The focus is on profitability and margins not costs and price today with a view of the industry from Wall Street by Brian Wieser, Pivotal Research and a panel discussion on Media Trading Desks and a discussion on Media Audits facilitated by the Media Audit Council.

Media auditing moves from a stick to a carrot as advertisers get smarter

Wall Street

It appears that from a Wall Street perspective there is no agency income crisis with most of the holding companies recording record profits in excess of the market growth. And from an investors point of view this makes the holding companies generally good investments, because Wall Street believes that no matter what the price the agencies are able to maintain and grow margins.

After all Marketing should and is focused on cost or price reduction, not the current industry obsession with the profit margins of the suppliers.

While agencies continue to find ways of meeting marketer expectations on quality and price and at the same time maintain and improve margins the industry is performing well from an investment perspective.

There are different perceptions of the various listed holding companies:

• WPP: A great futurist machine
• Interpublic: A ticking time bomb
• Omnicom: Safest investment choice

Media Trading Desks

There is a lot of discussion about the lack of transparency in regards to media trading desks and this has lead to marketer and procurement suspicion about the margins being generated for the agency networks, especially as many of these trading desks operate at the holding company level.

The panel were explaining that if the focus moves from the business model to the benefits, marketers are in a better position using the Trading Desks because they deliver to marketers greater efficiency in buying, data analytics and insights on individual audiences, and overall better campaign performance.

They also highlighted that rather than benchmarking the business model and profit margins, they should compare the performance of the Trading Desk against the inventory price in the market.

And why do the Trading Desks exist at a holding company level? Because in most cases the investment in technology to create an efficient and effective analytics, management, buying and optimisation system can only be justified at this level of volume.

Media Audits

Media Audits Council is a not for profit organisation  funded by the major global media auditing companies with the charter to develop best practice in media auditing, an area of consulting often shrouded in mystery.

The panel they bought together included global companies like Pfizer, Kimberley-Clark, Bayer and Nissan.

The focus of the panel was the role of media auditing in driving performance. Rather than focusing on simply measuring past performance, all media audit users found the bigger benefit was in the lessons and process improvement to be applied going forward.

While many of the panel saw the benefits linking agency remuneration to the audit performance, they all recognised that the bigger opportunity is driving the media value obtained over the market, rather than limiting agency payment. Making the process a big carrot rather than the traditional stick auditing has previously been.

Focus on price rather than cost

So overall there was a positive change in focus today from how much does advertising cost, looking for ways to measure the value delivered.

Of course the next step is to start to recognise the value created and to reward for that. But maybe that will be next year’s or perhaps the year after.

The ANA Marketing Financial Management Conference is the only event of its kind. It brings together top marketing finance and procurement professionals from the client side with agency CFOs and other key industry stakeholders interested in efficiencies, cost savings, return on investment, and delivering greater value to organizations.

This post also appears in AdNews

Global growth will continue to be patchy, so how do we maximise the opportunities.

Today was about obtaining a view of the world from four very different perspectives:

1. The economic perspective – John Swadener, PwC & Larry Cristini, Eurasia Group
2. The CPO perspective – Hans Melotte, Johnson & Johnson
3. The CMO perspective - Paul Matsen, Cleveland Clinic
4. The Agency CEO perspective – Martin Sorrell, WPP

A deficit of economists talk on the patchy global economic performance saying it is here to stay for at least the next 5 years

The economists laid the base of awareness that while there is growth in the global markets, this growth is patchy and unpredictable, with surprising figures showing that markets like the Middle East and Turkey are positioned for growth along with the traditional BRIC markets. This was based on population size and profile, government policy and regulations and media, technology and entertainment spend.

So against this background the next three speakers had more in common than differences:

1. All talked about the importance of optimising growth and yield over shorter term cost cutting
2. All reiterated the importance of metrics in not just measuring success, but to optimise performance
3. All spoke about the importance of integration, not just across marketing strategy, but within teams with finance, procurement and marketing needing to be aligned and then aligning their agencies and suppliers.

Interestingly all mentioned that to achieve this they recommended moving back to consolidating the number of agencies as a way of achieving this alignment and the associated collaboration.

Recent reports from the US have suggested that this is a trend as marketers find it increasingly difficult managing multiple agencies with recent appointments by Bank of America, Pepsi, MillerCoors, General Motors and Sprint.

The real difference between the various perspectives was in the focus on this change and approach.

The CPO focus, understandably was about achieving increased performance by building stronger business partnerships and strategic relationships, defining success, ensuring contract adherence, evaluating performance and aligning incentives.

The CMO was more focused on achieving alignment and maximising performance across the multiple media channels including bought, owned and earned and monitoring this activity and informing the strategy through marketing metrics and financial performance.

While the Agency CEO, talking largely to the finance and procurement audience, was focusing an positioning agencies as the junior partners, not the domestic servants to marketing and the business with a focus on leveraging the talent at their disposal to maximise the value of their client.

