Agency business models aren't working the way they used to. The market has shifted. And to remain relevant and competitive, agencies need to shift, too. This whitepaper addresses how a fresh look at agency business management can make a difference.

1. Should You Have a Business Manager?
By Mike Carlton
A Simple Business
The agency business has always been pretty simple. You get clients. You do
great work that moves their audience. You bill them. They pay you. And,
everybody’s happy. While there are lots of subtle variations to this equation, it
has never been very complicated. Until now.
It’s a new world. Agencies are being besieged by complexity. It is coming from
all directions. There is more change confronting the agency business today than
any of us have ever seen. And, it is likely to get worse before it gets better.
Today, it’s harder than ever to get clients. It’s harder than ever to do great work.
It’s harder than ever to build partnering relationships with clients. It’s harder than
ever to keep clients. It’s harder than ever to differentiate your agency in its
marketplace. And, it’s harder than ever to make money.
Wow! What happened? What’s going on? And, what can you do about it?
A Model in Decline
Simply put, the traditional agency business model doesn’t work the way it used
to. The market has shifted. And, to remain relevant, agencies need to shift, too.
There is no question that the consumer has moved well beyond a primary
reliance on print and TV as her primary information and entertainment sources.
Consumers’ commercial decisions are being based on information and
experiences from all kinds of media. They are inviting marketers to connect with
them in a myriad of new ways. Some of it social. Some of it one-to-one dialogic.
Some of it experiential. Some of it just plain cultural buzz. Yet many agencies
seem to be mired in the 30 second spot/colorful ad business.
A former president of Coca-Cola said it best. “The magnitude and urgency of
change isn’t evolutionary – it’s transformational. Agencies need to rethink the
core assumptions and practices of their current business models.”
And more. Hardly a week goes by without the trade press reporting other
industry seers questioning the business model agencies are following.
OK, Just What is a Business Model?
A business model is the way in which the agency relates to its clients, the
services it provides and the way it gets paid for those services.
1

2. A Look Back
In the historic agency business model, the agency created ads or commercials
and got paid a media commission for running them. That was a good model in
that if the ad or commercial worked in the marketplace, the client kept running it,
and the agency got paid continuing commissions that were a lot like residuals.
And, if the ad didn’t work, the client stopped running it and the agency didn’t get
paid any more until they came up with a new, and presumably more effective, ad.
Very simple. Very easy. And, very fair.
But the commission system had it limitations. It did not work well on non-media
related activities. And, the size of the media budget dictated the level of agency
involvement. So marketers and agencies groped for a better model.
As the commission system declined, agencies moved primarily to hourly charge
business models. These were more appropriate as agencies expanded their
range of services into non-media activities, which were not commissionable.
From an economic standpoint, hourly charges protected the agency on the
downside, but provided little reward on the upside. And, the agency received the
same compensation for effective work as it did for ineffective work.
Also, balancing internal time resources became much more complicated, and
more difficult. An agency could not sell more time than its staff had available, but
if client demand faltered, it could have a lot of un-bought time on its hands.
And worse yet, this model made it appear that the agency was just selling stuff at
hourly charges, and was no longer as much of a partner as before. Vendor
mentality began creeping into the relationship. Stuff overwhelmed ideas.
All the while, an expanded array of communications avenues was becoming
available with which to reach the client’s audience.
The hourly charge for projects model has partially evolved into the fee for
services model, which while still hourly cost-based can treat the client much more
holistically. In effect, the fee system could allow the agency to become media
agnostic, so that all kinds of new avenues of communications could be opened
with the client’s audience.
While there has been considerable experimentation with compensation systems
that reward the agency for effectiveness in the client’s marketplace; application of
these has been limited. They tend to falter on the details of how success is
measured and how the agency is rewarded. Thus, pay for performance systems
have generally only been adopted by the more sophisticated marketers.
2

