Thursday, June 12, 2008

Evolution of our business model

The biggest change in the communications industry over the next 4 years is going to be in our business model itself.  I think it is going to look very different from the way it is today.  In this piece, I shall examine the factors that are causing the change and the possible direction that the change may take. 

The biggest challenge facing the industry is getting good talent.  The challenge in getting good talent is that we are not paying them enough especially when you compare our pay scales with that in media, retail, IT and other sectors.  The reason we are not able to compete is because our clients have squeezed our margins.  Our margins will only improve if we add dramatically new value to clients.  So that is one set of factors that will force our business model to change.

The second set of factors relates to our client’s business needs.  Their business models have evolved rapidly as well and most marketers are faced with new challenges that do not have enough precedents.  So they need to have trusted advisors who will help them in navigating through these storms and air pockets.

The third set of factors relates to technology.   The internet, video conferencing technology, the mobile phone (including the Blackberry) and the laptop have dramatically changed the supply side of the industry.  The effects of all this on our industry is only just beginning.  In future, agencies will be able to have larger catchments than simply their own cities, regions or countries.  Also it will be easier and cheaper to set up agencies than ever before and so agencies will face greater competition than ever before.

To summarize, we have to increase our margins by adding value to clients.  Clients need more and better advice. And technology will change the scope of our markets as well as bring in new competition.

Clearly therefore agencies have to move from earning most of our revenue from execution to earning most of our money from consultancy and ideas.  This seems obvious, but I would like to outline some of the deeper issues involved.

As an industry we think we earn on the basis of ideas just because we may have moved from a commission based remuneration model to a fee based one.  But that is not true.  We still justify our fee based on the number of people and man-hours that we will spend on the business or on the basis of the output these people will create.  We never base it on the quality of our ideas.  How then are we really in the ideas business?

Our processes were created in an era where we earned commissions and we haven’t changed them after we moved to a fee based structure.  We still wait for client briefs and tend to be reactive.  Consultants are more self driven and work according to well defined deliverables and milestones.  We have yet to learn how to do that.

Also, while at a top management level, we talk about integration and 360 communications, we don’t actually walk the talk.  We still have divisions based on our specializations and each of them have business targets.  Thus their advice tends to be highly skewed towards their own disciplines.  This makes the client suspicious of our recommendations.

Given all this, here is what I think the business model of the future would be.

Agencies will organize themselves around industry verticals – rather like the practices that consultants have, rather than around their service offering.  Thus we will have divisions like retail, technology, healthcare, consumer goods, durables etc.  Each of these divisions will develop proprietary knowledge into their industries.  This knowledge will enable them to provide advice with confidence to their clients and actually command their respect.

Our remuneration will grow to much higher levels but will carry more risk.  We will no longer get assured fees at low levels, but high fees that are indexed to the outcomes for the client.  A kind of pay by results model that the internet has taught us. 

Agencies will then need to plan their portfolios well.  They will need some clients who will perform steadily with low risk, others who will perform brilliantly but with high risk.  Each agency will have to balance these types of clients according to their own risk appetites. 

Very few clients will be able to afford the integrated service model that agencies will offer.  Only the really large clients or clients in complex competitive situations will sign on as integrated clients.  Most clients will focus on specific areas where they need high quality help.  For every thing else, they will be able to access commoditized services off the net.  So in effect, our industry will evolve into two – a customized, high price model and a mass produced, low price one. 

I am really looking forward to the next few years as these changes unfold.  Advertising is still the activity where you can have the “most fun with your clothes on”.  Only now it is going to evolve into a slightly different kind of fun. 

Put your seat belts on.

1 comment:

narendra shenoy said...

Most insightful!

One usually equates advertising with a good ad or two sprayed all over the place in the hope that someone will see it and stumble on to your product. When I say "one", I am, of course, referring to an absolute lay person with limited mental skills, such as I. I can see now that it is not so simple and considerable strategic thought goes into it.

Sounds like an interesting time.

By the way, if this comment sounds to you like it was written merely because the commenter likes the sound of his own voice, that's most insightfull as well!