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Managing Marketing: Dysfunctional Agency Finances

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Managing Marketing is a podcast hosted by TrinityP3 Founder and Global CEO, Darren Woolley. Each podcast is a conversation with a thought-leader, professional or practitioner of marketing and communications on the issues, insights and opportunities in the marketing management category. Ideal for marketers, advertisers, media and commercial communications professionals.

Nick Hand is a commercially savvy, hands-on Finance Director, a CPA and has more than two decades of experience managing the finances of media, creative, PR agencies and more. He discusses the many challenges facing agencies and their finances and takes us inside the agency financial nerve centre to remind us that advertising agencies are commercial businesses that rely on making a profit to not just exist but to thrive.

You can listen to the podcast here:

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Transcription:

Darren:

Welcome to Managing Marketing, a weekly podcast where we discuss the issues and opportunities facing marketing, media, and advertising with industry thought leaders and practitioners.

Today, I’m sitting down with Nick Hand, a hands-on commercially savvy finance director, and a senior management consultant at TrinityP3. Welcome back, Nick.

Nick:

Thanks, Darren. Thanks for having me.

Darren:

Well, welcome back because you’ve been here before, haven’t you?

Nick:

I have, yeah, five or six years ago. Did a lot of work in that 12 months, very enjoyable. And when the opportunity came back, I thought sounds too good to me.

Darren:

And in the meantime, you’ve continued a career that started, well, let’s say last millennium, but you’re not that old; late last millennium, late last century.

Nick:

Thank you.

Darren:

As a finance director, primarily in advertising. You know, this is after you finished a degree in accounting and commerce.

Nick:

That’s right.

Darren:

What made you go to advertising? Because accounting is one of those careers that parents want their children to go into, but I’m not sure they wanted them to go into advertising.

Nick:

No, although my parents were quite happy. When I graduated from university, I just wanted a job. And I interviewed at an advertising agency, not knowing much about the industry at all. And they offered me the job as the assistant accountant to the finance director and I loved it.

And just being in that environment, around creative people trying to make money from something that’s intangible, just really appealed to my personality. And I’ve stuck with it ever since.

Darren:

And done very well. I mean, you’ve worked for some amazing agencies and media, creative, PR. So, it’s not like some people get caught up just doing media for instance or creative; you’ve worked across the range of agencies, haven’t you?

Nick:

Yeah, I think I was lucky. The agency I joined out of university was old school in that they were a full-service creative and media agency. So, I was exposed to both disciplines if you will, very early on. And so, later in my career, when jobs presented themselves with bigger organisations, I was able to parlay that experience into working for a big multinational media agency or big multinational creative agency, as well as at various times some of the independents as well in both disciplines.

So, I think I was lucky that I had that grounding early, that I was able to move between the two later in life.

Darren:

Now, when you started, it was the era when the Media Commission was being faded out/or phased out. They’d been the big hearing with the ACCC and it had gone to the, I think it was the High Court and they decided that agencies shouldn’t be collecting commissions on behalf of the clients and the media owners.

But that was an era when agencies found it very easy to make a profit, wasn’t it? I mean, if you’re getting a commission.

Nick:

Yeah, they did. And funnily enough, I suppose clients are a little bit more informed these days, but back then, clients didn’t see it as an extra cost. They said you’re going to get a 10% commission from the media agent, that’s fabulous. That’s not factored into our budget. So, it means I’m not going to end up paying you less because we’re going to pay that cost anyway.

So, obviously, things have changed and as I say, clients have got to be a little bit more informed and sophisticated in that regard. But it was almost at that time with the mediums that we were advertising in, it was almost set-and-forget in that regard.

The client didn’t have to worry about it. And I suppose also the agencies that I was working with early on, we weren’t necessarily dealing with marketing directors. We were dealing directly with CEOs and managing directors, and the owners of those businesses. And they perhaps had a little bit more leeway to make those sorts of decisions.

And even though they were business owners, they weren’t necessarily counting the pennies like a marketing director who’s got that fiduciary duty to tell their owners has to do these days.

