Is the advertising model broken, or is it just a case of KPI mismatch?

With the Hong Kong economy remaining sluggish, the adspend pie shrinking and market competition becoming more cutthroat, cracks are appearing in an already complex and fragile client-agency relationship. Gone are the days when clients were happy with the work of their advertising/media agencies in winning a handful of industry awards or delivering an improvement in brand awareness for them. Owing to the increasingly difficult business environment, advertisers have shifted focus from top- to bottom-funnel measures closely related to return on marketing investment (ROMI).

Obviously, there is a mismatched expectation in terms of key performance indicators (KPIs) between advertisers and agencies. 

In an era of disintermediation due to incessant technological advancements and changing market dynamics, the role of middlemen is gradually diminishing. Advertisers, big and small, begin to question the value, competence and integrity of their agencies, whereas agency executives also constantly complain of being squeezed by clients on their compensation and treated as vendors with overemphasis on the bottomline. Because of friction and frustration, the client-agency relationship has turned sour.

After all, the advertising business is essentially a people business. As such, relationships are bound to be highly volatile and emotionally charged. In the good old days, the average client-agency relationship tenure was close to a decade. Today, it is thought to be less than three years. Such a weakening client-agency bond is becoming a norm nowadays and has been further shaken by a number of devastating trends going on in the industry.

Most notably, one of these devastating trends is the drift away from 'Agency of Record (AOR)' services toward 'Scope of Work' projects. Driven by the need for greater specialisation, more and more advertisers resorted to a diverse 'family of agencies' to provide them with services across different communication disciplines. Workloads are uncertain for individual agencies in the 'family' and as a consequence, so is expected revenue.

Such a drift will not only pose a huge challenge to advertisers in bringing these separate agencies under one integrated umbrella, but also lead to conservatism in agencies in the areas of talent and technology investment.

An alarming self-destruction trend has already been observed particularly in agencies under holding companies—shedding people, cutting staff training and development budgets, and reducing capabilities through 'juniorization' of resources—in order to satisfy the holding company’s insatiable appetite for unrealistically high profit margins or even EBIT growth (again, another KPI pitfall!).

Worse still, under such high pressure for 'delivering the numbers', agencies are desperately chasing new business while at the same time upselling offerings with high yield (e.g. programmatic buying, media trading) to existing clients. As a result, they reduce the attention and time that should be devoted to client retention and staff training. This leaves agencies with younger and less experienced personnel who might not have a good understanding of the client's business, thus creating a climate of distrust between both parties.

Needless to say, dissatisfaction on the client side about agency quality, when great enough, might lead to a decision for terminating the agency contract or calling for an agency review or pitch.

In such reviews or pitches, procurement people (notorious for their obsession with the wrong KPIs, particularly in cost savings) will step in to stir the pot to drive media prices and agency commissions down. Ultimately, a self-perpetuating vicious circle of mutual mistrust is formed, the advertising model falls apart, and every party becomes a loser.

This is not to say that the advertising industry is dead. In my opinion, there is still a way out for agencies. In an era of sharing economies, all enterprises can thrive on successful partnerships that are based on a substantial level of collaboration and trust. This leads to shared values, shared resources, and most importantly, shared rewards. What we really need to do is to push this industry forward, walk the talk to initiate a fundamental transformation that adds to the agency's capabilities and influence with clients, and last but not least, align the agency’s metrics to the CMO’s needs and priorities.

As far as KPIs are concerned, clients should think more like 'marketers' than 'advertisers' and shift their KPIs from being campaign-focused (like awareness, engagement) to business-focused, so they will be liberated to think differently about how various channels and touchpoints can contribute to ROMI. Smart agencies should be those who are bold enough to set up KPIs to mirror their clients’ KPIs in a gambit to foster a more sustainable relationship with them.

In the past, advertising and media agencies have been forced to use the wrong KPIs, which they didn’t have a choice. In the digital era, agencies should take a bigger seat at the trust table by transforming themselves to become data-driven. As data-driven marketing consultants, agencies should have access to the client’s first-party data to upgrade their understanding on the client's  business, then turn the data into actionable insights for forming communication strategies and business decisions. In doing so, agencies will be in better positions to fight for fairer remuneration models that are motivational enough.

Having said that, the line between agency and consultancy is blurring. Management consulting firms like Accenture and Deloitte have quickly morphed their business models to compete head-on with traditional ad agencies. We need to act fast to capture any first-mover advantage.

The advertising model is not broken; it simply needs to be evolved to ensure that the partnership between advertisers and agencies remains strong, healthy, mutually beneficial and profitable.

Jackson Kwok is currently CEO of X Social Group and president of X Horizon Group. He was formerly Omnicom Media Group Hong Kong's chief executive officer.