them cheaper.” As advertising became more fragmented and complicated with the digital revolution, a saturated market of agencies began pitching against each other for the same amount of finite work, driving down fees.

Plus, hourly rates don’t even make sense for this kind of work. If there are rats in your attic, who cares what an exterminator charges per hour? You need to know what he charges to get rid of rats! In the same way, brand leaders—especially CMOs—need a partner that can help them achieve very specific financial goals. An hourly rate tells them nothing about what the agency can or will accomplish.

Agencies are Doing More Work Than Ever Before
Despite the decrease in fees, agencies are being asked to carry more and more of the marketing burden. Ten years ago, agencies were in charge of print, radio and television—now they are expected to be experts in traditional marketing, social, digital, programmatic, influencers, e-mail marketing, native advertising…. and pretty much anything else you can imagine.

“Since agencies [owned by holding companies] have to deliver profit margins, they are downsizing every year,” says Farmer. “So they are doing more work, with fewer, more junior people at a time when their clients’ need for profitability has never been greater. As a result, they are destroying their capabilities at a predictable rate.”

Agencies Don’t Know How To Measure What They Do
Agencies are stuck doing more work for shrinking hourly rates because too often, they don’t know how to quantify the results they deliver in a meaningful, measurable way. I’ve written about this before, using Alex & Ani jewelry as an example. Since its agencies weren’t figuring out where the company’s dramatic growth was coming from, former CMO Ryan Bonifacino resorted to hiring several outside PhD’s for their service and insight. And you better believe he didn’t flinch when he was writing those checks. Brands have no problem investing in growth. In fact, I’ve had marketing executives look me in the eye and say, “when you can analytically prove that the money I spend with you is providing a return, then I have an unlimited budget.”

But that’s the problem. The traditional “media marketing mix” is flawed. It’s a pinpoint in time, usually compiled long after a campaign is complete, and rarely takes into account anything that takes place before the swipe of a card. Online advertisers are to blame for a lot of this poor analysis. Just because I click a link and buy a product, doesn’t mean Facebook is the sole reason for that purchase. Maybe I saw a television ad or heard a friend talking about it, or saw someone else wearing that same pair of shoes one day, and I wanted them for myself. To really understand the impact of our marketing, we need better tools.

For far too long, ad agencies have avoided the analytics business. Instead, they’re interested in creativity and enamored with winning awards. As Farmer puts it, “agencies continue to cling to the notion that clients want creativity and service, but what [clients] really want is shareholder value. Agency executives have been completely deaf to the economics.”

Creativity still matters, but unless you can anchor the discussion in measurable data and results, your creative idea is worth nothing. That’s why I hate the traditional term AOR—Agency of Record? What does that mean? To survive into the future, agencies must become Agencies of Return. To do that, you have to be prepared to measure everything that you do, and take an honest look at your own results.

Agencies Are Afraid They Don’t Matter
Here’s the crux of the issue. As fees have been cut, workloads have increased, and measurement has become more complex, legacy agencies are getting cut out of the equation. Brands are bringing a lot of creative work in-house or they are parsing it out to freelancers or boutique agencies, “project by project, not relationship by relationship.”

That shouldn’t surprise anyone. Brands have shareholders to report to; they need help driving business. And that slight lack of confidence, that willingness to take work for lower fees and burn out your own employees and question your own ability… it’s becoming a self-fulfilling prophesy.

“I’ve written a book that documents the truth of things. But I’m convinced it won’t change the way these large holding-company agency executives operate. And that is a huge disappointment to me.” Farmer says.

“Executives at these large agencies somehow continue to eke out profits through these sweatshop conditions, and they get huge bonuses for doing so. They’re all just praying they retire before the whole system blows up.”

But what if we blew it up first?

Joining the industry against mammoth agencies like BBDO, Ogilvy, Grey and McCann is not for the faint-hearted. Despite the mess that exists behind the curtain— a mess that Farmer has clearly exposed—the agencies continue to survive, filling their leaky buckets with additional work. But the door is open. The situation is ripe for young, wildly unpredictable rebels to bust through the system and do something completely different.

We can start by charging for our solutions, not for our hours. We can outline very clearly a path for success so that clients don’t overload our hands with work we didn’t expect—work that doesn’t drive client profit. We can leverage available technology to measure results, accurately understand our progress and prove our value. We can hold confidently to the fact that if we’re willing to solve problems and help our clients drive business—our value is immeasurably great.