Darren:

Yeah, I wonder if it’s a fiduciary duty or whether it’s because as a CEO or a business owner, that is your marketing budget, and so I’m going to spend it. Whereas, a marketer, say a CMO or head of marketing is given a budget and they’re much more focused on maximising what they actually buy with that budget. So, they are looking at how can I nip and tuck the edges to get more in a way. And 10%, let’s be honest, is a decent chunk of money out of media.

Nick:

Absolutely. And I think you’re right. I think the business owners that I dealt with early in my career, certainly, they knew the value of a dollar, but they knew the value of the dollar and how that investment was going to pay back for their business.

Now, I’m not saying that the marketing directors today don’t understand that, of course, they do. But I think the owner-operator can take more risks, I’m going to say.

Darren:

And take a bigger picture for the business. Whereas, the marketer literally has the budget. That’s their marketing budget, and they have to make that work.

I’m interested in … because obviously having commercial training, a degree, you’re also a CPA, right?

Nick:

That’s right.

Darren:

And so, that’s really just a measure of ongoing career learning, isn’t it? Keeping up to date and developing your commercial savvy?

Nick:

That’s exactly right. It’s a designation that requires you to do ongoing professional development. And you get graded on that every year. And if you don’t keep yourself abreast of what’s going on, you potentially lose your designation.

So, that’s why businesses look for a CPA or a CA to run the finances of their business because they know that those people need to keep on top of their knowledge and continue to want to learn.

Darren:

But to be a finance director for an agency, you don’t need to have that, do you?

Nick:

I think you do because there’s more than one way to skin a cat. And as a finance director that’s looking to lead an agency of the “future,” you need to know the way that we’ve been doing things might not necessarily be the best way to do it. So, I want to find what is the best way to do it that’s going to be relevant to where that business is now and where it’s going to be in three or four years’ time. So, I think it is important to keep that professional development arm.

Darren:

Look, I was being unkind because, in the last 20 years, I’ve met a few, let’s call them finance directors of agencies that I’m not even sure they have an accounting qualification. But you could technically become an accountant in an agency.

Nick:

Well, I think you could. For me, there are two types of accountants. There’s those that make sure that the numbers add up correctly and that’s very important. You need that. And there are those that will actually take a commercial point of view and look at the right, well, how can I ensure that the return that this business is generating on the income that we derive is maximised. And I think most businesses if it was me, I’d want someone that can do both.

Darren:

Yeah. And especially because since the loss of media commissions, agencies have been under the pump, as far as generating revenue, haven’t they?

Nick:

They have. It was interesting, I was thinking about this the other day when you asked me to come on and we just talked about it before we went live. The number of independent agencies that are out there, the competition, I think, has never been greater in this business.

And it’s a buyer’s market and advertisers and marketers out there have got their choice of the very best practitioners and competition means it’s very difficult to differentiate yourself from the other agencies, but it also means getting a premium on price, and therefore the revenue is really hard.

Darren:

Yeah. I remember around Mark Buckman, when he was CMO at CommBank, he made the comment that the problem with the industry is there are just too many agencies and that the choices are unbelievable. And in many ways, it had almost commoditised the marketplace because there were so many people willing to do whatever you wanted at whatever price that you’re willing to pay.

Nick:

I think that’s spot on.

Darren:

It makes it hard though from a business perspective.

Nick:

It does. And back to your point about the media commissions, it wasn’t a perfect arrangement and in today’s fragmented world of media, there are problems if you re-introduce that today. But I think what it did do, it took the focus off what things cost and agencies and marketers were able to focus on the work a little bit more.

And I believe that the work was actually better because the commission covered a lot of what the agency was doing, and the marketer didn’t have to worry about, well, how much is this going to cost me? If I’m not happy with these two concepts, I want another three concepts. How much is that going to cost me? That’s a question that marketers need to ask today. Back then, they didn’t have to.

Darren:

Only because we see that a lot. Back in the commission days, there was never any conversations about money. You just have to watch any episode of Mad Men; they win a new piece of business there’s no discussion about money because it was all covered by the commission and the service fee.

Whereas, now, almost everything that a client asks for, there’s a financial implication. Before the commission and service fee covered all sorts of potential sins. And you could argue that agencies weren’t particularly efficient in what they did, because they were getting this stream of money coming from those sources.

