Archive | Advertising Agencies RSS feed for this section

How Will Post-Pandemic Employee Compensation Impact Your Agency Fees?

26 Aug

Virtual OfficeWith COVID-19 vaccination rates increasing, organizations across the globe are evaluating whether and or when their employees will be required to return to the office. As part of the consideration process, many are deliberating on whether to allow all or select employees to continue to work remotely.

The question being assessed by employers considering extending remote work privileges is, “How will this decision impact employee compensation?”

Many organizations are weighing different pay scales for remote workers. As an example, Google is planning to adjust employee compensation based upon the local market wages where an employee works from. Which certainly seems like a reasonable trade-off.

By way of example, in a recent article by Reuters, which had seen Google’s “salary calculator,” an employee living in Stamford, CT, which is an hour from New York, would earn 15% less if they opted to work from home, rather than commuting into New York City. Of note, Google is but one Silicon Valley company that has implemented location specific compensation models for employees living and working in less expensive areas.

As advertising agencies evaluate their post-pandemic approach to the use of flexible staffing and or remote workers, it stands to reason that while some will opt for location agnostic pay models, others may implement location specific remuneration programs for remote workers. In the case of the latter, the obvious question is, “How will cost-of-employment adjustments impact the fees charged to advertisers?”

Will those on commission-based fees adjust rates downward? Will those employing direct-labor-based compensation programs reduce bill rates?

It is certainly reasonable to assume that if an agency reduces its salary and overhead expenses, that the fees charged to advertisers should be reduced accordingly. That said, it is likely that any adjustment to agency bill rates will need to be the result of collaborative discussions, initiated by the advertiser, between themselves and their respective agency partners.

At a minimum, location-based employee compensation adds an interesting dimension to the ongoing quest for a fair and balanced agency remuneration system.

Advertisers: What is Your Line of Sight into Your Ad Agency’s Use of Affiliates?

23 Aug

Line of SightDo your client-agency agreements require your agency partners to disclose their use of related parties? To secure your permission prior to engaging affiliates? To document how those affiliates are compensated?

If so, then you are in a better position than many. At a minimum, testing for agency compliance to such contractual requirements is an option that you can pursue. If not, the level of work being channeled to related parties by your agency may surprise you.

In our contract compliance and financial management audit practice, it is not uncommon to see 5 to 7 different related parties engaged by an advertiser’s agency. Examples of services provided by affiliates include items such as barter, programmatic buying, direct response TV, event marketing, principal-based buying and ad serving. Yet, oftentimes these affiliates and the manner in which they are compensated are not known to the advertiser.

Why should an advertiser care? For one, if work is assigned to an agency affiliate without undergoing a competitive bid process, what assurance can the advertiser have they are not being charged above-market rates? Secondly, the added profitability by recommending certain affiliates, such as those engaging in the procurement and resale of media inventory through principal-based buys or barter, could adversely influence an agency’s recommendations to the advertiser. And to compound matters, if said affiliates are also applying non-disclosed mark-ups to the media inventory procured or services provided, how can an advertiser fairly assess whether the total fees the agency is generating from its business are commensurate to the services being delivered?

Thus, it is important to revisit contract language to ensure that the following controls are in place:

  • Principal-Agent language that requires the agency’s fiduciary responsibility is to the advertiser and that all decisions and actions are undertaken in a manner that maximizes benefits to the advertiser.
  • Require the agency to disclose any and all related parties that it intends to deploy on the advertiser’s behalf and to secure the client’s prior written approval. Requiring quarterly updates to this list would provide an added layer of protection.
  • For instances where principal-based buys, barter or other non-disclosed transactions are being considered, require a double opt-in process:
    • The first step would be a formal letter of notification from the agency to be signed by the advertiser granting permission.
    • Secondly, any purchase authorization form presented by the agency to the client for approval should reiterate the agency’s intent in this area.

With these agreement guardrails in place, advertisers can further protect their interests by periodically auditing the agency to validate compliance and verify the accuracy of charges made by and or for related party activities.

