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Tuesday, January 10, 2017

Three Things To Think About Agency/Client Fees

Everyone knows that fees have cut agency profits causing a lack of bonuses and profit sharing, elimination of training programs and lack of staffing.  But there are other, less obvious ways fees have hurt the business.

My dad ran a big agency.  Gumbinner-North was, at one point, the twentieth largest agency in the world.  After he retired, he warned me about fees.  In those days most agencies were still on commission from media. His words were quite prophetic. He told me that there were three problems with fees.

First, there is always someone who will undercut the fee an agency is receiving in order to win an account or keep an account.  There are many stories about agencies winning at any price and then discovering that they could not afford to service the business. (Under the commission system, there was minimal income cutting among agencies since all of them got 15%.  Fees came into being when major advertisers, particularly those that spent all or most of their budgets on network television, decided that it was unfair to be charged 15% since network was less labor intensive than other media.)  

Additionally, clients now often choose agencies based on price rather than the work or the relationship.  Sometimes new agencies are chosen based on a point or half a point, which could be considerable for a huge account.

Second, clients don’t understand fees (true to this day).  If the fee is paid monthly (most are) and there is a quiet month, clients don’t really understand that this is offset by a busy month.  Most clients don't understand how agencies work.  Consequently, many advertisers, believe that their agencies are overpaid. Most significant, under the commission system, agencies were technically paid by the media, so an agency's income did not show up as a line item in a budget.  Advertising budgets used to be set up as media and production.  Today, in addition to these two budget lines, fees are also a line item, often higher than production and it sticks out, constantly reminding clients how much money goes to their agencies and enabling clients to constantly nit-pick what is paid to their agencies.

Third, and most critical, under the commission system, agencies were paid by the media, not by their clients.  This helped keep agencies objective about their client's business and they could service their clients according to their needs.  Commissions enabled many agencies and clients to be true partners in both marketing and advertising.  Agencies could hire the best possible people to service an account since a few thousand dollars in salary was insignificant.  In fact, agencies often functioned as the marketing department of their clients.  

Today, fees have actually put clients in charge of their own business.  This is of like a lawyer representing himself.  Although my father never thought of client procurement departments, the purchasing group, sometimes over the objection of their company’s marketing and advertising people, dictates how the client should to be serviced and by whom.  I once had an account director who was about to be hired by an agency do a courtesy interview with the client.  After the interview, the client told they agency that she was too senior and they wanted to downgrade the position.  

Most fees are calculated on what is called a blended rate, the average of all the people servicing a particular client.  There can be little deviation for this amount unless the agency is willing to enter into a renegotiation.  Making matters worse, there are many cases where senior creative, account and media people are actually spelled out by name and salary in the contract. This has pretty much put the client in charge of its own business.

I am not advocating a return to commissions.  Rather, I am simply pointing out the things which should be taken into account when negotiating fees and client contracts

8 comments:

  1. Getting harder and harder to make a buck. As of late, clients also seem to be in the business of dictating agencies' profit margins. Take, for example, McDonald's mandate that its new Omnicom shop service the McD's business at cost. Kind of funny that Omnicom subsequently elected to call the shop "We Are Unlimited."

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    1. Anon: Never connected the two. Funny.

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    2. Anon: Never connected the two. Funny.

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  2. I personally and professionally like dynamic “cost + fee” contractual arrangements. Overhead plus estimated manpower costs, and, God forbid, profit margin (all reviewed annually). OMG, what a concept! What a disaster! The Agency might actually makes some money, even when things change. But that’s what it takes for ANY professional services business to stay in business these days. Shifting from AOR status to “project work only” has had huge financial implications for everyone. And with Client “Procurement” departments now calling the shots on costs, it takes a lot more than the lowest bid to get “The Best-of-Class”” in Agency talents. Because in the end, you get what you pay for. Not my opinion, just a fact. And if you don’t believe me, just ask Michael Roth at IPG or Sir Martin at WPP. No doubt about it, they will agree with me.

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    1. Agencies have to become stronger and resist the idea that clients can now dictate their profits. Clients need to work against their own budgets and hire agencies within those budgets, regardless of the the agency's margins; if the agency makes more money (or less), so be it.

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  3. Agree completely here, Paul. Agencies have retreated from a leadership position that created partnerships. Vendor has always been a difficult word for me. However, when life gives you lemons, figure out a better way. The agency world has not kept pace with the change the world has experienced. The way an agency operates has not fundamentally changed in 30+ years, which in my opinion, gives credence to the idea of fees. In advertising parlance, it's time to "think different" about how value is generated for clients and demand to be paid for it. A man hour does not equal a breakthrough idea that changes a brand's fortune.

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    1. Steve, I have always believed that strength wins. As Monty Python said, "And now for something completely new."

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