The scourge of short-termism comes from the top
Short-termism is trickling down from the boardroom - and the knock-on effects don't just impact the marketing and advertising industries, writes Rowly Bourne
The boardroom and digital ad-buying seem to have a lot in common; there appears to be a risk of over-reliance on short-term metrics and I think the two are connected.
The current tenure of a public company CEO is 5 years (CMO tenure is 3.5 years). So to impact their long term incentive plan (LTIP), they need to see a very rapid increase in profitability as most UK listed companies are valued on a PE ratio (price dived by earnings or profit).
The easiest way to achieve this is to cut long term investments such as M&A, CAPEX, R&D. You then ask the remaining departments to do more with less; focusing on near-term outcomes to ensure revenue can be squeezed out of the latent brand equity leftover from the previous CEOs tenure. As Ian Whittaker, Head of the Media and Digital Research at Liberum points out:
“The Media sector has several examples of companies that placed short-term earnings growth over long-term investment and saw their earnings and, ironically, share price suffer. RELX (the old Reed Elsevier) suffered a collapse in its share price, which took several years to reverse, after the market realised previous management had underinvested to boost earnings growth to meet LTIP plans. On the other hand, companies that invest see returns to shareholders. Sky, which famously prioritised organic investment over shareholder returns and meeting earnings targets, eventually was bought out at a big premium to its historic share price”.
As a result — in digital advertising — we are constantly chasing cheaper prices for ad buying and ad creation, with every brand puff piece currently discussing how they have cut costs by; changing agency, in-housing, installing a new tech stack and so the list goes on.
The irony is that the great investors and CEOs of our time are always quoted for their long-term view and bravery:
“stopping advertising to save money is like stopping your watch to save time” – Henry Ford
“Someone’s sitting in the shade today because someone planted a tree a long time ago.” – Warren Buffett
The Buffett quote is currently playing out in reverse. With CEOs cost cutting across the board, no trees are being planted; and the so called disruptors are taking advantage — direct to consumer being the example that the FMCG and ad industry is most focused upon.
But it’s something of an own goal, allowing the disruptors in. High impact advertising and great creative takes up head space of the consumers. It creates conversation, good or bad. It has the same impact that Love Island has on my office in the morning or that Brexit has on the whole of the UK for the last 24 months. It’s the shade created from planted trees. And these trees are no longer being planted.
The irony runs deeper than just opening the door to the competition. The incumbents are now validating VC investment strategies in Direct To Consumer (DTC) by acquiring all the success stories, before they’ve even had a chance to scale. Unilever has purchased Graze and Dollar Shave Club. Nestle has acquired a majority stake in tails.com and P&G has bought Walker & Company Brands.
The model is evolving even further, with Jungle Creations now beautifully blurring the lines between creative agency, media owner, DTC and social media agency, to take advantage of opportunities reflected in their consumer interaction data. Nat Poulter, COO at Jungle Creations commented:
“We wholeheartedly believe in the mantra; be curious, innovate, diversify or die, which broadly translates to; don’t just focus on the here and now, think about what could be. Armed with this mindset, we have been able to create a business that goes beyond publishing. Leveraging audience insight and understanding across our marketing services and commerce, we’ve been able to scale successful businesses quickly. These opportunities have been afforded to us, in part, because competitors have been focussed on the short term, too afraid to take risks or stray too far from their core.”
Before I co-founded my company Rezonence, I was an investment banker and ended up flying around much of the world with the senior management of Vodafone including, Vittorio Colao, Nick Read, and Peregrine Riviere. Nick talked me through their corporate investment strategy — which was similar to most companies of this scale — which consisted of organic investment, M&A, dividends and share buy-backs, and investors always start to worry when buy-backs are on the rise.
Taking this corporate investment strategy to advertising creates a similar roadmap to investment; branding, DR and simply doing nothing, and the ad industry has been looking at what “efficiencies” there are to be had and how they can stretch budgets.
Cheap ad buying has been proven time and again not to be the answer to effective cost cutting. Whether it’s your ads being served to bots, falling victim to one of twenty-nine other types of ad-fraud, not making it into view — which is only 48% of digital ads — or making it into view but never actually being seen — Lumen showed “only 18% of viewable digital ads actually get looked at — rather than saving money, you are in-fact wasting it.
So the only other leaver to pull is agency costs. I am sure though that many of you have seen the Linkedin video of what can be done in 10 minutes, 1 minutes, 10 seconds. With hourly fees across all professional services increasing (legal, finance, accounting, consulting), one has to question how we can continue to push agency prices down. It takes time to make great work, and great work is what sticks in people’s memory, and ensures your tree grows big and tall, keeping the competition in the shade. As Mike Follett, Managing Director of Lumen Research, who specialise in tracking and measuring attention puts it:
“Attention is a scarce resource, and advertising is just one of the many things that people mostly ignore; so advertisers have to earn people's attention. Ads that tell a story (or tell a joke) are worth more of your time, so people spend more time engaging with them. With this being the case, advertisers should focus on investing the time and money necessary to create these types of ads, or risk reducing the associated multiplier effect.”
Heather Andrews of research company NeuroInsight raised two scientifically proven points:
- If something is not in memory it cannot affect a future action
- If something has gone into memory, then your brain has already found a potential use for it.
NeuroInsight have in-fact identified five key drivers of memory and whilst as an ad buyer you can’t directly impact them, you can buy against them: narrative or emotional intensity, personal relevance, positive disruption, and interactivity. When you put these lenses over the great campaigns of today and yesterday, it’s clear why they get us talking; but they took thought, time, and some luck to craft. As you cant buy luck, you need to invest in time and thought.
Now is the time to apply the same quality filters to the whole ad buying process, and to see it as an investment in organic growth. You never know — thinking about the longer term benefits may very well have the same impact on CEO and CMO tenures.
Rowly Bourne is the founder of Rezonence