3. The Core of the Business Model Issue
With all this change, many of the business models currently used by individual
agencies have been arrived at almost by accident. They are often the product of
reactive client situations, rather than thoughtful proactive approaches. As such, it
is not uncommon to see two glaring weaknesses in them:
1. They Restrict Innovation
The consumer is accessible through more avenues than ever. And clients are
expecting agencies to lead in the use of these new avenues. Yet, many
agencies do not have business models in which they can be fairly compensated
using these new avenues. So, as a result, they fall back on the security of using
those they are most familiar with, and know they can make money at. Thus, the
30 second spot / colorful ad rut.
2. There is Little Reward for Outstanding Work
The client receives a fundamental economic benefit from creative leverage. A
great idea moves an audience more that an average idea. And, clients want
great ideas. But only the audience can determine the value of a great idea, and
only then by their behavior in the marketplace. Yet, most agencies get paid the
same for an average idea as they do for a great one.
These business model weaknesses have led clients to commoditize what
agencies offer. This falsely assumes that all talent is equal, and that all ideas
have the same leverage in the marketplace. A sure recipe for mediocrity.
And on the agency side, these business model weaknesses breed caution and
conservatism. Safety trumps innovation. Surely not the best way to get great
ideas. Or to win hearts and minds in the client’s marketplace.
Make no mistake. There is probably not one “magic bullet” agency business
model. But rather, a wide array of sub-models, each tailored to the needs of
individual clients. This is mass customization of the agency’s master model.
In this kind of environment, continuing thoughtful exploration of better agency
business models – each one unique to the needs of each individual client - is
obviously called for. But unfortunately, seldom done.
It’s Hard to Build a Fire House When You Are Always Putting Out Fires
Many agency leaders understand that things aren’t working the way they should.
But, they are almost overwhelmingly engrossed in urgent day-to-day issues.
About clients. About new business. About people. About their product. About
money.
3

4. When life is like this, it is very difficult to focus on the strategic issues of the
agency’s business model. As a result, serious business model thinking gets
pushed to tomorrow. And then tomorrow, it gets pushed back again. And when
it is done, it takes on a patch-work quality. This is clearly a case of the urgent
continually preempting the important.
The gut issue is that while agency leadership is busy minding the urgent, no one
is minding the shop!
To be successful today, agencies need to pay as much attention to their
business model as they do to their clients. But few are organized in a way to
make this happen.
This puts them on a road to limbo. Or worse yet, slow death. Slowly, the agency
loses its competitive strength. Slowly, almost imperceptibly, it loses its share of
the client spend. And slowly too, it loses its spirit. Not a happy picture.
The sad fact is that if the business model isn’t right, nothing else works well
So, Who’s Going to Fix the Business Model?
First, a couple of definitions:
1. Business management means the establishment and maintenance of a
successful business model.
2. A successful business model commands a premium in its marketplace and
meets the psychic and financial needs of the agency principals and staff.
In smaller, less highly developed agencies and similar organizations, the founder
or principal owner often holds the business management portfolio. This is
natural. Someone has to create the initial business model. And someone has to
make sure the business is soundly run.
But, as a firm grows, it is in everyone’s interest for the key players to focus more
intently on their specific skill sets, particularly as their firm encounters challenges
from larger, more experienced and more sophisticated competitors.
Enter the Business Manager
This is an emerging role. It needs to be thought of in a fresh way. It is
essentially entrepreneurial. It is intense. And it is highly passionate.
This is not just the trusted accountant, who may be loyal and knowledgeable. Or
someone skilled in finance. Nor is he a senior account person who does this in
4