But today, it’s much more transactional because everything a client asks for, the agency in many ways has to make sure they’re getting paid for it. It must be one of the challenges as a finance director.

Nick:

Oh, an enormous challenge. And I think that the issue here stems from the fact that when you’re dealing with a creative product, which is by its very nature subjective, how do you put a price on that? And so, what agencies have done perhaps to their detriment now, is let’s charge a premium or a fair price, but let’s try and get a premium for the implementation for the production work, and we’ll discount the creative work or we won’t.

If the creative is going to cost X amount of money which seems high and the client might not go for that, that’s alright. We’ll subsidise that with the implementation work, because we believe that the creative product is worth X, but it’s very difficult to substantiate that. It’s very difficult to convince a marketer that that’s what it’s worth because it’s intangible. When you are making stuff, when you’re actually making an ad, it’s much easier to price than to make a profit.

Darren:

Yeah, and also because at the end of that is something tangible. They get an ad or they get whatever.

Nick:

Exactly.

Darren:

But Nick, I never understood, why do you think the industry went from commissions and service fees to time and cost? Because this whole thing about … it is an accounting mentality. Accounting firms charge the time and cost. Lawyers charge time and cost. Where do you think the thinking was that agencies should be time and cost?

Nick:

Look, I think it stemmed from when a client (I would imagine that happened in the United States, a large FMCG client) probably said to the two or three agencies that they were pitching their business, said, “Look, I understand that this is the model that you’ve been working on for all this time, but we’re spending 3, $400 million with you potentially a year. We need to get our costs down. So, I need you to come up with a way that is still going to make you money, but isn’t going to cost us 10% and 7.5%.”

I think that’s where the conversation started. And so, the agency in that instance is happy to do that because the volume is just so great that unless they completely messed it up, there’s no way they couldn’t make a profit from it. But then the client is happy because they’ve saved 25% potentially out of making the numbers up on what they would have paid under the old arrangement.

Darren:

Or more.

Nick:

Potentially. And so, I think that’s great … when you’re dealing with a big client, in my experience, working in multinationals in Australia, Australia is a very small market with lots of competition, as we just said. And quite often, when you get these global clients from New York or from London or from Paris, the deal has been done with those big Northern hemisphere markets in mind.

And let’s use media as an example, the client and the agency head office may have negotiated an equivalent of, let’s say 2% of the spend for the agency fee. That might be great in New York where they are spending $500 million a year. But in Australia, where the spend is 7 or 8 or 9 million, it’s very difficult for the Australian agency to make a profit on that. Great for New York, not so good for this market. So, that’s where I think that model, whilst in theory, it sounded good, let’s go away from the commissions to the time and cost arrangement right in the large markets potentially, but not so much in the small markets.

Darren:

And my problem with it is, that it is very much about paying people to do things. So, you pay people to put together paperwork for your legal case, or you pay accountants to do the compliance accounting, or to ensure that you’re not exposed somewhere on your tax.

But how do you apply hours to things like coming up with a new idea or developing a new strategy or something like that? It really is more about to your point earlier, about the execution. It’s much easier to justify hours on execution than it is to justify the hours that it takes to actually come up with a new idea.

Nick:

You can’t because how long does it take to come up with a new idea? There’s a great video — I can’t remember the name … it’s on YouTube somewhere. Can’t remember the name of the design agency that came up with the logo for a big financial services firm.

And I think the fee that they quoted was a million dollars. So, big design and rebrand, and the designer who came up with it said that she actually drew it on a notepad in the briefing meeting. And wanted to show them, but her boss had said, “Let’s put that down for a minute.” Back in the office, they talked and the boss said, “I think that’s great. I think you’ve nailed it. That’s the logo, but we need to drag this out for a few weeks to justify our million-dollar fee.”

Where in actual fact that justification of the million-dollar fee is the branding and the awareness and the intellectual property that the company derives from having that iconic, now-iconic logo. Convincing businesses, convincing clients that that’s justifiable is often difficult because to your earlier point, about the agency getting paid on the output, so the implementation, it’s something tangible that you can see.

