A Financial Market View from the Advertising World

The mood was somber on the 5:52 a.m. train as it pulled into Greenwich last Monday. A week after passengers had been shaking their heads at the Lehman epitaph, Goldman and Morgan Stanley were sending out releases that signified, in the words of The Wall Street Journal, that “Wall Street…will cease to exist.”

I am a train and peHUB rarity. I don’t work in finance. I am a Partner at what used to be called an advertising agency. While Super Bowl spots and catchy taglines might be the public perception of what our value is, our core expertise resides in developing large-scale marketing, awareness and CRM programs that are aimed at driving corporate/product growth and profitability. Accountability comes quarterly, and if the numbers aren’t there, neither would we. The Chief Marketing Officer and the CEO follow shortly thereafter.

Our intrigue with the VC, PE and LBO worlds came after our industry began suffering from margin erosion, thanks to macroeconomic turbulence and procurement scrutiny. As the economics of the agency business had been based on the time to construct business programs and not the impact they had, we reaped little for the upside, but could be held to the fire if business goals fell short.

It seemed ridiculous not to base our compensation on bottom-line results, a la the finance world. As such, we’ve been in the process of re-architecting our business model within the $155 billion advertising industry, benchmarking everyone from Wall Street titans to boutique seed companies. With all the discussion about fundamental recalibration of the financial markets, perhaps it’s appropriate to relay some of the lessons we’ve taken to heart in evolving our business model.

  • Consumers are the new Wall Street. I used to boast that Wall Street was the true client no matter if we were trying to help sell ecommerce, cars, pain-relief drugs, travel destinations or sneakers. Now the consumer is the coveted über-target, and given our qualitative/quantitative capabilities, agencies are well versed to take advantage of this. With numerous Twitter-like businesses out there that take an eyeballs-first, figure-out-the-money-later approach, agencies suddenly have the opportunity to “shape policy” on business models…something that we are starting to see more appreciation from. Wall Street often views marketing as a line-item expense, but more companies are now realizing it business imperative.
  • Earn out over equity. A lot of investment bankers we talked with (rightfully) spoke along the lines of term sheets and investment-for-equity. Makes sense. A couple scenarios where we attempted this fell on deaf ears for various reasons. However, most of those naysayers were intrigued by the Agency getting a percentage of revenue in exchange for our service, in a commission-like scenario (with ceilings, percentages-based-on-amounts, etc.). Not radical. However, this can be adopted to work with already public companies creating new upside opportunities that would otherwise not get funded. Corporation wins with newfound investment via outsourced assistance, agency creates new revenue pipeline.
  • Small is beautiful. With the dizzying $20+ billion buyout days being a memory with the suffocated credit market, we will likely be left with fewer but bigger financial players and a significant amount of upstart boutiques. With the flattened world, we’re seeing a rising tide of entrepreneurial companies in growth categories where large investment of financial capital is needed. In our case, sweat equity is our greatest contribution and one that is showing promising potential returns in 2009. The dollar gains might be smaller, but the percentage return higher.
  • Team over people. The last, yet likely most important item. I don’t care if it’s in relation to a Fortune 50 or a start-up with 50 cents in revenue: Believing in people matters most. But not just the individual talent. Chemistry amongst the overall executive team is more coveted. Talent without unity often leads to a lot of smart, yet differing ideals that rot the upside of success.

By no means do I expect the agency business to rival the financial world’s in terms of total upside and personal income opportunities. I do sense, however there will be a relationship between the two. And maybe it will lead to more advertising talk on the 5:52 a.m. train.

Michael Duda is a Partner at Deutsch Inc. based in New York City. (www.deutschinc.com).