5. his spare time. And it should not be the leader of the agency who does this in
addition to her countless other duties.
The business manager needs to have broad business skills while being an
agency-guy at heart. This is a whole new function. With a whole new mission.
The primary focus of the business manager is the business. And, he should be a
full-fledged member of agency leadership. With the same credibility and strength
as the leaders of the other key disciplines.
In a nutshell, the business manager is responsible for the success of the
business, consistent with the core values and culture of the enterprise.
For, if the business is consistently successful, the holders of the other portfolios
such as account service, creative, digital, social, new business, media, planning,
etc. can concentrate their entire energy on their areas of expertise. By
minimizing their diversion to business issues, they can be individually and
collectively more successful.
Let’s Look at Those Discipline Portfolios
Within an advertising agency, or similar creative organization, there are typically
four or five key leadership portfolios. Each contains a specific set of
responsibilities. While it is not necessary that a different person carry each
portfolio, the skill set differences are such that in larger organizations a separate
individual usually holds each unique portfolio.
Typically, these four or five portfolio holders make up the senior management
team. And, they often behave as partners, in the most traditional sense. The
typical portfolios are:
Standard Bearer
The firm’s vision and values, setting and maintaining the strategic agenda, the
inspiration and rallying point for staff, and the embodiment of the firm to the
outside world, with particular emphasis on business development. Standard
bearers typically come from client service or creative, and in a small but growing
number of cases, digital or planning.
Client Service
The relationships with existing clients, including their retention and growth,
management of all client activities, stewardship of client spending, attraction,
development and leadership of client service talent, and participation in business
development.
Product
The quality and effectiveness of all the products of the organization (including
5

6. creative, digital, media, social, production, etc.), from conceptual through
completion. Attracting, developing and leading highly skilled talent, and
participation in business development.
Planning
Not all firms embrace this portfolio, but when one does, it usually represents the
end customer point of view and incorporates the strategic communications
component that may include research, etc. With talent responsibilities as well as
participation in business development.
Business Management
This is the newest discrete portfolio. Essentially, this portfolio embraces
everything necessary to make the business successful, except the functions
described above.
Just What Does the Business Management Portfolio Contain?
No two agency business managers have the same portfolio. But, typically the
business management portfolio can contain the following:
Development and maintenance of the business model
Agency strategic planning
Corporate governance
Budgeting
Finance and accounting
Merger and acquisition
HR, talent attraction, upgrade and retention
HR, including benefits, support staffing
Facilities and support services
Legal
Information systems and technology
Insurance
Establishment and maintenance of strategic alliances
Operations, including traffic
Business relations with clients (specifically compensation and stewardship)
Business relations with suppliers and media
Business relations with partnering organizations
Subsidiary organizations (studios, digital shops, PR firms, etc.)
In addition, and in many respects much more important, a well-developed
business management portfolio includes establishing and maintaining the
framework for the interactions and deliberations between the other portfolio
holders. For example, the agendas and schedules for the firm’s management
boards, committees, etc. are usually set by the holder of this portfolio.
6

7. At a higher level, a strong business management function provides continual
consultative and collaborative services to the leaders of the other functions. The
other portfolio holders rely heavily on the business manager as a trusted advisor.
The mind set is to build the mutual trust between business management and the
other portfolios to a level whereby each can focus most intently on their area of
expertise.
The most effective holders of the business management portfolio are extremely
powerful. But that power is not granted by special position or authority, but rather
voluntarily ceded by the holders of the other portfolios. When this level of mutual
respect and trust exists, the firm can soar.
A Word About Risk Aversion
An agency is a risky business. So it is easy to assume that a big part of a
business manager’s job is to almost automatically say no to risky initiatives
proposed by others on the leadership team. Unfortunately, this view
underestimates the role of a good business manager.
Success in any venture ultimately comes from taking carefully calculated risks.
So a good business manager should enjoy the sport of shrewdly evaluating
opportunity risks and embrace those risks that he believes worthy of taking.
What Does It Cost?
Obviously, a senior management person of this caliber is not inexpensive. And,
it is easy to view such a position as a luxury. Yet, business management done
well is probably one of the greatest bargains in the agency business. A good
business manager brings focus, efficiency and effectiveness to a bunch of largely
independent functions that if left alone easily fall out of sync, to the detriment of
the entire agency. Not to mention the clients.
In short, a good business manager way more that pays for herself.
Agency of the Year
A while back a hot agency had just won the Agency of the Year Award. A
reporter from Advertising Age asked the agency leader what was the most
important factor in his agency’s success.
Without hesitating an instant, he replied that it was including a business manager
as the partner responsible for minding the shop from the day the agency was
founded. He stated that without that, the other partners could never have
focused on what they needed to do to achieve the award.
Copyright 2012 Carlton Associates Incorporated
7