Defending the Castle When the Moats Are Drained

One characteristic of our industry is disappearing moats. After a brief overview of the fourteen moats we've lost from 1965 to today, we'll look at what turf we really have left to defend and what the future will look like if we get this right. It'll be very different, and you'd better get ahead of it.

Transcript

Blair Enns: David, by the time our listeners hear this, you and I will have spent three, I hope, lovely days together in New Orleans, where we are attending and speaking at the same conference, but we're both hanging out for the duration. Did we have a great time?

David C. Baker: We did.

Blair: [chuckles]

David: I am casting that positive thing into the world.

Blair: You are manifesting your future.

David: [chuckles] In my life, I have never manifested anything. What are you turning me into?

Blair: [laughs]

David: We're going to have fun, aren't we?

Blair: Oh, I'm so looking forward to this.

David: Yes, a lot of good people there, and good food, and there might be a Sazerac or two.

Blair: Yes. The organization is SoDA, Society of Digital Agencies. You and I have done a lot of work with SoDA and SoDA member firms. We think very highly of them and the person who runs the organization. I haven't been anywhere in months. This is early September, and I don't travel in the summer. I'm really looking forward to this. The reason I bring that up is, at this conference, this is the talk you'll be giving, or a version of it, and it's called Defending the Castle When the Moats Are Drained. If a goat is the greatest of all time, is a moat the messiest of all time?

David: [laughs] This is not starting out well.

Blair: [laughs]

David: This is slightly different than what I'm going to talk about, but it's basically the same idea. I presented, I think, seven or eight ideas to Tom at SoDA and said, "You pick one," and he liked this one. I have never spent more time in my life doing research for a talk. I had so much fun doing this. I knew what a moat was, I knew moats had disappeared, but I hadn't really thought about chronologically what moats have disappeared in our field.

My first entrance to the field I was a typesetter on a Varityper 4560. I was typing foreign languages right to left, Syriac, Aramaic, Hebrew. Nobody even knows what those are anymore. Then you would run it through a processor, and then you would wax the RC paper. Then you think about we used to make money on separations for photographs, we used to make money on printing, go on and on and on. I should probably talk about some specific ones, but this is such an unprotected field, isn't it?

Blair: It is. Are you writing a post on this eventually?

David: Eventually, yes.

Blair: Yes, because you've got this list you've chronicled, the disappearing moats for the creative professions over the years. Do you want to pick out a few?

David: Yes, like desktop publishing, or the democratization of the creative programs with Adobe changed this world. It gave access to all kinds of people. I remember 30-some years ago, I was helping a client move from Tulsa to Nashville. It was a post-production firm. I was in charge of helping them set up everything in their new facility. I helped them lease the facility and get the equipment and everything. It was about a $1.6 million post room.

That was the time when Avid Systems were starting to rise up. You could get an Avid then for $300,000. Now you get them for $40,000. That would do everything offline and online, including some of the color grading. The audio stuff, it could do. It just blew all of our minds. Then you think about far-shoring and near-shoring. Recently, some of the statements that our non-friends at Meta and OpenAI are saying about this field, they're basically saying, "The field isn't necessary. Within a few years, they'll be gone." You read all of this stuff and you think, "Oh, shit, maybe I should have made different life choices here." [laughs]

Blair: I'm with you. Zuckerberg and Altman saying, basically, imagine that their businesses are going to replace 95% of the marketing field. Yes, good luck, boys. Have at it.

David: It's not going to happen. Yes. Think about crowdsourcing creative and consulting firms dripping down and taking work from us, and freelancers, and fractional everywhere, and now online influencers that are a part of the media mix, the downturns, the whole remote stuff, people starting up from the bottom thinking that, hey, if I just start selling HubSpot to my customers, this is pretty easy to do. There's been this onslaught over and over and over again.

