The cost of
There has seldom been harmony when it comes to the contentious nature of how agencies make money from clients and the corresponding remuneration models. With bottom lines under pressure, it is inevitable that clients are always demanding faster and better but cheaper. At the same time, agencies have their own reality: requests to deliver more services for sometimes only a marginal increased cost; the agency talent crunch; and procurement concerns. The result? Fewer advertisers (46%) satisfied with their remuneration agreement – the lowest figure since records began in 1997, according to the latest ISBA/Arc Paying for Advertising report (the previous three-year study was carried out in 2012).
However, the study of 56 of the biggest international advertisers – many of which have budgets of £100-200m – does not paint a bleak picture overall. The average equivalent net rate paid for creative services has risen quite considerably on UK agreements, from 5.9% in 2012 to 7.8%. Also, more services (such as planning) are being handed to media agencies by clients – 92%, up from 77% in 2012. Correspondingly, average commission rates have gone up by 4%, compared with 3.5% in 2012.
Debbie Morrison, director of consultancy and best practice at ISBA, says the new report finds some signs that, despite the worrying dissatisfaction scores, marketers and their agencies are beginning to move their financial relationships on to a clearer footing. "The 2012 edition of this study made stark reading for the agency community. Average agency remuneration was down to an all-time low of 5.9%, agencies were under increased pressure to deliver more services for less, and most clients were dissatisfied with their agencies and the corresponding remuneration models. There was more emphasis on cost efficiency and marcoms procurement was a despised discipline. It was a reflection of the tough economic climate of the time," she says.
However, Morrison reckons the new report shows some of these problems are beginning to be addressed: "Today, procurement is baked into most negotiations, commission has finally died and resource fees dominate. Projects are the new kid on the remuneration block, and there is broadening of the scope of services that clients are now buying from both their creative and media agency partners. The one issue of concern is the demise of the payment-by-results mechanism."
Nevertheless, Morrison says there is still a long way to go before the industry really cracks the payment challenge: "With new technologies, new channels and new metrics in place, what this report also says is that no-one has landed the right answer when it comes to remuneration models that can deliver creativity and value for agencies and their clients."
But as one agency executive notes: "Too much of the language in this report, and in general commercial client/agency dialogue, is about paying for the cost of advertising." There’s not enough focus on the role agencies play in driving value for their clients, improving sales and profits. It’s a reminder that, to many clients, advertising and media remain a cost rather than an investment.
It is, of course, true that a singular focus on the basic function of negotiating better pricing makes it harder to move the debate into added value, whether that’s through better strategy or more creative ideas. Marketers and agencies need to work together to build new compensation models that are aligned more closely with the goals of both parties.
of clients are happy with
of creative agreements
Paying creative agencies
1 Fewer advertisers (46%) are now satisfied with their remuneration agreement, down from 51% in 2012 and the lowest level since records began in 1997. The proportion of advertisers satisfied with their agencies’ desire to achieve cost transparency also hit a record low (22%; 2012: 24%). Once again, more advertisers believe they pay more than they should (50%; 2012: 41%). Although slightly more advertisers (67%; 2012: 63%) say that they are concerned with their agency’s profitability, fewer advertisers are now aware of the agency’s profit margin on the account (31%; 2012: 40%) – also the lowest on record.
2The use of PBR has reduced dramatically to just 43% of agreements. But PBR in creative agreements is holding up among the biggest clients at the biggest agencies and on global accounts. At the turn of the millennium, nearly three-quarters of schemes were paying out one-half or more of the maximum PBR. Now, just one-quarter of schemes do. Put another way, in 2000, just one in seven schemes resulted in no pay; now, six in ten don’t pay out.
3Clients are more likely to be including both production (72%; 2012: 48%) and digital creative (72%; 2012: 55%) in their fee. Given the increase in scope, it is to be expected that the average (mean) net rate paid has increased (8.5%; 2012: 7.5%). This bucks the downward trend that we have seen since 2000.
