I was talking to a friend yesterday about the fall of the magazine business. We both have spent a substantial part of our careers in the mag biz. Her comment was a good one, “I talk to friends every day still in the magazine business that are surprised by what’s happening.” We both agreed that now being outside the industry it’s shocking that they didn’t see it coming long ago.

As industry after industry is ravaged by seemingly unforeseen forces that bankrupt one player after another, I’ve often wondered what stops people from seeing the obvious. It’s simpler than we think. At the end of the day we act according to how we’re incentivized. That’s true with how we charge clients and how we’re personally incentivized to run our agencies.

I was talking with a client yesterday and we agreed that the FTE model of charging is fatally broken. When that’s your model you have two levers to increase revenue, either take more time on a project or put more people against it. Both are counter to the goals of a client. As our client, Peter, said it should be a very simple transaction. Company A needs a campaign idea and pays an Agency B to create it. Ideas = Payment. Yet, as he said agency after agency wants to be paid money to be a partner, a retainer, that in many cases isn’t result driven. With the transparency of digital advertising tangible, manageable results are seeping into the business and the FTE model of charging clients is revealing it’s cracks.

Naturally, most agencies are currently managed in a way to maximize its profits based on this FTE model. You control your profits by maximizing and billing for every minute spend on a client’s business but also driving down compensation costs by using the most junior people, the cheapest, on the a project.

Again, the incentives are often misaligned with a client’s goals.

More insidious is that such an incentive structure makes those managing agencies focus on maximizing their individual agencies current business and zero time innovating. Such a focus is fine in stable times yet in quickly changing times this management focus leads to where the magazine industry finds itself.

What should we do?

I find inspiration in Eric Schmidt’s focus when he got to Google. The 70/20/10 plan:

We spend 70 percent of our time on core search and ads. We spend 20 percent on adjacent businesses, ones related to the core businesses in some interesting way. Examples of that would be Google News, Google Earth, and Google Local. And then 10 percent of our time should be on things that are truly new.

Likewise, we in the advertising industry need to adopt a similar plan if we have any chance of not falling into the same trap that the magazine industry has found itself in.

To accomplish that we need to spend 70 percent of our time running our current businesses, 20 percent of our time finding innovative ways to extent our current businesses with new tools such as digital and social and 10 percent of our time on projects and adjacent businesses that are blue sky, ones that have the ability to disrupt the current paradigm or at least radically transform it.

The big question is: Do we have the courage to change and innovate?

The next three years will tell and separate those who are talking the talk, (we’re agency folk are damn good at this), and really doing something about it.

If we change our compensation structures we will and if we don’t I hold out little hope that we can avoid the cultural tsunami that is eminent. 

Image via flickr

Original Post: http://www.johnwinsor.com/my_weblog/2012/08/the-702010-rule.html