I'll tell you the biggest moat that I just want to mention this one before we move on, is the geographic moat. When I owned my own firm, all of my clients were local. There were four firms. I was not the best firm in town at the time. If you were a local business, you were going to hire me, or Tim, or Kevin, or one of the others. Then that moat disappeared with the internet largely.

It was good news and bad news. The good news was now I could work with any client anywhere. I didn't have to just have a local client, but these local clients could work with any agency they wanted. That's probably the best illustration of the moat that just completely changed this world. Then you think about AI. I'm not panicky about AI. I'm actually pretty excited about it. You do wonder, "What's the future going to look like with even more moats disappearing and we're standing naked in front of our clients without much protection, essentially?"

Blair: Yes, it makes you wonder why we would get into this business.

David: [chuckles] Yes, that's what I mean by life choices. It's like, "Oh, is this what we want to do?" It just goes on and on. I don't think we're in an existential crisis, but I do think that more and more of the things that we do to make money, we're not going to be doing those things in the near future. What does that mean for us? What does our business world look like when we're not making money from the same things that we were before?

Blair: You modeled out here various types of business risks, and you cite them as a forcing function for change. Do you want to speak to that at all?

David: Yes. I'm actually right near the end of my certification for the National Association of Corporate Directors. It's a really involved, expensive process. I just finished going through all the 15 modules. I'm doing practice exams now, and then I have the proctored seven-hour exam to come up. One of the slides and one of the presentations was pretty fascinating to me. This is directed primarily at publicly traded firms. They said, "These are the 10 significant risks that publicly traded firms are facing." Of those 10, we as an industry are facing six of those. An economic slowdown or uncertainty, business model disruptions, that's a pretty big one, geopolitical volatility.

Blair: Check.

David: Pace of technology disruption.

Blair: Check.

David: Industry consolidation, yes, that's a big one. Supply chain disruptions. Not the way they're thinking of it, but I think of supply chain as really the near and the far-shoring, labor rather than materials. If all of these massive trillion-dollar companies are facing risks that they haven't faced like this before, it makes sense that us little people at the bottom might be under the same sort of risk profile and how that's changing. It just really struck me.

Blair: We have this history of disappearing moats, and then we have at least six enterprise risks. I think everybody feels like we are in uncertain times. The geopolitical thing is really big. There are wars and potential wars breaking out on multiple fronts. There's trade uncertainty. There are a lot of people unsure of when to spend, moving away from CapEx or anything like that. I know on the sales side, our clients face, probably just anecdotally, the highest level of uncertainty among their clients ever. There are just still so many deals just stuck in a pipeline or lost to no decision. It feels like we are at the cusp of a new reality. Do you want to just paint the picture of what this new reality looks like?

David: I want to think in broad historical arcs. I think it's useful sometimes to back up from where we are in this moment, we're reading the news cycles every day, and think about the bigger picture. I want to take us back to 50 years ago. Almost exactly 50 years ago, something big changed. Before that, the media was aligned with agencies. They were arm and arm. The media and agencies were aligned.

Blair: Agencies were agents of the media.

David: Yes, exactly. Clients in those early days, in the late '60s and early '70s, they wanted to buy the media directly to bypass agencies and to not pay that 15% commission. That's when the phrase recognized agencies came up. Media outlets said, "We will only give these commissions to recognized agencies." They said that because they were trying to exclude in-house agencies from getting those commissions. That's what they meant by recognized agencies, is not client departments. That went away in 1975. The media then said, "Just kidding, we're going to sell directly to clients."

That changed a lot of things. Now we have these three parties that have had these different alignments over these last five decades, the media, clients, and us. Then something else happened when clients decided that they needed to have in-house agencies. That was sparked about 10, 12 years later when the whole brand standards movement came up. They needed some sort of a method to protect the brand image, everything about the brand. They couldn't trust that process to multiple agencies they worked with, so they had in-house departments.