Paying media agencies
1 More clients (42%; 2012: 32%) believe there is a lack of financial transparency on their business. More clients believe/suspect that their agency is probably making additional revenue on their account (58%; 2012: 50%). Clients holding a more positive view are more likely to retain the smallest media agencies and/or to be in long-standing client/agency relationships. Only a minority of clients (45%) believe that agency trading desks and demand-side platforms "enable a better media ROI through targeted media buys". That is unchanged since 2012, although more advertisers now actually disagree, while fewer "don’t know".
2 Clients are increasingly centralising media planning into their buying agency (92%; 2012: 77%). Buying agencies are also picking up media strategy (85%; 2012: 61%). Set against this recoupling of media services at the buying agency is clients buying media directly from media owners themselves – 30% now buy media directly.
3 In 2012, commission made a comeback (73% of agreements had an element of commission) and that situation is largely unchanged now. However, clients in young relationships are now more likely to pay for media buying through fees – and, within that, by a fixed fee – rather than by scope of work (estimated costs). The proprtion of clients paying by project has increased from 9% in 2012 to 16%. PBR on media planning and media strategy continues to reduce – it is used in just 13% and 10% of assignments respectively (from 39% and 37% respectively in 2009). PBR on media buying is declining the most among advertisers in new relationships – use in long-standing relationships is holding up well. Of those on PBR contracts, fewer agencies (50%) received at least half of the maximum possible PBR (2012: 63%) and nearly one-third (31%) received nothing at all (2012: 19%).
4 More advertisers have made significant changes to their media agency remuneration agreement than in 2012 (55%; 2012: 40%). The principal driver for change (as in 2012) is "improved value for money" (48%), although this is cited by fewer clients than in 2012 (71%). The vast majority of advertisers (94%) still audit their media buying activity and nearly all audits are conducted externally. Typically, more media are audited than in 2012.
The industry’s view
Jenny Biggam, co-founder of the7stars
This report is a very accurate description of some of the issues our industry is facing. The remit of media agencies is getting bigger, planning and buying are coming closer together and there is a growing trend towards advertisers gearing up to do a lot of in-house media, particularly in digital. For instance, we see that with some of our very digitally advanced clients such as Gumtree and Trainline. And, for agencies, this should be something to watch out for, especially big network agencies. This is led in part by advertisers not trusting agency trading desks and the issues around transparency, but there are other considerations such as wanting to own their customer data. Also, as media advances, the buying side of media has become more tech-driven, making it easier for clients to buy programmatic and mobile in-house. On the issue of commissions, I think clients are increasingly using agencies for more strategic work, better customer insight etc – all skills that are not commissionable work. The only part of the media agency work that should be paid in commission fees is media buying. But when you are working on communications strategy and data evaluation such as social listening and content partnerships, the time spent on the campaign is not directly linked to how much media budget there is. I personally feel the fee model is much more transparent and cleaner. Clients can then see which team is working on their business, how much they can spend on their business and the cost of the team servicing the account.
David Bryan, group operations director at Group M UK
On the issue of transparency and media neutrality, it is worth noting these are two different things. Transparency is about understanding what clients are paying and what they’re receiving in exchange for that payment. It’s about the clarity of the contract. It doesn’t mean that agencies have to disclose their cost breakdown for every single activity or the way they work. That is not transparency. Neutrality is about day-to-day planning of a client’s activity, which fundamentally means the agency is planning and buying the media activity on their behalf solely for their benefit and no other purpose. The question that then arises is whether agencies have got big trading deals they need to make and does that skew a client’s planning strategy? There is a difficult paradox here: clients want big agency group deals to drive the value and drive the prices they receive from agencies such as Group M, but they want neutrality so they don’t want to be forced into buying in a certain way. From our perspective, we have managed to align both of those complex dynamics with fantastic group trading deals that drive huge value and excellent prices for our clients. We maintain media neutrality through how we are structured, with our buying teams distinct from our trading teams.
Magnus Djaba UK chief executive at Saatchi & Saatchi Fallon group
This report highlights the issue of trust. For example, which methods of remuneration best engender trust between client and agency? Fewer advertisers (since records began) are satisfied with the desire of agencies to deliver cost transparency (22%), though slightly more advertisers (56%; 2012: 50%) now believe that their agreement engenders trust. However, value for money isn’t about cost. Cost is obviously linked but it’s not the same thing. Value for money is about delivering brilliant results and for the client to believe they are getting the right people at the agency committed to the business needs.