But through the whole day, the most surprising disclosure was from Martin Sorrell who in the Q&A session following his presentation candidly shared that within WPP the deeper you go into the company the more excited people are to be working collaboratively across the various companies within the network, but at the higher levels of management there are more silos and turf wars due to the structure of the organisation and that this is a challenge that he is addressing.

This post also appeared in AdNews.

The pre-conference session kicked off with a presentation on the “maturation of marketing procurement” detailed in a session presented by Steve Lightfoot from the WFA and Paul Duxbury from SPIRE Worldwide.

Paul Duxbury SPIRE Worldwide & Steve Lightfoot WFA on measuring and managing marketing procurement

Through research and case studies developed between the WFA and SPIRE they have identified four stages of Procurement developing in the marketing category.

1. Balanced Traditional
2. Success Through External Partnerships
3. Seamless Integration
4. Balanced Emerging

The stage a direct procurement team sits within an organisation depends on the two main critial success factors:

1. Sourcing capabilities
2. Organisational readiness

With four main performance drivers and more than 40 sub-drivers, they are able to identify the developmental maturation of the marketing procurement function within an organisation and compare this with the ideal and industry best practice.

The bottom line of the presentation is that in the marketing category, direct procurement is becoming more sophisticated and more developed, especially amongst the larger global advertisers. But in the process they are moving from the traditional balance of cost reduction to a more balanced approach across the four performance pillars being:

1. Integrated streamlined marketing process
2. Money / budget management
3. Supplier and roster selection and management
4. Continuous learning and improvement

Interesting findings from the research were:

The more mature, therefore the more the organisation had moved from Balanced Traditional to Balanced Emerging:

1. the more time procurement had been engaged (5 years +)
2. the larger the marketing budget ($3 bill +)
3. the more of the marketing budget was under procurement management (75%) and
4. the more centralised the management of the marketing budget.

Interestingly on the percentage of marketing budget under procurement management, this also varied by region with EMEA 70% – 80%, while the merging markets in APAC and LaTam were only 40% – 60%.

Having said that, the WFA found that 45% of their members with business in China and APAC had direct procurement managing marketing expenditure in the region.

The ANA Marketing Financial Management Conference is the only event of its kind. It brings together top marketing finance and procurement professionals from the client side with agency CFOs and other key industry stakeholders interested in efficiencies, cost savings, return on investment, and delivering greater value to organizations.

This post also appeared in AdNews

While many people in the industry talk about being in partnership with their agency or with their client, the majority of remuneration models do not support this position.

Many advertisers and their procurement executives take a buyer/supplier view of these relationships, while the agencies often approach the relationship talking about a partnership.

But what is the difference? Which of these is correct? And what impact does this have on remuneration?

supplier / n. one who furnishes with what is lacking or required, to satisfy a need or demand

This broad description captures the relationship between advertisers and their agencies, where the client requires the provision of creative communication ideas developed for their specific needs and then executed to an agreed plan. Just because this service is customised to the needs of the client does not make the agency a partner.

partner / n. : Law. one associated with another or others as principal or contributor in a business, usu. sharing its risks and profits.

The key point here is they share the risks and the profits. Lets look at some typical remuneration models in the market and determine if they reflect a supplier relationship or partnership.

Media Commissions & Service Fees

A number of clients still use this buyer/seller mode of remuneration, with the client buying media/services and the agency supplying these with the remuneration based on the volume bought, not on the quality of work or outcome.

Retainer and / or Project Fee

These are a derivation of the head hour model, where the resource required is calculated or estimated and the total fee is paid for each service, project or outcome.

Rather than based on expenditure the focus has moved to the client buying human resources and paying the associated costs.

Advantage:
1.    The buyer knows the cost up front and is able to budget
2.    Guarantees the cash flow for the supplier against a set human resource.
3.    Buyers can make informed decisions on whether these services are cost effective and essential.

Weakness:
1.    No recognition of the value created in the form of intellectual property or revenue or profit generated by the supplier
2.    Difficulties defining the service levels and quality of the personnel required to provide those service levels.
3.    Irrespective of doing an outstanding job or a hopeless job, profitability remains the same.

Value Based Remuneration

Value based moves from the resource model to the pricing and ROI model setting a price on the delivery of outputs and a ROI bonus on the outcomes of those outputs.

Rather than based on the level and cost of resources, the focus has moved to the value of the agency outputs to the client and ROI of those outputs.

Advantage:
1.    The price is set up front for both the buyer and supplier
2.    The expenditure with the agency moves from a cost to an investment
3.    The agency can share in increased returns where the outputs they produce contribute to increased revenue or profitability

Weakness:
1.    Setting the required output and placing a price or value on that output can be challenging
2.    Agencies can be unwilling to have their remuneration linked to measures they believe they have little or no influence over
3.    Marketers are unable to budget the bonus or variable component of the agency fee based on results

Performance Based Remuneration (PBR)

PBR is a relatively common way of providing an incentive for the agency and usually takes the form of sacrificing profit margin.

