2013 has certainly been a landmark year, and we have seen both social and financial gains dance across the headlines of various news publications. We watched as the S&P 500 hit an all-time closing high of 1,682.50 in July, and we watched history be made with the United States Supreme Court’s ruling on DOMA.
While I still do not have access to a crystal ball, the fiscal outlook for 2013 will certainly determine a large portion of the way the growth within the Advertising Industry, among other industries, will play out.
The Way I See It
- I see the industry continuing to evolve to adapt to changing consumer trends, marketer needs and media evolution.
- I see the advertising industry continuing to be an important engine of business growth and job creation.
- I see the advertising industry as the storytellers that allow marketers to better inform the public and help businesses promote their brands and sell their products and services.
- I see the advertising business working hard to do with less, while attracting and retaining the best and most creative talent.
- I see the advertising industry needing to be fairly and reasonably compensated to do all that I just said.
The Way The Industry Sees It
I sat down with Neal Grossman, Chief Compensation Officer of TBWA Worldwide and Chief Operating Officer of TBWA\Chiat\Day’s Los Angeles office, to discuss the economic outlook and agency forecast for the industry in the year ahead.
There has been a great deal of press lately surrounding advertisers extending their payment terms. What are your thoughts on this?
I don’t see this as anything new or as the sign of a new trend. Larger advertisers in particular have for years been looking for ways to extend payment terms. Aside from media spend, agency fees and production represent a significant portion of their remaining marketing spend. Agencies, however, are not able to, nor should they have to, act as banks for their clients. In terms of agency fees, we don’t have much flexibility in the payment of our own costs. 80% of our costs (such as staff costs, rent, taxes, etc.) are paid within 30 days or less and less than 7% are paid after 60 days. To accept extended payment terms effectively is accepting a reduction in the agency’s profit margin and for smaller agencies it can create significant cash flow issues. With smaller agencies, it could even put them out of business. With regard to production companies, they are similarly situated where a significant portion of their costs are talent related and costs that need to be paid up front.
A lot has been said about value compensation in recent years and most advertisers seem to equate that with implementing some form of pay-for-performance. Does this address value compensation as agencies see it?
While the adoption of pay-for-performance has become more common place, it’s not been meaningful because there is often not a significant and achievable upside. The criteria is often subjective and we’ve seen examples where it’s been used as an excuse not to pay the agency, where junior clients are given equal weighting as senior clients in their evaluations of the agency and where procurement criteria related to cost savings and process are weighted more heavily than marketing criteria. Further, a common way pay-for-performance criteria are scaled uses a minimum threshold of “meets expectations” before any portion of the bonus is earned. And yet, most people’s expectations are that work be “above average.” So, the scales are biased to begin with because “meets expectations” (above average) as a beginning threshold for earning a bonus might not yield any bonus for above average work, and 100% of the bonus is often not achieved even when the marketing results are exceptional. As a result, pay-for-performance is generally not material and won’t be accepted by agencies as a substitute for base compensation they feel is inadequate.
Agency compensation has evolved over the years from commissions, to labor based fees, to experimentation with new forms of compensation such as commission on sales. What do you see as the next evolution of agency compensation?
Too much time, energy and cost is being spent by both agencies and advertisers negotiating individual components of agency compensation. At the end of the day, what really matters is the bottom line – i.e., what a client is paying relative to the scope of work and perceived value. When someone buys a car, they don’t really care how much the engine or the stereo system costs. In the end, it’s the total cost that matters. Advertising and marketing services should be no different. And yet there is an enormous amount of time that’s spent dealing with deconstructing fees into its component parts. Time that could otherwise be better spent trying to focus on maximizing the advertiser’s sales and brand value – things that far outweigh the potential savings of grinding an agency to the point where their ability to deliver on those goals are impaired. At the end of the day, we are a talent driven business and the more agencies are squeezed it ultimately will impact the quality of staff that can be assigned to a client’s business. I truly believe that advertisers and agencies not only want compensation that is fair, but simple and easy to administer. One need look no further for examples of non-deconstructed fees than what already exists in practice, including: fixed fees, hourly rates, rate cards, negotiated multipliers, commission, percent on sales and even media commission which is still being used, particularly on media only accounts. So, maybe what’s old may become new again.
Why do some advertisers refer to agency fees as “non-working” dollars and media spend as “working” dollars?
This is really the irony of our business. I understand that clients want to maximize the amount that they can spend on media; however, the language of “working” versus “non-working” is misleading and solely focused from a perspective of cost. This language implies that creativity and innovation have no value while, in reality, advertisers place a very high value on these. Clients come to agencies for big ideas – ideas that will transform their business and generate incredible amounts of brand value and, in turn, financial benefit. And yet the fees that are paid to agencies to deliver that are referred to as “non-working” when, in fact, if not done well won’t help the “working” (media) dollars “work” at all. And, when done well, can stretch the “working” dollars further (e.g., in the form of unpaid media). So, if the goal is to minimize the amount spent on agency fees and production and maximize the amount spent on media, then why not just say that. But to characterize that goal in terms of “working” versus “non-working” only serves to strain agency client relationships during a period when agencies are already feeling stretched by advertisers.
What’s the most interesting thing in your office?
My Magic 8 Ball. Whenever I am challenged with a decision, I can always rely on my Magic 8 Ball for an answer, or at a minimum some comic relief.