Jeff Dodds, managing director of mobile at TalkTalk
With businesses trying to strive for efficiency, this mood to consolidate everything into a single agency is no surprise. In my experience, the pressure from above is always around consolidation and, therefore, trying to save the cost of media and returning to recoupling of media strategy into buying makes sense. But I worry some of the strategic disruption gets lost when trying to centralise the financials, and what becomes most important is how little clients spend as opposed to how effective it really is. That is a trend I’m looking at with a pang of disappointment.
Paul Frampton, group chief executive at Havas Media Group
My resounding takeout from the study is one of positivity. A majority of advertisers (54%; 2012: 41%) believe their schedules are more media-neutral than ever. And 60% of clients have expanded the scope of their media agencies. In a highly competitive marketplace, surely this suggests there is both trust and an appreciation of the benefits of integration. "Value for money" is cited as the biggest reason for a media review but, sadly, on closer inspection, many brands articulate this as "paying less". The term "value" requires redefinition. As media agencies pivot towards greater focus on supporting advertisers in leveraging their owned and earned channels, taking cost out will often mean spending less in paid media and deploying project or consulting skills to owned and earned channels (project fees are up 77% since 2012). There is an underlying tension behind advertisers requesting more advice and services and wanting to pay less. Media agencies continue to struggle to shake off the shackles of the past when they were primarily "media buyers"; still 70% of contracts are remunerated on commission rather than a retainer. No business can survive or indeed invest on single-digit percentages.
Dominic Grounsell, global marketing director at Travelex
The report echoes lots of themes and grumbles among senior marketers in the industry. For me, the value of media agencies is realised in how they help me think through the big problems. Media agencies are better-placed to play that strategic role for clients than creative shops. Strategists in media agencies tend to think bigger and more commercially than those at creative agencies, which have a narrow outlook at how an ad works or how to say something in an interesting way. I’m looking to a future that is about the right way to deploy media in a very sophisticated way, all based on my data and my view of customer value, not the media agency’s aggregated view of the world – which is what we’ve had for far too long.
Kate Howe, managing director at Gyro London
Clients who think they can "get away with" just paying project fees when they want to work with the same agency on multiple and consecutive projects are the most challenging because they expect all the service elements that come with a retained agency – such as competitor reviews, store visits and proactive recommendations –without paying for them. They negotiate the project fees down and then see wthe added extras as the hunger the agency should show to secure the next projects. This is unsustainable and agencies have to stand up to it, otherwise all margin is quickly eroded. We find a mix of retainer fees plus project fees provide a healthy middle ground and can work for both parties. For clients, where different projects require diverse skillsets, it doesn’t make sense for the client to retain the entire talent base all of the time. For agencies, it becomes possible for the agency’s talent to work on diverse clients and projects (this is something millennials actively seek, so it helps to attract and retain talent). Best of all, when this approach is managed well (with pre-agreed rate cards, menus for project fees, regular feedback sessions and time reconciliations), the flexibility and transparency create the trust that engenders a long-term relationship.
Debbie Klein, chief executive, Europe and Asia-PacifiC at Engine
Creative agencies still charge in the same way for "business-as-usual thinking" as we do for delivering transformative brand and shareholder value: in hours. We need to move to a value-based remuneration model that works as strongly for clients as it does for agencies. A value-based remuneration system rewards innovation and risk, and means agencies get rewarded more if they help their clients to grow their businesses more. This is different from PBR as it is based on real partnership, not transaction. It works well where we have embedded and strong relationships with our clients.
Pete Markey, brand communications and marketing director at Aviva
There has never been more choice or opportunity when it comes to the different kinds of agency relationship models. There is also the added opportunity to go direct to media owners – five or ten years ago, that wouldn’t have been open for me. This is an interesting ecosystem of a more empowered client, where we are all building and testing strategies around our customers and data. If 30% of clients, albeit a minority, are buying direct from media owners, it should be a warning to media agencies. But I see media agencies responding very well to that challenge. No media agency intends to be just a "commodity player" any more; they want to unlock more value for clients. I look at the changing role of media agencies in recent years and it has been about their strategic role in driving what as a business I am striving to achieve. The fact that you can buy well and give me efficiencies is almost a given; it is what else you can bring to the business.
