Transparency series: Remuneration, agencies low-balling and false economies

Arvind Hickman
By Arvind Hickman | 18 May 2017

This is a free excerpt from the AdNews Monthly print magazine cover feature. Over the course of May we will serialise the feature into bite-sized chunks. To read the full article now download a digital version of AdNews or subscribe to the premium print edition here. You can also see this topic, and more within the Transparency issue debated at AdNews Live! Tackling Transparency.

Remuneration

One consistent thread at the heart of the problem, wherever you look, is money. Over the past decade, marketers have had far more scrutiny applied to media budgets and over the past five years driving down supplier costs has become a key consideration leading to procurement growing its influence in media agency reviews and pitches.

“I believe, as a client, you get what you pay for, and you receive a level of transparency relative to what you ask for,” a senior marketer at an ASX 100 company told AdNews.

“A number of clients, whether they are global or local, have really pushed agencies to the point of them having to find other means to generate revenue.”

When pressed on whether the c-suite views media spend and agency suppliers as a cost rather than an investment, the marketer added: “There is no doubt [agencies] have absolutely been treated as a line item to minimise as best as you possibly can and there’s also no doubt they see media spend as a cost not an investment.

“Clients are starting to do a lot more work around econometrics In the past, we haven’t been able to argue otherwise, but now marketers are getting a lot better at attributing investment to growth in sales, customers and other metrics.”

All marketers who spoke with AdNews acknowledged this trend, but a consensus was not reached on how much influence procurement exerts in reality.

“This really varies by client. If it is a compliance/governance process then procurement will typically play a greater role. If it is marketing-led, and they are genuinely looking for a different offering, we typically see marketers taking a more active lead role to ensure they get what they are looking for,” one marketer said.

Trinity P3 managing director, Darren Woolley, who has experience running pitches on behalf of clients, described procurement-led pitches as “the single biggest bane of our existence” and lamented the number of times his firm advised clients an agency’s fee was competitive, only for it to fall on deaf ears.

Tickets for AdNews Live! Tackling Transparency are on sale now. Early bird closes on 26 May.

Woolley believes marketers often lean on procurement because they are better with numbers and some marketers “feel like they've been taken advantage of by their agencies and use procurement to get money back or to reduce the cost”.

A senior marketer who has worked at several large organisations believes some marketers play on this notion that procurement is the ‘bad cop’.

“CMOs are hiding behind that and going ‘oh it's not my fault procurement said that you are not the cheapest one’. That's absolute bullshit.

“For any accounts payable you’ve got to be responsible for it - the spend and the media - and marketing decisions that go with it. Procurement makes recommendations, but they don’t actually decide on an agency.”

Agencies lowballing and false economies

On the other side, it’s not always clients driving down cost, sometimes agencies will undercut rivals to unsustainable levels to win work. Agency bosses told AdNews although many pitches still come down to cost, this mindset has eased over the past two years.

“Agencies are to blame here as well as they often drop their prices (retainers or commission) to compete with each other in order to win business,” one media agency leader told AdNews.

“This race to the bottom has come from agency competition as well as procurement, the result of which is that agencies can sometimes struggle to cover the cost of the team resources to service the account.”

Stephen Wright, director at independent Programmatic Media, told AdNews cost-cutting has meant that many agencies now rely on digital media revenue, which can yield higher margins hidden from client view, to make up for slim margins elsewhere.

Tickets for AdNews Live! Tackling Transparency are on sale now. Early bird closes on 26 May.

"When I used to do pitches with Trinity P3 and I’d ring agency CEOs about a piece of business, one of the first questions was whether there was a digital component,” he said.

“They’ve built a business model that’s heavily reliant on hefty fees and profit levels in the digital and programmatic areas. The other areas operate on very lean margins.”

For Australian media agencies to shift their business models away from digital could lead to reduced profits that would fall below targets set at a global holding group level, says Wright.

“Marketers need to acknowledge that remuneration across all aspects of the service needs to be looked at as a whole rather than programmatic in isolation,” he added.

Driving down costs on retainer fees and commissions to unsustainable levels is a false economy and usually leads to promises that cannot be delivered, inexperienced and overworked account teams, or agencies looking to build value back through other areas.

“This result sees more junior and less experienced people hired to service the roles, which may or may not drive the best strategies and delivery for clients. It can also lead to senior resources being over allocated,” one agency leader warned.

“This has been the case over the last five years and has led to the industry burning out some great talent who have now left the industry altogether.”

CMOs and agencies are in a tricky position to redress the balance.

“How do you then turn around to your CEO or CFO and say, ‘you know what, all we've done is bought a whole lot of crap for the last 10 years and none of it has really performed’? It's going to get them fired, so they can't do it,” Woolley said.

Check out the entire Transparency Series here.

You can hear these subjects tackled at the AdNews Live! Tackling Transparency event on 27 June. Tickets are now on sale. Speakers include Tim Egan, regional product marketing manager at Facebook and Tony Bell, national digital sales director at The Guardian Australia. More to be announced this week.  Early Bird discounted tickets are available until 26 May. Buy tickets now.

This article is part of a series on Transparency which originally appeared in AdNews in print.

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