And as human beings, I think we just automatically think, “Oh, well, Fred has spent 30 hours on this job and Judy has spent 50 hours on this job. I can understand that because I work hard. I know what 50 hours work looks like.” It’s much easier to, I think for many clients, many agencies as well, when they’re quoting these fees, to think like that in terms that they can tangibly understand.

Darren:

Yeah. And I wonder whether that drives the behaviour where it’s an intangible output, like a strategy that agencies typically do the 100 or 200-slide deck to somehow justify the value, or the creatives come up with 57,000 executions to show the client the idea, the one idea, as somehow to show evidence of industry to justify the fee.

Nick:

I’m sure that that goes on every single day. Absolutely.

Darren:

And Nick, particularly from a finance perspective, doesn’t the hourly rates and the retainer models drive the accounting into more sort of cost recovery mode as a way of trying to establish profit? Then it is about creating value and getting paid for it?

Nick:

It does. You end up measuring the wrong thing because if you’re having conversations with clients about well, we know that we said this was going to take a hundred hours, but then the brief changed, so the initial hundred hours that we spent is now, we’ve got to put that aside. That doesn’t count anymore because we’ve got to start again. So, we need another hundred hours to come up with a concept for the new brief that’s changed — that’s the wrong conversation.

The conversation should be around about this is the work that we’ve done, and this is why we’ve done it. And this is how we think … the agency is saying this to the marketer: “This is how we think this is going to drive value for your brand.” I’m sure that conversation gets had, but if you’re spending all your time doing the housekeeping on trying to argue over hours, you’re missing out on valuable opportunities to actually do what’s important and talk about what’s important. Not about what’s not important.

Darren:

And this reliance on hours, because I always laugh when an agency pulls out their Excel spreadsheets and starts showing me all the hours that are done. And I go “Where did these come from?” And they go timesheets. Because you have to remember, I was a creative for 15 years and I would do my timesheets maybe once a week, if I was lucky, maybe once a month.

I wasn’t doing 15-minute increments as … the discipline that the other categories like accounting and lawyers, they have a discipline of billing on 10 and 15-minute increments, so that must be frustrating.

Nick:

First off, there’s no such thing as a 15-minute job. So, the 15-minute increment’s always frustrating. 30 minutes minimum, if you are going to go down the timesheet road.

Darren:

For agencies, because lawyers do 10 minutes. I found one and I ended up getting three units for sending me an email, half an hour to write an email.

Nick:

Crazy. I don’t know how they can justify that; they’ve got the timesheets behind it, I suppose. But my point is that yes, it does end up being a cost recovery calculation and ultimately, anything in an agency where 60 to 70% of your income is going to staff costs, you need to recover those costs. Absolutely.

But the counting of hours, I don’t think it’s the right way of going about trying to justify the price that you’re charging. Because as I said before, you just end up focusing on the wrong conversations. It takes people’s time away from doing what they actually need to be doing to move the client’s business forward and potentially, it encourages inefficient behaviour in the agency.

If they’re getting hired for the number of hours, as soon as the clock is ticking, why would I stop? And my example earlier about coming up with a logo in the briefing meeting, and then that design agency spreading the process out over a few weeks to try and justify their fee. That’s counterproductive.

If the logo’s right, give them the logo a week later, and then they’ve got three or four or five weeks more with that logo in the market, doing what they needed to do rather than trying to justify the million-dollar fee. The benefit that the client gets from the fees is where the value lies, not in the amount of work that the agency has done to get there.

Darren:

Yeah. And look, in the way you were talking about it, I get this a lot from agencies; they start saying, “Oh, you think we should be like consultants? Like the management consultants.”

But the management consultants come in to find a problem, put a value on the problem and then bill to a sort of commensurate with solving the value of that problem. Either realizing the value or mitigating the loss or whatever. They find a value equation that they then plough the resources onto and then charge the big fees.

Whereas agencies don’t operate like that. And marketers, a lot of marketers don’t operate like that. Marketers are very rarely sitting there with the budget saying we’re going to grow this business by 10%. And the value of that is X. And therefore, that’s why we’re spending this amount of money to actually get that growth. But they think of it as contributing, but not actually cause — there’s no one willing to say there’s a cause and effect there. So, it turns the agency into a cost centre anyway.