Now fast forward to today, and 85% of Fortune 5000 firms have in-house departments. Where's the modern alignment? It was the media and agencies against clients. Now that has changed entirely. Not overnight, it's been a slow process, but now I think we need to view ourselves as being aligned against media and with clients. The clients are not the enemy. I've been saying this for 15 years, it's like, "The client is not the enemy." You cannot view the in-house department as your enemy. They're your friends, you need to work with them. The whole mantra is, "We're going to work with you until you don't need us anymore. You're our friend."

I think we need to be aligned with clients, and we need to understand that they need to be our friends. These clients, more than anything, what do they need more than anything right now is they need data. They rely on us to help them with that, and the media is over here basically saying, more starkly than it ever has, it's like, "You don't really need agencies. They're going away." It's a new day. I think we need to wake up.

Blair: I'm thinking of so many things. When you say the client is not the enemy, you're talking about in-house marketing departments being the client.

David: Right.

Blair: You're not talking about procurement not being the enemy, because everybody knows that-- [chuckles]

David: Oh, they're still the enemy. Yes. [laughs]

Blair: I'm just bracing myself. I know all my procurement friends are going to email me. Have at it, boys and girls. Have at it.

David: [laughs]

Blair: I love poking the procurement bear. This is the new reality. We need to think of ourselves as aligned with the client. We need to recognize we're in a battle against the media. Let's not fight the in-house department. They're there for a very good reason. We need to recognize our role in this relationship. Unpack our role in this new reality.

David: Here we are with the new reality of who we're aligned with, while more and more motes are being drained, and the enemy can just run across those dry beds now and attack our castles. What's our role? What are we supposed to be doing now given that there are fewer things for us to make money on, and we really desperately need this new alignment with clients?

I see our role in four parts. One is creativity. I just think that may be the very last mote that's drained, and hopefully, it never will be. Creativity. I don't just mean creativity as something we sell, I mean the people that provide that. We've talked about this before. Not everybody who feeds the best, best creative is in this category, but some people who do would never work for the client. We have access to those people. Creativity is one.

Blair: That's largely an issue of culture because these large clients with in-house marketing departments, as much as they try to create a culture in the marketing department, the culture is really set from the top down, the larger organization. It is a more efficiency-seeking, innovation-averse culture, and creative people, they need freedom. They need a culture of innovation and freedom, freedom to fail, freedom to think, et cetera.

We on the agency side, it's hard to see that mote going away. Personally, I don't think AI will ever solve for this. It will iterate existing things, but, as we've talked about recently, there are parts of human ingenuity, intelligence, and creativity that require the free will of the creator to think for reasons unknown to them, get up one day, and just think about the problem entirely differently.

David: Yes.

Blair: That might be the last mote.

David: It might be.

Blair: That's creativity. After that?

David: Next is data analysis. This is where people are going to like. What did he just say? Data analysis?

Blair: [laughs]

David: If you're just a branding firm or something, and you don't even think about data, or data analysis, or collecting data, you're a generation behind here. I just don't think there are going to be any thriving firms that don't include some heavy data collection from the work that they're doing, data collection that feeds their own unique IP, data collection that enables them to compare the work they're doing for clients and help set expectations about the effectiveness of their work. This is the area that I think we probably are most behind in, is data analysis, data collection. First is creativity and then data analysis. Do you want to say something about the data side?

Blair: I think that's an accurate assessment. You're going to have to make an ROI case. I'm hearing Rory Sutherland's voice in my head. It's like, "You can't immediately make an ROI case for much of marketing, and some of it, you can never make an ROI case for it. You just have to go with it, understanding that businesses are not entirely mechanistic. They're more like complex adaptive systems. They're more like living organisms." I think I would sound a note of caution around data analysis. I think there are times in the marketing world, especially when we're thinking about the creative side of it, where data is just overstated.