The most successful models use a mix of soft, medium and hard measures.
1.    Soft measures: relationship objectives measured by systems such as Evalu8ing.com
2.    Medium measures: marketing measures eg. brand awareness, desirability or propensity to purchase.
3.    Hard measures: business measures eg. sales increases, market share, market penetration or even share price.

Difficulties:
1.    Achieving agreement on the measures, especially the hard measures such as sales.
2.    Difficulty managing the PBR as a floating component within their budget, with a “use it or lose it” accounting practice.
3.    PBR measures that are complex, difficult, time consuming and costly to administer and implement.

Partnership Behaviour

So what does constitute a partnership? Where the agency share in the risks and rewards.
1.    100% of the agency profit at risk based on PBR.
2.    Linking all agency profit to the sales success or profitability of the client.
3.    Investing time and resources with a major profit or revenue share.
4.    Joint venture with agency as the outsourced marketing / advertising department.

Conclusion

Not every client wants a partner. Not every client wants a supplier.

The basis of any remuneration should compensate a supplier for their costs with a reasonable profit or reward the partner for the value they create in the business.

Advertisers and their agencies need to understand the type of relationship they want and develop remuneration models that reflect and sustain that relationship, not just pay lip service to it.

We have had years of experience in developing customized remuneration models based on industry benchmarks and best practice. But in most cases the primary driver for the marketer and procurement is trying to deliver transparency and accountability to ultimately reduce costs, not necessarily build sustainable relationships.

In other words they see their agencies as suppliers.

What relationship do you have with your agencies?

There is the joke about two guys on an African safari. Suddenly a huge lion jumps into the centre of the camp and the two start running away from the lion.

One of the guys stops and starts to put on his running shoes.

His incredulous friend asks “What are you doing”.

He replies “I want to put on my Nikes”.

His friend shouts to him “There is no way you can outrun a lion”.

He replies with a grin, “I don’t have to outrun the lion, I just have to outrun you”.

The same philosophy is required to win in the current media trading situation marketers now find themselves in with a soft media market. It is well reported that marketers are concerned about the lack of transparency in media trading with media agencies setting up trading desks to trade media inventory.

Much of this inventory appears to be “bonus” inventory provided by media owners at no cost to the agency networks as part of the sales incentive used by media owners to secure share of market and share of advertiser budget.

While most discussion is about how to stop this practice, this approach is flawed as the situation has been created by a short term view taken by most advertisers to reduce the agency-cost of their media, with the media agencies compliant in this endeavour.

And the only people that seem to be profiting from this strategy are the industry auditors who get paid to go looking for “value bank” of “bonus” inventory and end up only finding refunds due to poor agency accounting practices.

Instead of begrudging the media agencies finding a way of profiting from the soft media market, the focus should be on how to benefit from this “value bank” of media inventory to a greater extent than your competitors and at the same time effectively reduce your media costs.

Most media owners have budgeted into their cost of business up to 20% and in some cases 30% or more of revenue as sales incentives. Compare this to the average fees paid by advertisers to their media agencies, which average at 3% – 5% of media spend globally according to the WFA.

So now the media agency has reportedly hundred of millions of dollars in inventory as a “value bank”. The question is not how to stop this, but how to benefit from this situation and get a greater share of the “value bank” and that is to run faster then your competitors.

The media agencies need to convert this inventory into income. They currently do this by:

1. Using it to provide a more competitive buying position to win business in pitches
2. Using it to to earn buying performance bonuses by exceeding buying benchmarks
3. Using it to achieve total payments based not on cost of media but related to sales or lower cost per acquisition

Smart advertisers are not seeing the inventory as their property and complaining that it should be given back to the advertisers, but work out how to cost effectively get your hands on more of this “bonus” or “value bank” than your competitors.

Here are two ways you can maximise your share of this “value bank” of media inventory:

1. Create significant financial incentives for the media agency to use more of their “value bank” to lower your media cost either against rates card or CPM or some appropriate measure. Spending $50, $100 or even $200 to get $1,000 in additional media above and beyond what everyone else is getting for a similar media spend is a good deal with a 5 times ROI even at the highest spend.

2. If you are in a more direct response category, such as financial services or telcos etc, put the direct response media cost and associated agency fee on a payment per sale. Work out what your typical media and media agency fee contribution to cost per acquisition, year on year, and then provide the agency with the opportunity to earn the media and fee as a payment per sale. This creates an opportunity for the agency to legitimately turn the “value bank” of inventory into cash. Price the level of payment correctly and you will be enjoying lower media costs against guaranteed sales.

There are possibly more ways, but the point is this situation has arisen because of the downward pressure on agency fees and the soft media market. It will not last like this forever, as the economy recovers media owners will be less likely to provide the level of incentives they are now.

Rather than complaining about the situation, the quick and the nimble have an opportunity to yield the benefits of the situation. But of course it is not for everyone. You need to have a very clear understanding of what is your current cost per media and where your buying position stands against the particular market to make sure you get the benefit, rather than just end up overpaying for the agency’s bonus.

So how can you benefit from the “value bank” of media being held by your agency? Leave a comment here or maybe get in touch with me directly to discuss.