IPA and ISBA unveil agency pay guide

The popularity of last week's agency remuneration event in Westminster shows how keen the industry is to tackle the issue.

Who would have thought a teach-in on how agencies should be paid would ever play to a sell-out audience?

Certainly not the trade bodies, which had to change the event's venue twice, such was the demand for places.

And when the session got under way in a Westminster conference suite last week, some of the audience had to stand and some latecomers were turned away.

How times change. As one platform speaker pointed out, not so long ago you would have been pressed to fill a phone box with people wanting to debate the issue.

So how did the launch of a best-practice guide by the IPA, ISBA, the PR Consultants Association and the Marketing Communications Consultants Association become a hot ticket? The reason is partly historic. Since the virtual collapse of the commission system in the late 90s, no single comparable alternative has taken its place.

FALLING MARGINS

Intensified competition between agencies has created a buyer's market over the past five years. The meeting heard that only 11 of the UK's top 50 agencies earned the 15 per cent gross margins that the media financial specialist Willott Kingston Smith suggested they should have earned last year.

Many agencies draw a direct connection between those figures and the rise of the procurement specialists. According to David Pattison, the IPA president, the result has been to turn many fee negotiations into "gladiatorial experiences" and a shift away "from the spirit of the contract to the letter of it".

Left to go unchecked, such a shift could have dire consequences. David Wethey, the chairman of Agency Assessments International, pointed to The Netherlands, where the average agency margin has fallen below 4 per cent.

NO MIRACLE SOLUTION

The conundrum is that no single method of remuneration can fill the void left by the commission system. Not payment by results (PBR), not fees based on the hours an agency works, not concept fees and not having clients pay for an agency's intellectual property rights.

"There are no silver bullets," Wethey, who oversaw the guide through 12 drafts over 18 months, said. "There is no miracle solution. When we moved from commission to fees, we believed it was a massive step forward. Commission was old-fashioned and unfair and we thought payment by results would take us to paradise. It didn't."

The problem with PBR, according to the guide, is it can be complicated and can demotivate an agency if it fails to earn the incentive payments it thinks it deserves.

Moreover, they are hard to measure. One speaker said: "If the sun shines, you sell more ice-cream. It has nothing to do with advertising."

AGENCY-CLIENT RELATIONS

Graham Kemp, the chairman of the MCCA, suggested PBR schemes could undermine the relationship between an agency and its client. "If a client isn't getting rewarded for successful sales, it's unfair for agencies to be paid," he said. "But in big client companies, marketing budgets aren't built that way."

Charging a variable fee based on the time agency people spend on a client's business appears to be no less problematic. It can be complicated to administer, it is not linked to an agency's performance and does not easily enable an agency to secure yearly increases.

LICENCE FEE

Hamish Pringle, the IPA's director-general, advocates a Hollywood-inspired system whereby clients pay agencies a licensing fee for a breakthrough creative idea. The system is gaining popularity in the US and a number of digital agencies in the UK are taking it up. But because there is no copyright on an idea, only the visualisation of it, such licensing contracts need to be tight.

Some UK shops prefer a concept fee that allows clients to make a one-off payment for developing the creative concept of a campaign with more to follow depending on how the idea translates into sales.

"Concept fees will become important because clients want ideas without necessarily being committed to long-term relationships," Neil Henderson, the St Luke's joint managing director, said. "It's a compelling idea but how do you set its value?"

Pringle agreed it was not easy but called on more agencies to look for guidance among the 1,200 Effectiveness Awards case histories. "I don't think enough people rely on the precedents that lie in the IPA database," he said.

PROCUREMENT QUESTIONS

The teach-in highlighted the tense relationship between agencies and procurement people. Agencies accept them as a necessary evil. Indeed, given the relatively short tenure of most marketing directors, Pattison predicted that procurement people would be the brand guardians of the future. Procurement specialists claim agencies misunderstand their role.

Production mark-up, where a client pays an agency for buying products and services, provided a good illustration of how procurement people often feel about agencies.

"Agency management of third-party costs is a big area of concern," Debbie Morrison, ISBA's director of membership services, declared. "There is an almost total lack of ability to negotiate good terms." Andy Haywood, a Lloyds TSB marketer and a former procurement specialist, echoed her concerns: "Some of my frustration is in not having the right people in agencies with the right skills to negotiate remuneration."

However, the lack of confidence is mutual. Hugh Bishop, an MCCA director, said: "For every procurement person who does their job well, there are another two or three who don't. That's the reality."

For their part, the procurement specialists blamed the agencies for their lack of profitability. "I know a commercial proposition when I see one and I know a well-run business when I see it," Jennie Beament, Virgin's head of procurement, said.

Natasha Lee, her counterpart at Cadbury Schweppes, suggested industry bodies had a "duty of care" to stop agencies accepting work at knockdown rates. And Jane Dormer of British Airways claimed agencies were missing out by not involving procurement specialists. "We're trying very hard to have as much influence with agencies as marketing departments," she told agency managers. "Please invite us in. Tell us how your prices and costs work. We can be your allies."

Some believe large agencies should employ procurement specialists of their own. At present only two, Abbott Mead Vickers BBDO and Lowe London, do so. Lowe's Tina Fegent, the former procurement manager for sales and marketing at Orange, commented: "I used to have to deal with so many people on the agency side. Finance directors are essential, but they are not purchasing people or trained negotiators."

PAID PITCHES

At the same time, procurement people were urged to recognise how much it costs agencies to pitch. Bishop said: "The average cost for us is between £35,000 and £40,000 and it's going up all the time. Procurement people don't understand that."

Pringle cited easyJet, which halted a £50 million pitch after eight months, as an example of where procurement people could exert influence. "We think what easyJet did is unforgivable," he said. "This wastage in the pitch process has to be addressed."

Morrison agreed. "We believe agencies should be paid to pitch," she said.

"We don't put a figure on it but it needs to be seen as a sign of good intent and we must stop pitches being called just so that a client can find an idea."

WHAT THEY SAID

"Commission was old-fashioned and unfair and we thought payment by results would take us to paradise. It didn't." - David Wethey, chairman, Agency Assessments International

"If a client isn't getting rewarded for successful sales, it's unfair for agencies to be paid." - Graham Kemp, chairman, the Marketing Communications Consultants Association

"Concept fees will become important because clients want ideas without necessarily being committed to long-term relationships." - Neil Henderson, joint managing director, St Luke's

"Agency management of third-party costs is a big area of concern." - Debbie Morrison, director of membership services, ISBA.