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This article was previously published in The Makegood.

Advertising agencies are notoriously inefficient in digital media. A recent study showed that agencies typically spend more than $4,000 in media labor to place an advertisement on a website.

The good news for challengers is there’s a big opportunity to win business away from inefficient agencies by adopting new methods that give you a sustainable competitive advantage. Gaining this advantage starts by understanding your core competencies.

Here’s a handy litmus test: of everything you do at your agency, which of those activities does your client appreciate when you do a great job? Those are your core competencies. Conversely, which activities aren’t noticed even when you do a perfect job? Those are non-core activities.

Core competencies are the defining activities of your agency. A core competency fulfills three key criteria:

1. It differentiates you from your competitors.

2. It’s not easy for your competitors to copy.

3. It’s highly valued by your clients.

Identifying your core competencies is an important exercise because it guides your decisions on how to best allocate your resources. Once you understand your core, you know where to focus your time and money. You also discover where your resources are being squandered because they are diverted away from your core competencies.

To illustrate this concept, see figure 1 for a breakdown of core versus non-core activities of a media agency on a typical digital campaign.

In this example, you see that 45% of time and 33% of labor costs are being diverted away from core competencies.

Non-core does not mean not important. For example, it’s critical to traffic tags without error. If not, the campaign would fail and your client would surely be disappointed with you.

How can you perform those non-core activities as efficiently as possible? The goal is to minimize the resources you spend on non-core activities. Cost advantage is a classic competitive advantage and even more powerful in the context of non-core activities.

Outsourcing is one way to reduce non-core activities. In addition to reducing costs, outsourcing insulates your organization from distractions related to running the operation like hiring, training, managing, providing office space, and many others. Outsourcing is common in many industries. For example, consider software companies and their data centers. Despite the mission-critical nature of the data center, the activities involved in running a data center are not a core competency of a software company. Therefore, it’s typical for a software company to outsource their data center to third party specialists. This enables the software company to focus their resources on their core competencies such as building software, selling software, and servicing their clients.

While it’s common for publishers to outsource their ad operations, it’s not yet common for agencies to outsource ad operations. The dynamic nature of agency ad operations makes it difficult to outsource. It’s not a factory job. Working in agency ad ops is like playing in a jazz band. You constantly have to adapt to changes from other “band” members. For example, revisions to creative assets often come without notice to meet client demands. These changes need to be implemented flawlessly without delay and to make beautiful “music” for your client.

“I’d outsource if I could,” says Michelle Burnham of Burnham Marketing. “I tried outsourcing our trafficking and reporting functions. It worked great when there weren’t any changes to the plan. Unfortunately, that’s hardly ever the case in digital. I found myself spending more time documenting what had to change than it would take me to make the changes myself. It was scary when we started running up against deadlines because of the short lead time on these changes. Ultimately, I gave up and brought it back in-house.”

While the benefits of outsourcing non-core activities are clear, it’s also clear that the problems related change management need to be resolved to make it feasible. Agencies that solve this problem will be able to focus their resources on high value activities and to operate more profitably.

Can you outsource your non-core activities? If not, why not? Answering these questions will help you discover weaknesses and opportunities in your agency.

Regardless whether or not you choose to outsource, your strength is at your core. Focus your time and money on your core competencies and you will gain a competitive advantage.

This article was originally published in The Makegood.

“I remember to have heard of a notable Woman, who was thoroughly sensible of the intrinsick Value of Time: Her Husband was a Shoe-maker, and an excellent Crafts-man; but never minded how the Minutes passed. In vain did his Wife inculcate to him, That Time is Money: He had too much Wit to apprehend her; and he cursed the Parish-Clock, every Night; which at last brought him to his Ruin;”
- Ambrose Philips, 1719

With all the advanced technology in digital advertising today, you would think that placing an advertisement on a website would be as easy as clicking a button. Not so. In fact, the current reality is quite the opposite. It’s amazing how laborious, tedious, and expensive it is.

Brian Morrissey wrote about this problem in “Beefing up Banner Ads”:

“The dirty secret of Web advertising is the actual process of buying and selling ads isn’t very efficient. Compared to the TV industry, where a few dozen players can move billions of dollars, the legwork it takes to execute a Web ad campaign is laughable. According to ThinkEquity, administrative processes eat up 28 percent of the costs in Web advertising versus 2 percent in TV.”

That 28% online versus 2% TV overhead statistic has been used in presentations by Google and countless others to put a spotlight on the inefficiency in the process of placing an advertisement online (and to justify big investments in new technology). It’s a statistic that may have launched a thousand startups.

We recently took this research in a different direction with a study that asked the question “how much does it cost an agency to create and execute a digital media plan?” By using Activity-Based Costing and understanding all the tasks, roles, time, and hourly costs involved with the process, we calculated that it takes an agency 482.5 hours and costs an agency $40,356.36 in labor costs to spend $500,000 assuming 10 sites with 10 placements each. In other words, on average it takes 48.25 hours and costs $4,035 to place an ad on a website.

That’s a lot of time and money.

The research showed 8% overhead expense in the agency’s media department (note: this number does not include creative and other expenses outside of agency media labor). This seemed high. However, in discussing this research with agency media executives, we learned that 8% is actually on the low side of the spectrum and that that 10-12% is a typical rule of thumb for digital media.

Online advertising is often sold on accountability. This accountability comes at a price. We found that 64% of the time spent on an online campaign is spent in implementation, execution, and reporting. Much of this time is spent manually copying and pasting data from one system to another because of lack of tools and integration. Microsoft Excel is still the tool of choice to fill the gaps and to tie it all together. TV does not have the extra burden of accountability at this level of detail (although that may change as TV becomes addressable).

This high cost situation is ripe for disruption. Cost advantage is a classic, powerful competitive advantage. Conversely, cost disadvantage is a classic weakness.

Agencies that employ inefficient manual processes and pass those costs along to their advertiser clients are in a risky position.

Procurement officers who look at this situation see an opportunity to squeeze out the inefficiency.

Entrepreneurs who look at this situation see a big opportunity. It only takes a quick glance at Terry Kawaja’s Lumascape to be overwhelmed by the innovation in advertising technology. To date, this innovation has been largely directed at remnant inventory, which is a small portion of the spending in digital advertising. However, direct sold inventory is next.

Agencies have a window of opportunity to take control of the situation and to gain a competitive advantage. Streamlining agency operations through workflow automation is the key and will be the subject of future articles in this column.