Ultimately, this approach will allow an advertiser to leverage the full breadth of its agency partner’s resource offerings in a very transparent manner, providing comfort that its agency’s practices are aligned with its expectations.

What Role Will Media Agencies Carve Out for Themselves?

29 Jun

Role QuestionPoint of fact: The media marketplace is evolving at a pace never previously experienced.

While consumers have a dizzying array of choices for accessing content, ad sales are dominated by a handful of media ownership groups. According to a recent GroupM report, the “Top 10” firms accounted for 55% of global ad revenues in 2020. Of note, the “Top 5” firms (Google, Facebook, Alibaba, Amazon and TikTok owner ByteDance) represented 46% of global ad sales during this same period.

In the U.S., the world’s largest ad market, digital media represented 62.9% of U.S. media spend with 88.1% of digital display spend being placed programmatically in 2020 (source: eMarketer). Not surprisingly, Google, Facebook and Amazon increased their share of the U.S. digital market to almost 90% in 2020 (source: GroupM).

Top media ownership groups such as Comcast, Disney, ViacomCBS and AT&T have expanded their offerings to advertisers on a direct basis to include media space/time, content, product integration, experiential support, audience research and production services… somewhat reminiscent of the days of full-service advertising agencies.

And finally, media planning and buying decisions are becoming more highly automated as AI-powered algorithms and machine learning continues to expand their role in the advertising and media sector. This in turn has spurred advertiser investments in AI marketing, totaling over $6 billion in 2019 (source: Statista).

The question to be asked is, “How will media agencies distinguish themselves and their client offerings to protect their share of the media services market?”

This is an important topic, one which is surely being discussed within the major ad agency holding companies. Why? Media agency contributions to agency holding company financial performance are significant. This has been particularly so with the growth of digital media over the last decade-plus. According to Ad Age Datacenter, digital work in 2020 accounted for 58% of 2020 U.S. revenue for agencies from all disciplines. Yet, overall revenues for U.S. ad agencies have been lackluster at best, with low single-digit growth in 2017, 2018, 2019 and a 6.8% drop-off in 2020.

For advertisers seeking to boost campaign performance, improve media ROI and reduce time-to-campaign launch times, they will inevitably evaluate a range of approaches to planning and placing their media budgets. These may include adding consolidating their media agency networks to achieve better integration and improved leverage, in-housing certain aspects of the media strategy and or placement processes to improve efficiencies, working directly with media ownership groups and a host of other alternatives.

In a dynamic, evolving marketplace marked by uncertainty, the onus is clearly on media agency management to defend their role as gatekeepers and stewards of client media spend. Perhaps agency leadership can draw some inspiration from the words of American educator and the founder of Stanford University, David Starr Jordan: “Wisdom is knowing what to do next; skill is knowing how to do it and virtue is doing it.”

Risks Related to Ad Agency Staff Reductions

23 Feb

LayoffsAdvertisers cut budgets; ad agencies reduce headcount. This is a causal relationship and always has been.

No one can fault an ad agency for making prudent fiscal decisions when revenues decrease.

That said, advertisers need to take precautions in this situation to mitigate their risks, particularly when there are significant downsizings as there were in 2020.

It was recently announced that Omnicom and Interpublic had eliminated “10,000 roles” between the two organizations in 2020, citing the pandemic as the primary reason. This represented an 8.4% reduction in staff for Omnicom and 7.6% for Interpublic. Significant by any measure… and they will not be alone, the other holding companies simply haven’t yet disclosed annual headcount data.

Like with most professional fee-for-service providers, involuntary staff reductions tend to have a disproportionate impact on longer-term, more highly compensated individuals and personnel working in shared services functions such as finance, human resources, legal, procurement, traffic, etc.

Advertisers that have reduced their budgets obviously need to collaborate with their agency partners on revised scopes of work and remuneration programs that reflect new spend levels. Clients that have maintained or increased spending will need to implement safeguards to ensure that their accounts are adequately staffed and supported.

This includes making sure that the mix of agency personnel working on their business is reflective of the need for strategic insights, breakthrough creative and executional excellence in all facets of the business.