When the business starts to be run by the spreadsheet people, I think that's the beginning of the decline of innovation and creativity. I do acknowledge it's important, and some things can be measured. Those things that can be measured and make sense for you to measure, they should be measured so that you can make the appropriate case where it needs to be made. I also think, just as often, the person on the agency side should be making the argument against the mechanistic view of the business end of marketing, and should be arguing against data. What do you think of that?

David: I do agree with that. As you were talking, I was just thinking about the recent change that Nike made. It seems to me like just do it, which, by the way, was prompted by somebody on death row-- I don't know if you've ever read that story, but he was just getting ready to die, and they said, "Do you have any last words? He said, "Let's do it." The guy at the agency that worked for Nike remembered that and said, "Why don't we use that phrase and change it to just do it?" Anyway, that strikes me as a supremely creative phrase. The new one strikes me as being driven by data. [chuckles]

Blair: I didn't know they changed it. What's the new Nike slogan?

David: The new one is why just do it with a question mark, or something like that, because they're afraid of offending people who don't want to lose in a competitive environment. To me, I just rolled my eyes when I read it.

Blair: Why do it at all? Give me a T-shirt that says that.

David: [chuckles] This is why we are not running the account for Nike.

Blair: Yes.

David: The first is creativity, second is data analysis, and third is complexity taming. This seems like a really important role that we are capable of doing. We are living in a disaggregated world where there are so many different levers to pull to make things happen and so many different tools to use. I think clients are just overwhelmed. It takes somebody like the people like you and my best friends at these agencies who can put all this stuff together and help them make sense of an increasingly complex world.

Complexity tamers is how I'm phrasing that. That's the third one. I think that's one of the new roles we have, which is clearly consulting-oriented. It's helping them understand how to weave all this stuff together and not lose their minds in terms of marketing effectiveness.

Blair: As you were talking about, I'm thinking of financial planners. We do a lot of work in that space. I'm often saying to them that the value you create isn't financial. One of the common value drivers is just organizing complexity, making complex things simple. You could extrapolate, in a complex world, I think most advisors create value or should be looking to create value by organizing, taming complexity.

David: One thing that scares me here, though-- I'd be curious to hear your perspective on this. An example of taming complexity was really the digital transformation movement, which was led-- You never thought we would lead it, but we led lots of that digital transformation, helping people understand, reimagining things in a digital world. There was a lot of money to be made for a few years, but people still selling digital transformation, it's like that train has left the station a little bit.

The new train seems to be, "Let's help our clients integrate AI." I think there's going to be a lot of money to be made in the short term, but this is not something I would climb on permanently. I think it's a temporary thing, and AI is just going to be built into everything, just like digital is at some point. The idea that you're going to help clients understand AI, I think it just has a very short life to it. I'm nervous about people taking this complexity-taming notion and thinking it applies to AI and that they can do that for 10 years. I don't think that'll be true.

Blair: I'm with you on that. Can I just summarize these key elements of our new role in this new world?

David: Yes.

Blair: Our new modes are creativity. That's true today. As soon as I say this, it'll be over, but it should be true for the foreseeable future. Data analysis, and you say we're not very good at that, we need to get better at it. Taming complexity. What's your last one? Objective, courageous pattern matches. Want to talk about that?

David: Yes. What I really mean by that is just really understanding the scientific part of marketing. In my research for this talk, I came across this stat that just blew me away. 24% of us have any formal marketing training at all. The people who do have formal marketing training, it was a four-day course in the graduate program at Harvard, and now you lead your LinkedIn profile with that. This is really missing. We just keep riding this train without much formal education. It's not as if formal education will solve everything, but I'm just alarmed at how much we're just following our gut instincts when we're trying to understand marketing.

Blair: If you came out of the marketing track in business school, your first job was probably brand manager at P&G or the equivalent on the client side. The clients always hired for marketing education. Not the client, but a lot of Fortune 500 clients have always hired for a marketing education. It's not something we really do very well on the agency side.

David: We really don't, yes. I think it's a hole. I really think it's a hole. I think it's one of the reasons we lack some credibility there.