Nick:

Yeah, you’re exactly right. And the reason that that continues to be perpetuated is placing a value on what a creative agency in particular and also a media agency — placing a value on the contribution to the client’s businesses, is very hard to do. And the agencies that I’ve seen and I’ve read about that do this well, they’re prepared to take a punt on their capabilities and the quality of their work.

The best agencies will say, “Look, if this doesn’t work, don’t pay us. Don’t pay us.” And so, there’s no risk, therefore, to the marketer. Perhaps they’ve wasted three months getting a campaign that’s not working, but there’s really no risk to the client in that scenario.

Darren:

Well, no financial risk.

Nick:

No. And so, those agencies that are prepared to do that are able to move the conversation much more towards, “This is the impact that we believe that the campaign is going to have on your business. And the value that we ascribe to that is X. And so, we want a number that is commensurate with that value. That’s our price. If we don’t achieve that, then you don’t pay us that. Perhaps it’s not an all or nothing approach, if it doesn’t work and it completely bombs, you don’t pay us anything. If it sort of works, then you pay us a little bit. If it really works, you pay us that.”

Darren:

A sliding scale.

Nick:

Exactly.

Darren:

I’ve also seen agencies where they go “Here’s our base cost. This is where you’re barely covering our costs. And we’re willing to put every bit of profit and even most or some of our overhead on the fact that this is going to work.”

And to me, that actually demonstrates that term that agencies love to throw around with their clients, but very rarely live to; and that is a partnership actually putting yourself, so you’ve got skin in the game.

But I know a lot of agencies don’t have that confidence because they start using excuses like, “Well, we don’t control everything. We don’t have control over distribution and things like that. So, and after all advertising is only a small part of the …” And they start diminishing the very role that they take.

Nick:

Exactly. And I think that’s the problem. And I understand it particularly … and the agencies that do do that well are generally the owner-operator agencies where the proprietor decides that that’s the way that we’re going to play this. And it’s on him if they never get paid, whereas the multinationals can’t do that.

The CEO of a multinational network cannot make that decision because potentially, there’s legal liability for foregoing his fiduciary duty. And of course, those agencies continually want their markets to deliver more and more and more every year. And you can’t do that if you’re potentially giving up a significant chunk of your income on those sorts of performance-based arrangements. So, I’m sure there’s a balance there, but it’s very difficult to find.

Darren:

Yeah, Nick, I’m glad you brought up performance-based because it’s an area that a lot of people talk about, but we’ve had some real issues getting that across the line. It’s happened a few times, but some of the traps that we fall into and one of them is marketers are often not able to enter into a true performance-based payment system, fee phase system.

And the reason is going back to something I mentioned earlier is they have a budget and if suddenly, the campaign succeeds and they sell hundreds of thousands or millions more items, yes, the company makes a lot more revenue, but the budget doesn’t increase to actually cover the fee to be paid to the agency.

And suddenly, you’re having a conversation with the CMO that says, why don’t we go to the CFO and see if we can get that part funded out of COGs, out of costs of goods sold. And the CMO, you see them, their faces glaze over because they go, “You want me to what? I get a budget. Why would I want to even raise the possibility that marketing is a cost of goods sold?”

Nick:

It’s funny you say that because I remember working with a client at an agency where the CEO did actually come from the marketing team; promoted from a CMO to a CEO. And he was able to make the decision that marketing is going to be a part of cost of goods sold. It is going to be variable based on how much we are able to sell or not sell.

And therefore, it was a relatively easy conversation to get a performance-based bonus into that client. Because as you said, it didn’t need to be budgeted for, because if the agency exceeded expectations and the campaign exceeded expectations, the money was going to be there.

Darren:

Rather than this locking it in as a budget. I mean, I’m sure they still budgeted. They would do a projection of sales and then the percentage that would be funding it, so they would have a baseline. You can’t just go into the start of the year going, we’re going to get paid/I’ll have as much money to spend as I sell.