Items such as tightening up creative and media briefing and approval processes, specifying media planning procedures and desired outputs, identifying media management guidelines for in-flight stewardship and post-campaign performance reporting and being overt about financial management expectations and reporting (i.e. project tracking, job closure and reconciliation, third-party vendor payments, etc.) are necessary steps for advertisers to take.

In our experience, as long as both client and agency are aligned, working through these situations to mitigate the risks associated with involuntary staff reductions can be effectively addressed.

As Josh Billings, the 19th century writer and humorist advised: “Caution, though very often wasted is a good risk to take.”

Agency Model Transformation Was Already Afoot

31 Oct

One sad reality of 2020 was the negative impact of COVID-19 on U.S. employment. Simply stated, the loss of jobs resulting from shelter in-place regulations negatively impacted business sectors ranging from travel and hospitality to retail and yes, advertising. 

According to a recent report from Forrester, 35,000 U.S. ad agency jobs were cut this year. The principal reason for this contraction, agency expense reduction moves tied to drops in revenue related to marketing spend reductions by advertisers. 

However, the loss of ad agency jobs, which accelerated in 2Q20 was actually part of a broader trend tied to the ad industries adoption of technology. This according to Jay Pattisal and J.P. Gownder of Forrester Research, authors of a blog post entitled; “The Smaller, Smarter Future of Agencies.”

According to the authors, the application of artificial intelligence (AI) and intelligent automation (IA) to agency workflows “will yield a long-term reduction in the size of agencies as measured by the number of human employees.” By their estimation, creative and media agencies will lose 11% of their jobs to automation by 2023. Their recommendation to agencies is to embrace this change and accelerate their transformations, becoming more “streamlined, intelligent providers” by harnessing the power of “intelligent creativity.” 

Many within the industry have prognosticated on how the ad industry model might evolve and the perspective advanced by Forrester certainly has merit. However, for an industry with over 57,000 ad agencies operating in the U.S. alone (source: Manta Media), there is no “size nine shoe” solution that can be applied to each individual agency’s quest to remain relevant. 

One thing is certain, many of the jobs lost in 2020 will not return, regardless of the course of the pandemic or the resumption of client marketing spend. Process innovation, automation and consolidation will have rendered many of those positions as obsolete.

Will Consolidation Play a Role in Creating the “New” Agency Model?

27 Aug

Consolidation 2It was a simpler time when advertising agencies began to “unbundle” in the 1980’s, separating media planning and placement from creative. This, along with the shift from remuneration systems predicated on commissions to direct labor-based fees, formed the basis for today’s advertising agency model.

While there were certainly variations on the aforementioned theme, this approach served both advertisers and agencies well for the next thirty years. However, as the advertising business became increasingly more nuanced and fragmented, the industry saw a rise in the level of specialization resulting in an increased number of agencies with highly concentrated service offerings. In turn, agency holding companies went on an aggressive acquisition binge gobbling up traditional and specialized agency brands. While there were some efficiencies gained by the holding companies in consolidating back-office functions, the acquired shops were allowed to continue to operate under their individual identities. In so doing, there was little to no cultural acclimation across the holding companies’ agency brand portfolios.

One of the notable consequences of this movement was that marketers saw an expansion in the number of roster agencies, which swelled beyond their ability to effectively manage their now far-flung agency networks. According to Manta Media, in 2020 over 57,000 agencies were operating in the U.S. alone, creating a highly fragmented and competitive marketplace for marketing services providers.

Concurrently, a once stable and manageable business sector was now having to deal with increased levels of complexity stemming from an expansion in the number of media types and outlets, the rapid adoption of changing technologies, the emergence of “Big Data” and an ever-evolving set of consumer media consumption behaviors.

Fast forward to the present and it is easy to understand the position shared by many who feel that the “agency model” is no longer effective and needs to either be fine-tuned or perhaps completely overhauled. These pundits believe that talent constraints, eroding margins, expanding scopes of work, a shift from retained to project-based relationships and the emergence of management consulting firms as viable competitors in the marketing services space have led to the demise of the traditional agency model.

