Over the holidays, I’ve been catching up on a thick stack of publications that have lain dusty and dormant in my living room. In the din of the Thanksgiving hangover, this particular article caught my attention:
Mayhem on Madison Avenue
Yes, in some respects, it’s yet another ‘our profession is being disrupted beyond recognition’, but what really jumped out was this recurring theme that I couldn’t help but link back to the era when big lizards roamed the land: the meteor has fallen (more slowly, but as definitively) and T.Rex and his friends (the dominant model of a ‘professional’ the past 80 years) don’t really know how to react. They’re getting their lunch eaten (literally) by these little things nipping around at their heels (those whippersnappers which just won’t play inside the box).
In particular, I found the following passage illuminating for the traditional architectural/engineering/construction model, especially with regards to fees:
“In many ways, the end of the rich old model is the agencies’ own fault. In the 1980s, agencies decided they could benefit from economies of scale, as well as manage client conflicts of interest, by merging. Not incidentally, this trend also gave the agency owners a way to cash out. The result was an industry centered on four major holding companies: WPP, Omnicom, IPG, and Publicis.
But the move has backfired. “Agency leaders were making more money than the clients,” says Martin, the industry consultant. “That’s when the clients began to realize, ‘Gosh, we must be paying them too much.’ Clients forced the agencies into a service-fee model instead, which is far less lucrative. “It’s like lawyers,” explains BMO Capital’s Salmon. “The fees are based on head count and time spent working.” Grimaldi explains why this is so much tougher than the old model. “If a creative team now takes six people instead of two, just think about the burn rate of that room,” he says. “Unfortunately, not everything generates as much money as it used to. There are only so many hours you can bill.” Now those hours are getting squeezed from every direction. The clients employ procurement officers and cost consultants to negotiate down the fee on everybody in an agency. And given today’s hypercompetition, agencies can sink up to $1 million and four months pitching for a new account they might never win. “When the smoke clears,” says McGuinness, “we make no money.”
Plus, as Garfield points out, “in the whole history of mass advertising, the number of transformative ideas that have created wealth via advertising you can count on one set of fingers and toes.” Garfield sees this big-idea payday as the last wish of an industry that’s drowning. “In a world where media spend is in inexorable decline, and where advertising per se is an endangered species, [agencies] don’t know where to turn,” he says. “The realization of the nightmare is under way. And that nightmare is the utter collapse of the business model.”
So, I’ll bite: we in the architecture and engineering fields are on that cusp as well. For way too long, we’ve relied on a fee for service model that, in order to appropriately compensate equity partners relative to their risk exposure, meant staying predictable and repeating the same thing over and over. Firms that reached the ‘top’ and could command fees accordingly (and accomplish much of that work with under-compensated staff), could afford to take more creative risks artistically, but the business model they use is largely the same: fee for service, based somewhat on time spent and ability to keep those costs as low as possible.
That era will still linger with us for the near future, but I’m starting to see the some firms (mostly headed by younger or young at heart visionaries) stealing around the edges, creating new ways to provide real value to their clients, avoiding some of the traps of the dominant fee for service, and generating highly creative work to boot. Some examples include Paratus Group, SHOP, and KRDB. Each has struck out into their particular market space in a creative, expansive way, business wise.
What are the best new business models in the design world that you’ve seen? Whose studio’s do you think are combining great value and an ability to generate appropriate fees? Who’s looking forward? We’d love to hear your thoughts….