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