Why Advertising Agencies Must Disrupt Themselves

“The days when agencies expect multiple $100 million-plus agency-of-record accounts to go up for grabs each year are now barely visible in the rear-view mirror.” So begins a recent article in Advertising Age that attempts to dissect what’s happening to the business model of the advertising agency business.

What’s happening to agencies is the same thing that has happened to the PC business, the airline business, and the steel business. The advertising agency industry is being disrupted.

“Disruptive innovations are like missiles launched at your business,” says Clayton Christensen, the father of the theory of disruptive innovation. Over the years, Christensen and his colleagues have described missile after missile that has taken aim and destroyed its target: iTunes in music, Southwest in airlines, Charles Schwab in investing. Disruptive innovation isn’t necessarily a new technology; it’s usually a recombination of existing features and technologies served up in disruptive way. Southwest didn’t reinvent the airplane, but it could be said that they helped reinvent air travel.

In fact, Christensen discovered that in most industries, the new disruptive offerings that had brought the big established companies down weren’t always better; sometimes they were actually “worse.” But because they were offered at a lower cost, they gained quick adoption. In industry after industry, while the big guys are busy adding features (and costs) to their existing products and services, the disruptors find ways to solve similar customer problems at lower costs and steal huge swaths of both customers and market share. Think Netflix and Blockbuster.

Too late to successfully fight back using your current model

In effect, disruptors enter the lower end of the market and take the business the large incumbents either don’t want or have stopped paying attention to. But having gained a foothold in the market, these disruptors continue to innovate and gain more and more share until it’s usually too late for the incumbents to successfully fight back.

The essence of the problem is that large incumbent organizations aren’t really focused on innovative ways to create value for their customers, but rather on continuing to feed the machine. Their version of innovation is “sustaining innovation,” which is about making continual incremental improvements in their existing category and business model. When faced with disruptive innovators, the incumbents usually react by trying to lower their prices. This manifests itself in the agency world with firms lowering fees in negotiations with procurement. But the result is that the large traditional firms are now caught in a downward spiral and continue to shrink both in relative size and stature.

Disruption in professional services

In professional services, the legal industry is being disrupted not only by low-cost providers like LegalZoom and LawPivot, but innovative enterprises like Clearspire. The large legacy firms pretend not to be bothered by these disruptors, but in fact “big law” is in a steady decline, with the world’s largest law firms accounting for less and less of the total market for legal services.

To look at what’s happening in the advertising business, I would invite you to imagine two columns on a sheet of paper; one labeled “Incumbents” and the other “Disrupters.” The names you would list under “incumbents” may be fairly obvious. But who or what would you list as “disrupters?” Here are a few I’d put on my list:

Open source creative resources (Giant Hydra, Ideasicle, Genius Rocket)

Advertising platforms and virtual agencies (SpotRunner, Pick-n-Click Ads)

Audience platforms and agency trading desks (Accuen, Mediabrands, Xaxis, Funbox)

Marketing implementation companies (Avventa, Tag, E-Graphics)

Production companies as agencies (B Reel, Trailer Park, Radical Media)

Media companies as agencies (Conde Nast Studio, Electus, Scratch)

Technology companies as marketing services providers (Google, Facebook, Foursquare)

Really only one solution

How can an existing company cope in this environment? Disrupt your own brand. That’s what Andy Grove did years ago by creating Intel’s own low-end disruptor: the Celeron chip (on the advice of Clay Christensen, by the way).

To take it one step further, Christensen believed that ultimately the only way a entrenched company can avoid being disrupted is to set up a small separate venture – located away from headquarters -- that functions like a new company. This venture must not be held to the same income and profit expectations as the mother ship, but should be run like a start up. Importantly, the new venture cannot be a “division” of the established incumbent, operating under the corporate umbrella. It must have complete independence to implement its own structure and business model.

Advertising agency executives are famous for walking into their clients’ offices and encouraging them to take visionary risks; to “disrupt” their brand. This might be the perfect time for us to take our own medicine.

by  Tim Williams