Nick:

Well, I think also, I mean, when you are looking at including marketing as a line in that cost of goods sold, you need to factor everything that goes into that line. When marketing and advertising got put into overheads, I’m not quite sure where … certainly, in my studies, marketing was always part of cost of goods sold.

If you’re a manufacturer, you need your raw materials and you need somewhere to make it, and you need machinery to make it with, and some people to work the machinery. And then you needed some money per unit to sell the thing.

So, all through my educational career, it was always a part of COGs. So, I don’t know when that changed, but it does lead to the problem that you were describing.

Darren:

And also, going back to as a finance person within agencies, when you’re constantly looking at costs and managing costs and cost recovery, is it then hard to switch your mind into growth for the agency? Because I’m wondering why agencies primarily look at growth strategies around acquiring new customers, new clients, pitching for business — when in actual fact, businesses that are run with very strong financial strategy would be looking for growth in other areas, wouldn’t they?

Nick:

They would. I think from an agency perspective, it’s how much can you diversify what you’re doing? So, if you have a remuneration model that is purely based around selling head hours, which is effectively what we’ve been talking about; the only way you can increase your revenue is to sell more head hours. And the only way you can sell more head hours is to put on more people. And the only way you can afford to put on more people is to get new business.

Darren:

Get more demand.

Nick:

And whether that’s from existing clients or every agency has a new business acquisition strategy, that’s the only way you can do it. Now, to get away from that cycle, you need to be able to diversify your income streams. And perhaps it is punting a little bit more of your income on performance and value-based arrangements if you can.

Getting clients to agree to that is difficult as we’ve already talked about, but that doesn’t need to be part of the strategy. But also, what is it that we can potentially … what intellectual property do we have that is unique enough that we can package it up and sell it to people that aren’t our clients, and get an income stream from that?

Where the work’s already been done but we’re just getting a recurring revenue stream from selling that product based on that intellectual property, whatever it is. I’ve worked in a few agencies that do have that strategy, but it’s very difficult to implement, particularly when you’ve got the grind of keeping clients happy. And as I said, there’s the new business acquisition strategy as well.

That just takes a lot out of any agency and particularly today, where there’s a talent shortage and it’s hard to get and keep good people. A lot of those alternative remuneration or income streams get put on the back burner.

Darren:

Absolutely. While you were talking about that, it made me think about the number of times agencies have explained to me that they can’t embrace the technology to automate a lot of production because they get paid by the hour. And that if suddenly, it’s a piece of technology doing the work, how do they justify the hours? It’s a bit of short-sighted approach, isn’t it?

Nick:

It is. And the reality is that the way that technology has moved on, even in the last five years, that we talk about the number of agencies that there are, because the barriers to entry are so low. What used to happen, the production side of things, there used to be a significant barrier to entry around cost. It’s expensive to buy all the equipment that you needed to have a production facility, but not anymore.

And so, in my mind, as more people are able to do that more cheaply, because they have been able to automate it and they’re perhaps not charging by the hour, they’re simply charging by the output; if a client is unable to do that. And I know a lot of the multinationals in particular set up production hubs to try and do that sometimes with low-cost offshore markets as well — that’s not what agencies should be doing in my opinion.

I think the agency should let the implementation primarily be done by someone else. What agencies are good at and why advertisers still need agencies is because of their strategic, their creative thinking.

Darren:

Which they don’t charge for.

Nick:

Which they don’t charge for. And that’s the corner that a lot of agencies have backed themselves into, is now, all of a sudden, you separate the implementation from the thinking, and it’s very difficult then to make up the money that you haven’t been charging for the strategy and the creative that you’ve been having subsidised by the production. It’s very difficult to make up that gap.

And a lot of agencies don’t know how to do that. And a lot of clients aren’t prepared to pay for it necessarily because, “Well, hang on, I’ve been paying X for the last five years, and now all of a sudden, you want to charge me 50% more. I accept the fact that I’ve moved all the production over here, but what has that got to do with what I pay for the strategy and the creative?” And it’s very hard to come back from that.