While there have been numerous questions raised, there has been little progress made on client-agency relationship improvements, compensation schema and or agency positioning, let alone ideation around creating a new marketing services delivery model.

There clearly is no “silver bullet” and while we don’t portend to have the answer to remedy all of the challenges facing the industry, we predict that the ultimate solution may involve some of the following actions:

  • Advertisers will streamline their marketing services agency networks with a goal toward eliminating redundant resources/competencies, clarifying agency roles and deliverables, establishing a “lead” agency and providing a framework for long-term, collaborative relationships.
  • In-housing will continue as advertisers seek to improve their controls, gain line-of-sight into the disposition of their spend at each stage of the marketing investment cycle, better assess their return-on-marketing-investment and to drive working dollars. This will involve managed service models where the client takes ownership of the technology and data and engages the agency to plan and execute select components of their communication programs.
  • Compensation programs will blend a balance of direct-labor and or project-based fee methodologies with gainshare and painshare components that link a portion of an agency’s remuneration to the advertiser’s in-market performance.
  • Agency holding companies will “right-size” their brand portfolios, combining and or shedding redundant service providers, consolidating agency brands and developing “centers of excellence” to gain scale efficiencies and improve client delivery within key functions (i.e. broadcast production, digital production, programmatic trading, trafficking, etc.).
  • Agency service delivery models will evolve to simplify advertiser access to the range of agency holding company resources through dedicated relationship management teams that can tap the entirety of a holding company’s offering.
  • Management consulting firms and advertising agency holding companies will co-exist, and in fact, will be called upon to collaborate in providing their clients with integrated end-to-end solutions focused on both building brand and driving in-market performance.

Experience suggests that the best way to solve complex professional services challenges is to focus on the common denominator and craft solutions that ease the burden of the client organization in accessing those services. Thus, consolidation will play a key role for all stakeholders (advertiser, agency, intermediary, publisher) as the advertising industry considers how to evolve its current business models.

The more you drive positive change, the more enhanced your business model.”

                                                                                                          ~ Anand Mahindra

 

The Cost of Feedback is Nominal, the Value Significant.

30 Jun

do advertisers get what they pay for“I think it’s very important to have a feedback loop, where you’re constantly thinking about what you’ve done and how you could be doing it better.” ~ Elon Musk

Chances are, most will agree with Mr. Musk’s sentiments regarding feedback and its link to driving improvements.

What organization wouldn’t aspire to successes achieved by one of the 21st century’s most prolific thinkers? Consider the fact that Tesla, with a market cap of $160 billion, is larger than GM, Ford and Fiat Chrysler combined. Or that his fledgling SpaceX organization has been valued at $36 billion after its first successful manned space flight.

As such, it was somewhat of a surprise to read the results of a recent World Federation of Advertisers (WFA) study. Conducted by Decideware, the study surveyed 60 global agency leaders on client-agency performance evaluation practices. Below are some key findings:

  • 7 out of 10 advertisers provide their agencies with feedback on at least an annual basis
  • Only 4 out of 10 advertisers allow for agency feedback as part of the evaluation process
  • 3 out of 10 clients conduct face-to-face meetings to discuss evaluation results
  • Agencies aren’t comfortable providing “honest feedback”
  • 43% cited the lack of honest feedback as the “biggest barrier” to effective evaluations

That so few marketers would invite their ad agencies to provide formal feedback on topics dealing with team performance, workflow, process and the overall relationship is a bit of a mystery; particularly given that anecdotally it has long been believed that strong client-agency relationships yield superior performance.

In our experience, we have found numerous examples of successful marketers that believe in and are utilizing a 360-degree evaluation process with their agency partners. Importantly, that process  incorporates candid, two-way dialog, which serves as a fundamental building block for their agency relationship management efforts.

It would be helpful to understand “why” some marketers have chosen not to invite agency feedback or to review performance evaluation results in face-to-face meetings. Are they simply not interested in what their agencies have to say? Are they too understaffed and time strapped to invest in a robust evaluation process? Are they of the belief that if their agency partners had a point-of-view that they would share their insights, without prompting?