Ash Tailor, global brand and marketing director at Britvic
What am I looking for when it comes to remuneration agreements? Simple, fair, adaptable to future changes and one that is evaluated effectively. All this is a given. The most critical element I would like to add in here is integrated thinking to help deliver integrated creative and media strategies. In my experience, the best conversations between clients and their agencies happen when, from the beginning, you can agree what success looks like. It then leads to a "grown-up" conversation with agencies and you end up rewarding them for outcomes and not just the inputs.
The death of payment by results
here was a time, a few years back, when agencies saw payment-by-results contracts as a badge of honour. If you believe that agencies exist to help their clients grow their business, sell products and services and build profits, then being remunerated for doing exactly that seemed a real step forward. And, after all, aren’t agencies supposed to be business partners to their clients rather than suppliers of a commoditised service? In which case, it makes sense for agencies to share in the upside of their work, right? But as the new ISBA reports shows, PBR is falling out of favour.
For some marketers, PBR has proved simply unmanageable. Dominic Grounsell, global marketing director of Travelex, says: "I think there was a huge and an unnecessary rush towards PBR-driven models. For me, I found them complex and problematic to manage. Whether it is media agencies – where you have lots more data to play with and a lot more opportunities to validate the quality of the work – or creative agencies, the PBR model is fraught with issues such as brand sales connected to a totally arbitrary range of factors. As clients, we are asking agencies to sign up to risk-based payments knowing full well they cannot influence through the entire sales funnel."
It can only work with the right partner and in a long-term relationship
Liz Wilson, Chief operating officer, Karmarama
Liz Wilson, chief operating officer at Karmarama and chair of the IPA’s commercial leadership group, agrees that the complexities of PBR make it challenging for marketers to manage, particularly as more comms tasks require complex integrated teams from across a range of different agencies. "The drop in the use of the PBR mechanism comes as little surprise. I don’t think this has anything to do with the economics. Sometimes it is about simplification," Wilson says. "Most clients are dealing with multi-agency relationships, different media channels and lots of specialisms while trying to integrate different partners. It then becomes very difficult to determine who did what or achieved what." And Wilson believes that PBR is sometimes considered as a way of cutting costs. "Some procurement people continue to use PBRs as an extra layer of saving. I agree you get the best results when you are on a shared agenda, but sometimes clients don’t want to share when there is a pot of gold later in the year – it is almost like a punishment for success for the clients. It can only work with the right partner and in a long-term relationship," she believes.
But Debbie Klein, chief executive, Europe and Asia-Pacific, of Engine, reckons marketers still have an appetite for remuneration models that better reflect agencies’ input: "It’s true that we now have more project work, faster turnaround and one-off briefs. PBR is less appropriate for those shorter-term campaigns and projects, and we have seen some drop off in PBR as an ingredient of every fee as a result. But we are seeing an increased appetite in our client base for new remuneration models that are based more on outcomes than inputs and outputs. At Engine, we have shifted our thinking from PBR alone to looking at value-based pricing and licensing models where we feel the balance of reward is fairer."
For all this, though, some agencies and marketers still manage to make PBR work well for both sides. James Murphy, chief executive of Adam & Eve/DDB, says PBR is still an important mechanism for his agency: "For those who argue this is a complex mechanism or that it is hard to link hard sales data to brand campaigns, they’re probably not trying hard enough to measure the effectiveness of their work. Equally, for clients who want to make this work, they will need to go to enormous amounts of effort to strip out the effects of the various activities they are undertaking to be able to figure out how a particular campaign led to a revenue increase, even a profitability surge. If clients want to use PBRs, they need to invest properly in monitoring and measuring the results. They have got to be able to work out if sales didn’t go up, was it poor marketing or were there other issues at play – such as product availability or business reputation issues."
Ultimately, though, Murphy is convinced that the upsides of PBR are well worth putting in the significant effort required to structuring and measuring results: "A long-term client/agency relationship where clients are focused on achieving outcomes and impact, and the agency has some skin in the game, has to be a good thing."