Darren:

Yeah. But I’m not even talking about companies I talked to that have taken AI and built it into the agency process. So, developing reports, processing huge amounts of data into formats that can go into things like briefing and reports back to clients. And a lot of those labour-intensive agency things that would just fill up a retainer very quickly can now be automated.

And yet, they say the biggest obstacle they have is the agency justifying. And it’s not even capital expense because they’re all SaaS solutions. But justifying that cost and having to recover that cost because in their mind, it becomes part of the overhead because it’s no longer a human resource, and our time and cost or head rates.

So, it just seems to me that from an accounting and business point of view, agencies have become almost in this rut of thinking that their business is selling people’s time.

Nick:

You’re right. But I also think that clients play a part in that too, because that’s what they’re used to. And as I said earlier, it’s very easy for clients to understand, “Okay, well, I’ve got three people over here and that’s a junior and that’s a mid-person, that’s a senior person, and I’m paying a sliding scale per hour for what they’re doing. I understand all that.”

And it’s a lot easier for them to then extrapolate that into, “Well, I feel as though I’m getting value for money.” Where they’re just thinking about the cost. They’re not actually thinking about the output. And it may well be that the agency just needs to accept that for the sorts of activities you’ve just been talking about, “Well, maybe I can’t get a big chunk of retainer, but I’m not going to lose that income stream completely.”

If I tell the client that we’re going to generate these reports for you weekly, it used to take a whole week to do them. So, you were paying $50,000 a year. Well, now, you’re only going to pay $20,000. And the agency obviously, doesn’t have to have so many more because since you’re not doing it … but the conversation with the client needs to be around you’re not going to get it for nothing because we are still producing something that’s of value to you. We just need to agree what the appropriate price for it is.

Darren:

Yeah, that’s right. It becomes a pricing issue, not a head rate. So, it’s about changing or getting yourself out of that rut, it’s about moving to a mindset about the value you create. And also, embracing this technology is going to future proof your agency, anyway, because if you don’t embrace this technology, someone else will then come along and go, “Well, we can do your account for $30,000 a year less because we’ve got a better way of doing all those reports.”

Nick:

There’s a great analogy. I don’t know if it’s true or not, that I’ve heard a couple of times. I hope it is; that Steve Jobs said to his exec team at Apple, all the designers, “We need to come with a phone, and it’s going to do this, this, this, this, and this.” And I guess the person that managed the iPod division said, “You can’t do this. This is going to kill the iPod.” And Steve Jobs said, “Well, yes, probably, but if we don’t do it, someone else will. So, I’d rather we kill it than one of our competitors kill it.”

And so, your point is spot on, that agencies need to accept the fact that their overall income for these things might suffer, but if they don’t do it, one of their competitors will. And I always found it funny that agencies don’t embrace technology like so many other industries do. But we’ve just talked about the reason why.

Darren:

Well, there is a financial, there’s a cultural. I mean, this is why this conversation is so useful because I think there’s a cultural aspect, but there’s also a financial aspect in that all of the networks have fallen into this trap of reporting on things like billings and never talked about profit. They don’t get to profit until they’ve consolidated it all up to one number for the annual general report for the listed entity.

But they could be hemorrhaging profit all over the world, as long as they manage to make it at the top there. And as we know, that behavior has driven things that are at worst, unethical and potentially are illegal, in some cases.

I want to get back to the independents because there is a real trend towards marketers asking about independent agencies as compared to holding companies or network agencies. And one of the things that I’ve found really interesting is a lot of marketers are much more aware of the network fee that their network agencies are paying.

In fact, I had a client only a couple of months ago, say, “I don’t want any network agencies because I’m not going to lose …” and I think they say 15%. And I’m sure it varies depending on the network. I’ve heard numbers of like 8% up to 15%, that a local office has to pay as part of being part of the network. Now, that immediately takes … let’s say, it’s 15% or 10% off the top line. It must make it incredibly difficult because you’re behind the eight ball before you even start working towards profit.

Nick:

Well, it does, but to me, the most important thing is the client’s perception of the value of the money that they’re paying. And if their perception already is well, this network agency’s price is already overinflated because I know of the management fees that ended up going back to head office, that’s not a good starting point because automatically, that client is thinking about the wrong thing.

