Global Marketing
Management Consultants
Global Marketing
Management Consultants
Global Marketing
Management Consultants

The Low Road or the High Road for Ad Agencies compensation?

Ad agencies compensation

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.

The industry road that ad agencies are wandering down is about to narrow. Sooner or later, agencies will find themselves at a fork that is less like a choice and more like an inevitability. The fork will not involve a 50-50 choice. Heads to the left; tails to the right? No; it’s not that kind of fork. The choice will be between the High Road, to the left, and the Low Road to the right.

The choice is not about political choice during this Trumpian age. It’s not about Blue States to the left or Red States to the right. It’s not about brands-as-causes versus brands-as-brands.

Nor is it a choice between the High Road of creativity, with Big Ideas, brand equity and Lovemarks to the left — and the Low Road of data, analysis and spreadsheets to the right. The choice is not about Art versus Science, even though many writers and journalists seem split on the subject. It’s not about “we need to be more creative” versus “we need to be better with data and analysis.”

It’s also not a choice between traditional advertising — TV, radio and print — and digital and social content, although to hear agencies talk about it today you’d think that they need to be good at everything, and there’s no fork in the road at all. This TV versus digital type of choice is a distraction from what is important.

The real choice is about future money — the real lifeblood of an agency. Where are future fees going to come from? What services will the agency provide and be paid for? How much money can agencies expect to receive? Will there be a growing stream of fees, like a torrent after a downpour, or will it be more like a river that slowly empties into the desert, narrowing and shrinking until it can no longer be seen?

Agencies used to be paid a percentage of client media expenditures. Remuneration was very, very high relative to agency workloads — so high, in fact, that agencies did not bother to keep track of the amount of work they were doing. Mainstream creative work was for TV advertising, and this type of work was its own reward. If it was really, really good, it sold client products as well.

Since then, remuneration has changed, and agencies are now paid for generating man-hours of work. They negotiate the number of man-hours and the cost of man-hours, and they accept lesser values than they think is fair. But because they never developed any credible ways of negotiating fees on any other basis, least of all for their SOW workloads, they’re stuck with negotiating fees for man-hours.

However, not all man-hours are equal, creatively speaking, and in the digital / social environment of today, which is slowly replacing the TV environment of the past, a very hefty percentage of the man-hours involves boring activities like email marketing, website maintenance, graphics resizing, social content creation and the handling of thousands of monthly deliverables instead of a few creative TV campaigns.

In the meantime, client brands are languishing, but fixing brand growth was never an agency strength. Creating TV advertising that was memorable was good enough — great ads used to sell products on their own, particularly when TV advertising was a new phenomenon. That can’t be said today with a straight face. In fact, no one seems to know what it takes to make brands grow again.

As traditional advertising gives way to digital and social communications, agency man-hours become increasingly banal, and agency value-added diminishes. Clients recognise this and take away some of the work, giving it to their own in-house agencies, who do the boring work at lower cost. Clients then continue to cut agency man-hours and fees.

When this happens, agencies worry about the loss of man-hours, and they find themselves, against all reason, fighting to hang on to them.

That, my friend, is the Low Road, and when you’re fighting to hang on to man-hours, you’re already on it.

What is the High Road? In a way, it’s the management consultant’s traditional road, where the focus is on fixing client performance problems. Tackling business problems, like low growth and unacceptable profitability, or the loss of market shares to “unworthy” competitors.

Unfortunately for agencies, though, the High Road is not a high-volume source of future man-hours. It requires smarts and business-like analytical sophistication. Ideas. Insights derived from marketplace data and diagnoses. Strategies. Imagination. Business and economic concepts. A practical understanding of how prices, costs, purchasing behaviour and competitors act and react. It’s a road where risks are taken, and marketing is an investment rather than a cost to be benchmarked.

The High Road is a path that agencies need to aspire to so they are not trapped into selling man-hours to stay alive.

Dare I say it? The High Road is a Creative Road requiring a different kind of creative skills.

To succeed in the future, ad agencies need to become creative again, and to set a higher standard for themselves. If they succeed in solving client brand performance problems, money will not be an issue.

The challenge for agencies is twofold: 1) deciding that this performance-based Creative High Road is the right road for the future, and 2) developing the skills and credibility so they can take the High Road with their clients. The first challenge must be mastered by the agency CEO. The second challenge must be mastered by everyone after they have been led to the fork and told which way to turn.

If agencies fail to master these challenges, they’ll trudge down the Low Road man-hour path until it dries up, and everyone who remembers the Glory Days of advertising and how ad agencies used to be will shake their heads and wonder how top management could have it so wrong.

The Low Road is unspeakably low but easy to follow, and it has a kind of inevitably to it. It’s a continuation of the current road the agencies are on.

The High Road is nearly out of reach, and it will take a big effort to get there. It’s the road for future survivors. It’s a road that requires strong and visionary leaders.

Cartoon credit: Donald Reilly, The New Yorker, The Cartoon Bank. With permission.

This post was originally 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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