Friday, June 30, 2006

Why Advertising Agencies Don't Get R&D

Friday, June 30, 2006
Why Advertising Agencies Don't Get R&D
By Max Kalehoff

A few weeks ago, at the 2006 Innovative Marketing Conference--produced by Corante and Columbia Business School--I attended a panel discussion on the "changing face of advertising," led by consultant Joseph Jaffe. Considering the conference theme was innovation, I had to ask a question of the illustrious panel reflecting my own experience working in the cutting edge of marketing and media: Why the heck are advertising and marketing agencies so often so late to invest in or experiment with new technologies and emerging media, while the marketers and clients demonstrate increasing interest and tendency to pursue them directly?

I'll admit, this is not a rule, and you can be sure most of Jaffe's panel passionately disagreed with me, and perhaps you do as well. However, my experience working at innovative startups for nearly a decade supports this notion: that advertising agencies, generally speaking, are increasingly behind the curve. And this is especially true when it comes to primary research and product development.

Fortunately, for my ego, one panelist agreed with me steadfastly and responded to my question in a most eloquent fashion. Dr. Len Ellis, one of my early career mentors and former executive vice president of strategy at WCJ, noted: "The advertising-agency industry is one which does not have R&D built in as a line item in the budget."

That point stuck with me, so I recently asked Len to elaborate on why product R&D so often is not part of the advertising-agency model. He noted:

1. The Deliverable. Advertising agencies produce content for a living; specifically, memorable stories in print ads and broadcast spots. Moreover, these stories are to be one-of-a-kind. Storytelling does not require R&D, nor does originality in storytelling.

2. The Value Proposition. Like all professional-services firms, agencies sell expertise, which by definition reflects what has worked in the past. R&D reflects an intention to try what hasn't been tried before.

3. The Culture. Like all vendors, ad agencies are risk-averse. Proposing the untried to results-oriented clients is a risk with long odds, an unknowable payoff and a steep downside.

And more recent contributing factors include:

4. The Ownership. The big agencies that have the requisite resources are all publicly owned these days, and Wall Street has little patience with company spending that cannot be tied to short-term results.

5. The Environment. There's been general erosion in R&D spending by U.S. businesses recently.

While Len makes some very good points, I also posed the question to my friend Mark Green, senior vice president, media services, ACNielsen Analytic Consulting, a sister company to mine. (Mark also has 18 years of media-agency experience.) He explained that in the context of primary R&D, if you were to break down the traditional ad-agency model into its three parts--media services, creative and account management--it begins to makes sense why R&D doesn't always fit.

First, creative and account management view advertising and marketing as more of an art form--not something subject to R&D. As for media services, it has been a victim of lowering margins and head count, while ad spending has increased dramatically. Media services has become more of a commodity business, and therefore can't support R&D, as the cost won't be directly passed on to the client. While some of the big players do make small plays in R&D, these efforts are mostly hype. Mark emphasized that this is not a steadfast rule; there are a few exceptions.

Finally, I posed the same question to my colleague Pete Blackshaw, who helped lead the first interactive marketing department at Procter & Gamble. He underscored that the R&D absence in the agency model is partly the fault of the marketers they work for. The client's model of risk aversion and fear of exploring the unknown often passes right down to the agency. The bottom line is that clients need to put skin in the game and invest, along with their agencies.

With commoditization and risk aversion seemingly so prevalent, what is advertising to do? In these disruptive times in our media and marketing landscape, isn't R&D the ad industry's salvation? Better yet, isn't R&D necessary to avoid carnage?

Max Kalehoff is vice president of marketing for Nielsen BuzzMetrics, a global measurement service for consumer-generated media.

 
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