What they should be thinking about is what is the work that I need done? What is the value of that to my business, and what value do I place on the money that I’m going to pay the agency? Now, it may well be a premium that includes 15% network management fees, but more often than not, it’s not because you can potentially get equally as good thinking practitioners at an independent, cheaper than you can from the network.

Darren:

Well, and that could be all well and good if the client was a network themselves and using a network agency to get that coordination. But when it’s a single market client, and they know that the agency pays even on their fees and network fee, and it’s a nice thing to say that it’s all about the price but they’ll be running a pitch because procurement’s part of it. And they’ve got two independent agencies and a network agency, and the network’s coming in at 10, 15% more. What’s the first thing procurement are going to do?

Nick:

Well, they’re going to ask for the price to be matched.

Darren:

And when they bring that down, the network fee doesn’t go away. So, now, as the CFO of that network agency, you’re going to be resourcing with it effectively 10 to 15% less money in the kitty to pay for the resources, which means that you’re going to have to buy people that are cheaper. So, they may be less capable or less experienced to fulfill those roles.

Nick:

Or working harder.

Darren:

Or working longer hours and not getting paid for their overtime. And this is why I think the industry, my personal perspective is I find that the advertising industry spends far too much time talking about the things they do, like creativity and generating ideas on long-term brand value. But what it needs to do is to wake up to the fact that they are a business and they need to start getting much more commercially savvy about how they sell their services. What do you think?

Nick:

You’re, again, 100%. It is difficult though, because particularly, I’m certainly not justifying the way that those agencies go about their business. But there needs to be income coming in when you’ve got a big rent cost, you’ve got the agency network fees that you’re talking about potentially a lot of highly priced or highly paid administrative staff that aren’t recoverable from clients.

You’ve got an HR director, you’ve got all these things, it’s much easier sometimes to cut the price, to win the client than it is to say, “Actually, no, this our price. We believe that what we’re charging is irrespective of the network phase and all those other overheads — irrespective of that, we believe that this is a premium price and it’s justifiable because of the people that are going to be working on your business, their track record, the work that you’re going to get, the results that you’re going to get is worth paying that.”

And it’s very difficult to say no, and potentially walk away from a million-dollar revenue client than it is to say okay, well, it’s not million dollars. It’s now $650,000, but we’d rather $650,000 than nothing. But you can only do that once or twice. If you do that three or four or five times.

Nick:

You’re working for nothing.

Darren:

That’s when you end up in trouble.

Darren:

And so, procurement people often don’t understand this. They say to me all the time, “Why would an agency negotiate a fee that was not profitable?” And I say to them, “It’s because they want your business. They’re not that interested in your money. Having you on the wall is much more important than actually making a profit.” Is that a fair assessment?

Nick:

In a lot of cases, it is, yes.

Darren:

Sad, isn’t it?

Nick:

It is. I mean, and it depends on the agency as well. We all know who the hot network agencies are at the moment, and maybe they’re more likely to say no because people want to work with them, because they’ve got a track record of working for the clients that they have. The agencies that are potentially struggling from a product standpoint are less likely to say no. Are more likely to acquiesce to procurement because they need the business.

Darren:

Hey, Nick, it’s been terrific catching up. And it’s great having you back here at TrinityP3.

Nick:

Thank you.

Darren:

And I’m really enjoying having you on board and helping our clients and their agencies work out what I call a sustainable agency fee.

Nick:

Let’s work towards that, my pleasure. Thank you.

Darren:

And one last question before we go; of all the agencies you’ve worked with, which one was the most profitable?

Ideal for marketers, advertisers, media, and commercial communications professionals, Managing Marketing is a podcast hosted by Darren Woolley and special guests. Find all the episodes here

 

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    Darren is considered a thought leader on all aspects of marketing management. A Problem Solver, Negotiator, Founder & Global CEO of TrinityP3 - Marketing Management Consultants, founding member of the Marketing FIRST Forum and Author. He is also a Past-Chair of the Australian Marketing Institute, Ex-Medical Scientist and Ex-Creative Director. And in his spare time he sleeps. Darren's Bio Here Email: darren@trinityp3.com

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