Blair: Yes. The people who did have any formal training, we were so enamored with them. We gave them brand new titles. We called them planners, and we gave them all kinds of special powers and responsibilities.

David: Yes. The whole account planning movement did not start because we wanted to be more strategic. It started late '40s because we were tired of account managers making shit up.

Blair: [chuckles]

David: We said, "We've got to have account planners." It was purely a reflexive defensive move in the industry, which we're pretty good at.

Blair: How do we think about this new role through your two-room model of a strategy room and an execution room?

David: I've talked a lot about this, and it's in the Business of Expertise book. The notion is that you've got this smaller room. It's the only room that has an opening to the outside. It's the strategy room, research and insights. It's where the client has to come first. Then, if they want, they can go through the connecting door into the larger execution room or implementation room and buy all of that stuff from you. You close that door off to the outside so that the only people who have access to buying your implementation are also getting your strategy first. That's the whole notion of the two-room model.

The problem is that we have been making most of our money from the implementation room. Every mote that gets drained, it changes the shape and the size of that implementation room. Now it's like, "Oh, I guess we're not going to make money from that anymore. What do we do next?" Slowly, over time, strategy/research/insights should be, anyway, becoming a larger and larger percentage of what we make money on.

Against that background, I've just got some suggestions about what does our new world look like? I don't have all the answers. When you and I face this, as we think about facing a new future, what's the framework? What's the set of principles that we have to keep in mind so that we stay on track and don't lose our heads as the enemies keep crawling across these dry motes now?

Blair: I'll just point out that that second execution room, that's where you got paid for your people to do things with their hands, whether that's typing. It wasn't always typing initially. It's mostly typing now. You probably charged for that in units of time, hours, days, FDEs. Now AI is your enemy because it's allowing everybody to move a lot quicker. This lucrative room where you worked slow, relatively speaking, and got paid well to work slow, that's disappearing.

David: Yes, exactly.

Blair: You said you've got a set of 10 principles, what you call 10 responses. You start with nimbleness. Talk to us about this and the others.

David: I can go through these pretty quickly. Some of them are pretty obvious, but the first is craft nimbleness. I'm talking here about financial nimbleness. Don't be signing any long leases. Don't enter any long contracts for anything. Crave your ability to react quickly as the pace of change increases. Crave nimbleness.

Blair: What I'm hearing you say, correct me if I'm wrong, is these are uncertain times. Everything's changing. You need a lot of dry powder. You don't want to be locked into anything because the future is so uncertain.

David: Right. Don't be locked into the same staff, the same facility, the same service offering design. Yes, be ready. Second is trust. I just think in a world where AI is going to make us take a second look at everything, like who created this, then trust, transparency, honesty is going to be so critical. I think you're going to have to present yourself differently publicly on your website. You're going to have to disclose so many more things if you want to remain trustworthy.

You could see how even recently, even today, people are still making decisions between firms based on the quality of the ideas, and the cost, and the nimbleness. Pretty soon, trust is going to come in there. It may not be ever measured mathematically, but people are going to start choosing firms because they trust what's happening there. That's the second one.

Blair: Does that mean you should be doing more or fewer AI-generated LinkedIn posts and comments?

[laughter]

David: If that's a real question, then you are no longer my partner.

[laughter]

Blair: Crave nimbleness, trust is the new lighthouse. What's next?

David: Size doesn't matter. You've got to quit believing that you need to keep getting bigger and bigger and bigger in growth. Tied to that is the next point. When are we going to drop this insane focus on recurring revenue arrangements with clients as if nothing else is good? In a world where things are moving quickly and nimbleness is really critical, you've got to do what's in your client's best interest.

