Tag Archives: agency fees

Why Working Media is Still a Relevant Ratio

20 Jul

In the decades since full-service agencies unbundled and the 15% agency commission fell by the wayside, advertisers have sought ways to assess the efficiency of their overall advertising investment.

One of the more reliable measures of efficiency had been the ratio of working media to non-working media. Working media being defined as the percentage of an advertiser’s budget spent on distributing their message to the intended audience (media pass-through costs). Conventional wisdom held that non-working media expenses (i.e. production, studio charges, agency fees, etc.…) should fall between 15% and 20% of an advertiser’s total spend.

The media landscape evolved to include digital, social and mobile channels, which have garnered a greater percentage of media spend, leading many industry pundits to suggest that focusing on working media ratios as a measure of efficiency is irrelevant. Why? Partly because of the increased focus on content creation, analytics and the expansion of an advertiser’s roster to include a host of specialty agencies. All of which have served to fuel non-working media costs.

Stop. While applying a 15% to 20% benchmark may no longer be appropriate, that doesn’t nullify the need to assess the efficiency of advertiser spending.

One must remember that there have also been developments within the industry to increase efficiencies and offset the justification for a rise in non-working media as a percent of total spend. Digital media asset management systems, production centers of excellence, offshoring and programmatic buying are but a handful of items which have leveraged technology to wring costs out of the system.

Advertisers have no choice but to establish goals and benchmarks for monitoring the efficiency of their overall advertising investment. No one is suggesting that this be done at the expense of creating brand relevant, distinctive, effective content. Quite the opposite, trimming unproductive non-working media expense is a necessary means of boosting that effectiveness. Perhaps this is why major advertisers such as Unilever and PepsiCo publicly share their goals and performance as it relates to the non-working media ratio.

The fact is that advertisers’ agency rosters and third-party vendor networks have expanded dramatically. This in turn has created additional layers and redundancies across many of their agency network partners, which can serve to fuel non-working media expense. A few short years ago the World Federation of Advertisers (WFA) conducted research, which found that a majority of advertisers surveyed felt that their agencies had added layers of costs when it came to one important aspect of their advertising spend… media buying.

So why shouldn’t advertisers monitor non-working media spend in addition to the analytics utilized to assess effectiveness? In the end, eliminating waste is part of a marketing organization’s fiduciary responsibility to their enterprise.

The good news is that advertisers can establish their own internal guideposts for monitoring working media ratios. It is relatively easy to look back on expenditures by category to provide a historical perspective to calculate this particular measure of efficiency. Importantly, this will also allow advertisers to establish firm goals to assist them with their resource allocation decisions.

 

What is the Right Approach to Agency Compensation?

14 Nov

agency compensationThe topic of effective, mutually beneficial ad agency remuneration methodologies has been discussed ever since the mid-1980’s when full-service agencies and 15% commissions became passé.   

There has been no shortage to the variations on compensation structure that have been explored, adopted and debated over the last thirty years, well before the emergence of procurement in the agency sourcing and contract negotiation mix.  The perception among many industry professionals is that agency compensation is a “zero-sum” proposition… somebody wins and somebody loses.  Further, agency representatives have long alleged that procurement wants one thing, year-over-year rate decreases in spite of the fact that advertisers are asking their agency partners for increasing levels of support. 

Experience has taught all of us who have been participants in constructing agency compensation packages that there is no silver bullet.  The variables which come into play to customize a fair remuneration program which optimizes an advertiser’s return on agency fee investment while properly incenting the agency vary greatly from one relationship to the next.  In our agency contract compliance practice we have reviewed commission only, fee only, base fee plus commission, direct-labor based fees, retainer fees tied to SOWs, flat fees and on and on.  Each has its pros and cons. 

In our opinion, the key to crafting a proper remuneration package comes down to one item, measurement.  It has been said, “If you aren’t measuring, then you are just practicing.”  Time and time again we find that neither the advertiser nor the agency has the requisite inputs to assess and effectively negotiate and or monitor a balanced compensation program.  Ultimately, the way to create a “Win-Win” scenario in this area is for an advertiser to tie agency compensation to agency deliverables.  Unfortunately, advertising is a complex sub-set of the professional services arena and valuing deliverables is a major challenge. 

The good news is that consultants such as Farmer & Company have made inroads in the area of connecting compensation to outputs.  Like most things worthwhile, the initiatives are challenging, but can be tackled.  Farmer & Company takes an in depth, data-driven approach to compile historical project / task level information that many agencies and clients have not maintained.  Why?  They’ve simply never tracked variables such as the effectiveness of the client briefing process, time-on-task, rework levels and or the quality of the outputs.  All are achievable and rewarding, but require a commitment among both client and agency stakeholders to begin capturing this data at the requisite level of detail. 

Recently, I came across an article written for Procurement Leaders by Danny Ertel a partner with Vantage Partners entitled: “Complex Services: Alternative Pricing Models.”  The article addressed the topic of service purchasers achieving their “budgetary concerns with pricing models that do a better job of aligning incentives.”  Importantly, marketers and agencies alike can take solace in the balanced approach proposed by Mr. Ertel for a more “strategic” approach to negotiation, rather than focusing on “trading volume for discounts.”  To quote noted actor and martial artist David Carradine: 

There’s an alternative.  There’s always a third way, and it’s not a combination of the other two ways.  It’s a different way. 

If you’re interested in learning more about balancing risks and outcomes, you will find the article to be thought provoking.  Separately, if you’re interested in discussing how to lay the groundwork for valuing outcomes on this important topic, contact Cliff Campeau, Principal at AARM at ccampeau@aarmusa.com for a complimentary consultation.

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