Why agency success rests as much on the intangibles as the tangibles

Ever since one of my first business training courses (hat tip, BBH) I’ve loved the concept of intangible value. I like its apparent inherent contradiction; something that is intangible and indistinct has a clear, hard-nosed contribution to the worth of a business.

From a pure play financial point of view, this is what I believe we deliver to our clients more than anything else. Yes, of course we must drive sales and cash in the short-term but where we drive real value for our clients’ shareholders is intangible value. That is our undisputed expertise. And that intangible value is most clearly demonstrated in the value of clients’ brands. It varies from sector to sector but financial analysis shows that brands and other intangibles typically account for between 30 percent and 70 percent of a company's market value; in certain sectors such as luxury goods, this figure can be higher still.

We operate at our best in the intangibles. Brand Finance do regular surveys of the value of a brand which it defines as ‘marketing-related intangible asset including, but not limited to, names, terms, signs, symbols, logos, and designs, intended to identify goods, services or entities, creating distinctive images and associations in the minds of stakeholders, thereby generating economic benefits.’ In 2019, McDonald’s had a brand valuation of over $31 billion on that measure and their market cap is approximately $160 billion. We should be proud as an industry of the role that communications has played in that valuation.

Armed with this skillset, one would expect that agency people are the absolute masters of managing the intangibles in their own businesses. You would expect the agency world to be roofed out with business leaders who are obsessed with recognising the intangibles in their agencies.

But I’d like to ask fellow CEOs how often this has been discussed in their latest RF meetings or in the budget planning for this year. Or how much the intangibles were discussed when looking to manage the recent revenue downturns. Of course, the P&L shows us what revenue is coming in and what costs we have. But it doesn’t ask you to consider intangible value when you make decisions around cuts or hires for example. Or the impact following a win, or a loss - and not simply the P&L impact. What is the effect on the agency’s own brand? Has it become more desirable as a place to work or not? Has it become more attractive to clients?

What have the intangibles looked like in the last year?

An intangible could be trying to keep a creative department feeling like a creative department during lockdown. Keeping staff morale high during periods of uncertainty. Protecting revenue while investing in mental wellbeing. The impact on a team of working with an extremely tough client. The impact on a team that works with a brilliant client. What are the negative effects on working on a pitch? It’s not just the tangible costs… what about the intangible costs on other clients in the agency?

All of these things have an intangible impact, for better or worse, on agency performance. And while these might not be specifically listed in an excel spreadsheet… we all know they impact effectiveness, creativity and ultimately business success.

A place to spot the absence of full respect for intangible value is in agency brands themselves, and the regularity in which we see mergers and name changes as an alternative to actually doubling down on proving why you exist in the first place, suggesting a somewhat ‘relaxed’ approach to the intangible value of agency brands.

This is just the public tip of a much bigger iceberg. We all know agency culture is fundamental in attracting and retaining the best talent. Where is this on the balance sheet and how is the latest P&L making provision for it? People need to feel good to deliver their best. How is positivity in the agency measured and valued in the business?

Client relationships are a clear asset for an agency. How are we measuring the nature of the relationship so that we know how secure that revenue is over time? And how is that quantified when you look at the P&L?

I certainly don’t claim to have a full answer to this (those business courses only went so far). But I do know that making calls about what is best for the agency operates as much in the intangibles as the more obvious tangibles. Nobody needs a CEO who simply reads a P&L and makes cuts or hires according to the numbers on a page. Anybody who can read a spreadsheet can be CEO if that’s the case. We’re paid to make decisions on the intangibles because it’s difficult.

I believe we need to be better at practicing what we preach to our clients about the importance of the intangibles. I think this is necessary at all times but none more so when the industry is placed under short-term financial pressure.

Make the right calls for the intangibles and I believe the tangible P&L will be just fine.

Charlie Rudd is the chief executive of Leo Burnett