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Why cost benchmarking is the waterboarding of the advertising industry

Advertising industry cost benchmarking
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This post is by Michael Farmer, Chairman of TrinityP3 USA and author of Madison Avenue Manslaughter: an inside view of fee-cutting clients, profit-hungry owners and declining ad agencies, which won the Axiom Gold Business Book Award for the best marketing / advertising book of 2016.

Procurement and benchmarking rose to corporate prominence once “increased shareholder value” became the advertiser’s mantra. Marketing declined in importance, from an investment to achieve brand growth to a cost to be optimised. Benchmarking consultants jumped on the bandwagon. 4As shamefully accepted the ANA benchmarking trend with hardly a whimper, leaving its members to fend for themselves.

Benchmarking is the waterboarding of the industry, enhanced interrogation that weakens its subjects but develops no useful information. Although benchmarking has become commonplace, it has had no positive long-term benefits. Indeed, the opposite is true — advertiser brands are still not growing, CMOs last in their jobs only half as long as CEOs and agencies have been compromised and weakened.

For those who do not understand benchmarking practices, I have prepared a special guide for readers by rewriting an advertisers’ RFP and putting it in plain English. See below.

Plain Language RFP by Big Brand Advertiser for a New Agency

  1. Purpose. Big Brand Advertiser (BBA) is seeking a low-cost New Agency (NA) to carry out an undefined Scope of Work, consisting of many unplanned strategic and creative deliverables that may or may not have the effect of improving brand performance.
  1. Agency Salaries. BBA is seeking an agency whose people are paid near or at the bottom of the range of salaries paid by comparable agencies. BBA will determine what these low salaries should be by comparing them to “benchmarked salaries” contained in a salary database whose validity BBA and its benchmarking consultants are not prepared to reveal. If NA’s actual salaries are higher than our benchmarked salaries, we’ll pay at the benchmarked rather than actual rate. Agency salaries should be about 50% below the comparable range of salaries paid to management consultants as validated by Glassdoor.com.
  1. Agency Overhead. NA should have a minimum of overhead for its operations. Zero overhead would be ideal — the homeless people in Grand Central Station provide a useful benchmark. BBA will use its Overhead Benchmark to evaluate how many dollars of overhead will be allowed per dollar of direct agency people. This “Overhead Rate” is a moving target; we proudly reduce it every year as we drive down what we pay for overhead (see point No. 4).
  1. Cost Exclusions. As part of our overhead benchmarking, BBA will exclude certain overhead costs at NA like training, new business development and holding company fees for shared services. In other words, BBA will not actually cover NA’s actual overhead costs, just as it will not actually cover NA’s actual salary costs. That’s what benchmarking is. “Benchmarking” is a more elegant term than “fake cost analysis.”
  1. Other Exclusions. We will not discuss inefficiencies from poor briefing or poor ad approval processes. We will exclude Scope Creep from our deliberations. We will not calculate “price” for agency services (fees divided by SOW workloads).
  1. Resource Plans, SOWs and Profitability. BBA recognizes that NA is unable to calculate the number of people it will need, since BBA is not providing detailed SOWs. BBA will solve this problem for NA by telling NA in advance what fee BBA will pay. NA can then allocate a number of people so that it can generate a profit margin that is 1) consistent with the fee and 2) acceptable to BBA. This acceptable profit margin will be based on benchmarked salaries and benchmarked overhead costs as defined above, and it will be called the Benchmarked Profit Margin. BBA recognises that the actual achieved profit margin will be less than the Benchmarked Profit Margin, and that the assigned NA people may have to stretch themselves to complete the SOW, but that’s the way things are in an oversupplied market, and BBA intends on taking full advantage of such oversupply.
  1. Expectations. NA will work in coordination with many other agencies who will compete with NA for the fixed agency budget that BBA has established. NA should not expect to have much influence over BBA’s Scope of Work or strategic direction, since NA’s advice cannot be trusted in this competitive environment. BBA will handle SOW development and brand strategy on its own, even though its own modest marketing capabilities have been stretched by Procurement and Finance over the years, and its CMOs have turned over every 2-3 years.
  1. Innovation. BBA, in its perpetual quest to innovate in marketing, will continue to develop new benchmarks, like the recent “non-working/working ratio,” which defines agency creative and production efforts as “non-working costs.” BBA will seek to minimise such non-working costs through various efforts to bring the “non-working/working ratio” to zero, which would lead ideally to the elimination of the need for any creative agencies at all.
  1. Benchmarking PR. BBA believes that its CMO can generate positive publicity for BBA by showing how innovative it is in thinking about marketing benchmarks and ratios — thus disguising the moribund state of BBA’s actual brand growth rates. BBA expects NA to be a full supporter of benchmarking and to participate on ANA panels with BBA about its benchmarking innovations, thus creating industry buzz that will be fully reported in the trade press.
  1. Performance Expectations. BBA expects, as a matter of course, that NA will generate “Bain-like” analytical quality and “Bernbach-like” creative quality during its short tenure as a new agency for BBA. If NA fails, we will simply issue a new RFP in 2-3 years and exploit our growing experience with agency pitches to find an even lower-cost agency to meet our requirements, using innovative new benchmarks to be developed.

If any ad agencies are interested in this RFP, have your New Business people give me a ring, and I’ll direct you to the right people.

Cartoon Credit: Drew Dernavich, The New Yorker, The Cartoon Bank. With permission.

This post was first published on Media Village

TrinityP3’s Agency Remuneration and Negotiation service ensures that the way in which you pay your agency is optimal.

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Michael Farmer is Chairman of TrinityP3 USA and author of Madison Avenue Manslaughter: an inside view of fee-cutting clients, profit-hungry owners and declining ad agencies, which won the Axiom Gold Business Book Award for the best marketing / advertising book of 2016. He currently serves as Adjunct Associate Professor of Branding and Integrated Communications at The City College of New York (CCNY) and is at work on a new book about the challenges facing Chief Marketing Officers.

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