Regardless of the reasons for eschewing this fundamental practice, there are compelling benefits to be gained for marketers by course correcting in this area by implementing two-way evaluation frameworks. At a minimum, eliciting agency feedback on day-to-day workflows, briefings and approval processes, in market results and client-agency relationship management can yield efficiencies that are beneficial to stakeholders on both sides.

Beyond near-term improvements in operations and performance, established communications programs, that encourage ongoing candid feedback, help to build trust and strengthen relationships. It is incumbent upon CMOs and agency CEOs to collaborate on putting the appropriate protocols in place to encourage, understand and act upon the perspective each party generates throughout the year.

 

Budget Reductions Create Opportunity to Fine-Tune Agency Network

28 May

 

Advertising concept: Ad Agency on digital background

For marketers seeking to generate efficiency gains, looking internally to rethink the processes used to manage planning and creative development workflows can yield significant benefit.

As importantly, looking externally at “how” and “where” work is being performed across an organization’s network of marketing services agencies is extremely important. This involves an objective assessment of the current network of agency partners, their resource offerings, capabilities, performance, and the roles and responsibilities assigned to each.

Without periodic assessment, agency networks can become bloated beyond a marketing team’s ability to effectively manage these vital resources. This risk can be compounded in companies where marketing positions are vacant or have been eliminated as a result of a budget reduction decisions – leaving fewer client-side personnel to manage dispersed agency activities.

Reviewing and creating an inventory of roster agency capabilities and the roles assigned is never a bad thing when it comes to identifying unnecessary expenses or opportunities to consolidate resources and protect against redundancy. Amongst other benefits, since the work necessitates a review of each agency agreement and remuneration program tenets, output should include a comparison of agreement terms, conditions, requirements, and bill rates to ensure consistency (where applicable) and reasonableness of agency bill rates and other costs.

This practice is even more apt when marketing budgets are being cut and agency scopes of work reduced. Such assessments form the objective basis for eliminating duplicative activities and or resources, paring specialty agencies that are not being fully utilized, and eliminating unnecessary fees that are putting downward pressure on working dollars.

Consider; How many agencies do you have that are managing influencers? Involved with social media or content production? How many different agencies are being utilized for studio services or broadcast production? How many agency trading desks are being utilized for the placement of programmatic media? Are you utilizing specialist firms that may no longer be required based on changes to the marketing budget (e.g. event management)? It is highly likely that there are opportunities to consolidate work among fewer partners to simplify workflows, improve communications and reduce costs.

If you are utilizing a “lead” agency to coordinate activities, briefings, production and trafficking across your agency network, it may be worthwhile to solicit their input on potential agency roster moves. Further, once a plan is formulated, collaborating with the lead agency’s account team to affect transitions can be critical to the success of consolidations and the reshuffling of assignments. If you do not employ a lead agency model, the time may be right to consider this approach.

Streamlining external agency networks will improve communication between marketer and agency, enhance business alignment and instill clarity on success metrics. In the wake of current crisis driven budgetary adjustments and uncertainty, companies may want to give serious consideration to such an approach.

“Whatever the dangers of the action we take, the dangers of inaction are far, far greater.”

                                                                                                                   ~ Tony Blair

Adjusting Marketing Budgets is Multi-Dimensional

5 May

budget cutAs we began 2020 no one could have predicted the level of upheaval the economy would experience as a result of the COVID-19 pandemic. The changes forced on businesses as a result of government mandated shelter in-place policies, while critical for curtailing the spread of the virus, have been devastating. According to consulting firm, Brand Finance “America’s Top 500 Brands could lose up to $400 billion” due to COVID-19’s impact on the economy.  

Organizations have sprung into action, many slashing advertising spend, along with other expenses as they seek to offset dramatic reductions in revenue and to deal with mounting cash flow challenges.

As marketers approach the mid-point of the second quarter it is clear that the changes to their fiscal budgets will be significant and potentially lasting. In a recent poll of marketing and advertising executives, by Advertiser Perceptions, 77% of those surveyed expect ad spend to be soft through the first-quarter of 2021.