I was talking about this yesterday with a group of people, and somebody was objecting to this. I said, "Give me specific examples in your personal life of all your recurring relationships." They listed mobile phone and cable, streaming. "Which ones of those do you like?" They don't like any of them. We've got to get around this idea that somehow recurring revenue relationships are the only way to move forward. I think we need to be open to way more fits and starts with clients, big and small projects, which means we're going to have to be more nimble as an agency, too, if we're going to manage the whole overhead equation.

Blair: I get that. I think there's a movement towards subscription. I see the appeal on the selling side, but as somebody who is drowning in subscriptions on the subscriber side, I have a hard time reconciling those two things. It's really hard to be nimble and adapt to the client when you're locked in in a services arrangement and a fixed recurring fee.

David: When a client feels locked in.

Blair: Right, that's the most important thing. The client feels locked in, feels like you are not nimble and the arrangement doesn't allow them to be nimble.

David: How many of you feel like the switch Adobe made 25 years ago to monthly costs was in your best interest?

Blair: It still pisses me off every time I log into Creative Cloud.

David: Yes. We sound like old men yelling at Cloud, too.

Blair: [chuckles]

David: Fifth is be a better collaborator and stick to your strengths. There's going to be less and less room for pretending you're good at something. Build great relationships with sister firms that you can work with informally here and there, and bring people in. Not quite the whole Hollywood model, but there's not going to be room in this new world for you to pretend that you know what you're doing. Be a better collaborator and stick to your strengths. Next is-- This is just more a warning, but I think small to mid-sized generalist firms are doomed. It's like you folks, you're just screwed.

Blair: Meanwhile, there are going to be many small and mid-sized firms that succeed. They are not going to be generalist firms.

David: Right, they're not going to be generalist firms. That's a big warning. Six. Seven, disintermediate yourself before others do. Our industry has this history of scrambling when one of the motes is drained. Let's get ahead of this a little bit. Let's imagine what AI will replace, for instance, and let's go ahead and fix that for ourselves.

Let's lower prices. Let's say, "No, let's just give this to someone--" whatever the answer is. I don't know what the answers are for all of these things. Disintermediate yourself. Be open to formal collaboration. I think this is going to drive some consolidation in the marketplace where you bring smaller firms together. Nine, trust your innate humanity and your ability to connect.

Blair: Same more.

David: This is tied to trust a little bit, but I think in the presence of more and more scientific tools that pretend to understand humans and how to reach them, we need to keep relying on our gut. We need to pretend that the users we're trying to reach are just like us. Even though we might be in slightly different places, socioeconomically, racially, whatever, educationally, politically, we need to trust our innate humanity and be human to human. This is the opposite of the data. I think we need to understand all the data, but then we need to wrap it in humanity. I don't see enough of that happening.

Somebody will write an article as a part of their marketing strategy, and they're paying all kinds of attention to SEO tools or some persona instead of imagining a specific person who thinks just like you and has the same fears that you do. We cannot lose that. We cannot lose the fact that it is a human on this side of it, and it's a human on the other side of it. I think that that's getting obscured a little bit.

Blair: There's a whole bunch of bullshit AI-driven messages in between. Sorry to keep coming back to that.

David: Man, I've just been imitated by spam every day, too. It's just disgusting.

Blair: Have you sent any of these spammers to our spoof episode?

David: [laughs]

Blair: Spam hack your way to growth?

David: I should say, "Please listen to this and then get back to me."

Blair: I've done this a few times.

David: Oh, have you?

Blair: Yes. A couple of people have replied, "Yes, will do," and I never hear from them again.

David: Of course. Anyway, it's about biggest creative challenges. I don't have any big answers. I just want people to have a framework about how to think about how to face this new future where the moats keep getting drained and we keep examining our life choices.

Blair: All walls fall, all moats drain. We're in a period now where there's so much change in the moats and the geopolitical and other environments. It is a time to rethink pretty much everything, to be nimble. I'm not going to repeat your 10 responses to the current situation, but it was a great conversation. I'm looking forward to the speech. Thank you, David.

David: Thank you, Blair.