Thus far, many companies have taken a wait and see attitude with some of their advertising and marketing commitments as they rightly weigh options related to modifying, rescheduling or cancelling advertising commitments. Moving forward, decisive action will be required to safeguard and recall funds pre-paid to agencies, production resources, events management companies and media sellers for creative that will never come to fruition, media that will never run and sponsorships that will be postponed or cancelled.

Equally as important is the need to review and likely revise annual agency scopes of work, staffing plans and remuneration programs that have been impacted by the reduction in marketing spend.

These can be challenging and complex conversations to have with your agency partners and in turn, with third-party vendors, particularly because their organizations are dealing with comparable business and financial issues. For the purposes of this article, we want to focus on the client/ agency portion of the ledger, rather than external commitment and resource reallocation reviews that are likely currently underway.

A disciplined approach, focused on contractual terms and current financial facts, will yield the greatest return as you seek to right size your marketing budget in a fair, responsible and expeditious manner. This approach also recognizes that in addition to the goal of reducing costs, companies are seeking to improve financial flexibility and limit risks and exposures. Stephen Covey wisely suggested, it is best to; “Begin with the end in mind.” Same applies now, it is best to begin with a review of current governing documents between advertiser and agency, and any year to date agency financial reporting, in order to answer this handful of straightforward questions:

  1. Does the Agency Agreement afford you the right to modify your Scope of Work and or retainer fee? If so, what is the notification requirement in your agreement?
  2. What Scope deliverables have been completed to date?
  3. Where is the Agency on their Staffing Plan commitments?
  4. What P.O.s have been issued to the agency? For open P.O.’s what is the open balance on each P.O.?
  5. Do you have a detailed Job History Report, that provides financial details for all jobs, open or closed? Can you identify which jobs have been completed? Of those that remain open what are your options to postpone, modify or cancel any of them?

Answers to questions such as these will assist in facilitating productive interactions with all stakeholders, across multiple fronts ranging from informing budget reduction and reallocation decisions to the potential impact of internal or agency-side staff reductions on financial management processes and controls and the corresponding risks.

One area that must be addressed is agency remuneration. Reductions in overall spend, scaled back Scopes of Work and revised agency Staffing Plans necessarily impact agency compensation, whether commission or fee based.

For their part, agencies have rightly taken steps to address the impact of client ad spend reductions. To date, each of the major holding companies have announced plans to reduce expenses. These reductions include; employees being furloughed or laid-off, involuntary salary reductions, the waiver of bonuses and 401k contributions, executive management taking massive pay reductions and a freeze on non-billable expenses… all designed to lower their cost base.

If your agency is on a direct labor-based remuneration program, the reduction in the agency’s direct labor and overhead costs means that the fees which you pay should be reduced accordingly. With this compensation schema, even a modest change in an agency’s cost structure can have a meaningful impact on the fee calculation.

It should be noted that the goal of the compensation review is not to wring out savings at the expense of the agency, but to adjust the fees to reflect the reality of the revised 2020 marketing and advertising budget and corresponding changes to the Scope of Work.

Marketers have a fiduciary obligation to their organizations to account for, safeguard and recall funds targeted for reduction. This can best be done working in collaboration with their agency partners, while affording those partners a high level of respect and empathy. Once the budget right sizing process has been successfully completed, all stakeholders can refocus their attention on the future, perhaps drawing motivation from retired 4-star U.S. Army General, Colin Powell who once said: “Always focus on the front windshield and not the review mirror.” 

 

 

Optimizing Client Relationships: Collaborating Effectively with Procurement

30 Apr

procurementThe “Procurement Phenomenon” at the dawn of the new millennium has morphed squarely into the Procurement Era for Marketing and Communications Services. Agency executives can no longer ignore this new marketplace reality and must now embrace, educate, and in some instances, emulate this very influential Client stakeholder.

Join J. Francisco Escobar, President & Founder of JFE International Consultants for an engaging, complimentary webinar that will take you through the evolution, definition, current trends, and best practices that will guide you and your team in optimizing relationships with client procurement teamsClick Here

%d bloggers like this: