This is a guest post by Florence Garnier - a member of the Marketing FIRST Forum, the global consulting collective co-founded by TrinityP3

“We are operating in one of the most competitive sector of all,” says Maurice Lévy, CEO of Publicis Holding group, to worldwide agency relationship consultants on third day of the Paris Ad Forum summit. “Competitive, because agencies are fighting one against the other to win new business, and secondly because once they have won a budget, their task is to make their client win against its competitors, and lastly, because this talent industry is all about egos…and thus competition”

In uncertain economic times, marketers are trying to find communication solutions within the limit of their organizations to implement more reactive and interactive strategies to meet consumer’s needs. With a strong time and cost pressure some of them are questioning the added value of communication agencies…

Make or buy?

It is often said that agencies “sell ideas, orchestrated by talents, and executed on different communication channels” …

“If an agency can be replaced by a senior art Director, it’s not an agency anymore” declares Marco Tinelli, CEO of fast growing international digital agency Fullsix. Because some agencies are not perceived as bringing enough added value, some advertisers (retail, financial services…) tend to internalize some communication functions such as production of creative assets or community management. For those who go along that route without giving it a second thought, there is a high risk to consider communication a commodity, thus loosing the brand heart and spirit. Owner of a strong emotional territory, the luxury sector is known to nurture some defiance of the communication agencies…

With some noticeable exceptions, when both part make the most of client and agency creative side: Ogilvy has put the Louis Vuitton legacy “in motion” with the “journey” worldwide campaign featuring Keith Richard, Sean Connery or Angelina Jolie, JWT has built a whole product and communication territory for Maison Cailler, Nestlé’s chocolate premium brand. “The only thing, which makes an agency relevant in the food chain, is the emotional creative aspect” underlines Maurice Lévy. “Big ideas last long” says Rémy Babinet, Head of creation and co founder of BETC. “Our added value lies in our capacity to attract, hire and build teams of talents” insists Mercedes Erra, co founder of the same BETC, HAVAS’ group “jewel of the crown”.

Scale or skills?

In order to establish a closer relationship with their clients some agencies prove to be very successful in trying new models. Some focus only on their core expertise: “we keep the managing inside, and the doing outside”, explains Luc Wise, one of the founder of HEREZIE, a 18 months years old agency, operating for 16 clients, among which Essilor or Chevrolet.

Some others have suppressed the account management function (“no bullshit”) and try to limit “the number of dots on the map”. Creative people liaise directly with the advertiser. This has proven very successful for: Fred & Farid, operating from France with 200 people of 20 nationalities, on budgets such as Martini, Weight Watchers, Orangina, Société Générale…

Praised for its Youtube campaign for Tipp-ex, Buzzman, a six-year-old agency of 45 people focused on digital content has the same credo and commits to the advertiser results:  “the agency remuneration is linked with the achievement of KPI’s awareness/engagement/virality”

Preparing the future together?

To support their clients in tackling the marketing challenges of the future, some agencies are building new practices, and some develop R&D programs. From Fullsix perspective, new practices are: experimentation, acceptance of failure, speed of action, and measurement as ground for continuous improvement. With a different scale of action, Publicis has 300 people working in R&D within the Vivaki structure, regrouping media, digital, a nerve center, as well as a “watch system”. The holding company has also built a partnership with Google, conscious that the “Googles of the world” have business models built on scale whereas communication agencies are built on skills.

Strangely enough, the pride of the Publicis group is not its largest company, but DENUO, an original initiative founded in 2006 by Richard Tobaccowala, aiming at detecting and supporting start ups in their development, thus giving birth to the marketers of the future. In France, BETC also subscribes to this kind of initiative with the “start up lab”, supporting e-loue, vestiaire de copines, MyLittleParis et Supermarmite helping them to become brands.

Enabling consultants to meet with the “best in class’ or ‘best in class to be’ agencies on one market, this Summit has been a new opportunity to tackle the issues of the marketing industry. In today’s world, cost is far from being the only criteria; it’s also very much the technology and know how which will make the brands expand.

People and ideas will remain at the very heart of the industry….

While the statement that the industry is on the “cusp of a meltdown” is melodramatic, the current media agency remuneration model is unsustainable. But many in the industry have known this for a number of years.

It is interesting that in the April 20, 2012 AdNews report, Simon Rutherford lay the responsibility with the media agency management and their “greed and egos”, but it is the buyers of these services, the marketers, that are equally to blame.

Demands for lower cost from media agencies, driven by procurement, has seen media agency fees drop globally to an average of around 3% of media spend according to the World Federation of Advertisers (WFA) in 2011. The downward market pressure has achieved the result desired by marketers, but at what cost?

The current situation is predictable as in the face of falling revenue and profit, it is natural for agencies, like all companies to look for new or additional sources of revenue. Here enters the media owners, the third party in this relationship and one who have always been a key player in the relationship.

While media owners play both the marketer and the agencies equally, it should not be forgotten that the media agency was originally a construct of the media owners. Rather than dealing with thousands of advertisers, it was certainly easier forging relationships with a smaller number of “agents” in relationship terms dictated by the accreditation system that ensured the media owners where paid.

Today we have the marketers offering 3% of their total media spend as “compensation” for the agencies’ services, while in many cases the media owner has budgeted 20% or even as high as 30% of the media spend as a sales “incentive”.

In the past this was the 10% – 20% declared commissions, depending on the market and media category and the additional added value. Today this is now euphemistically called “non-media income” and can include anything from commitments for no-cost media inventory to payments for “services”.

Many industry “auditors” have jumped on the bandwagon here and suggested that regular audits can eliminate this behaviour, but in most cases these arrangements are almost impossible to detect and the audit process will almost certainly drive the process further underground.

The warning bells were sounded in 2010 when the WFA released their Media Charter, with a strong emphasis on transparency. It was reinforced locally last year when reported again in AdNews February 16, 2011 that the media agencies locally, through the Media Federation of Australia (MFA) were resisting the Australian Association of National Advertisers (AANA) introducing the same charter locally.

Three months later the issue was “broadened” to encompass more agency sectors, as reported in AdNews May 20 2011, and disappeared until now. But none of the other agency sectors manage the same significant level of investment on behalf of a client with a third party like media. Creative, digital, public relations, sales promotions, events, experiential will be investing typically less than half of their revenue with third parties. But media agencies manage 97% of significantly larger total media spends with third parties whose business model has allowances for significant costs of sales.

In these circumstances trust is important. Here an agency is managing significant sums on behalf of an advertiser so transparency and accountability is essential. Not just in the spend but in the way the marketers pay for these services.

Here is where the advertiser, the buyer, is responsible. Caveat emptor – let the buyer beware. Buying at the lowest market price comes at a cost. Perhaps rather than compensating agencies for their cost of business, moving to reward them for the value created would be a smarter strategy. This could be the media value delivered or shock, horror, sharing in the value created.

But it seems ironic to me that under the Golden Rule, the man with the gold makes the rules. Advertisers are in a situation where they made the rules and are  now complaining about the outcome. If this is the case then perhaps it is time to change the rules.

This article appeared in AdNews on April 26, 2012.

The terms paid, earned and owned media are fairly well established in the parlance of marketing and especially media and channel strategy. But recently in NYC at the WFA Global Marketer Conference I saw this research presentation by Initiative Media on rethinking the application of these three media channels, which they presented in Cannes Lions Creative Festival last year.

The most interesting insight here is to think about paid, earned and owned as component parts of the whole media strategy and not separate and distinct approaches. Through their global research across global brands and multiple categories they found that each channel has a very distinct but complementary role to play in brand and sales building.

In a global business environment there are still significant local cultural issues that require marketers to operate in a global framework with local customisation.

The irony here is that while it makes common sense that earned, owned and paid are three parts of the whole channel strategy to engage the customer in the brand, within most organisations these are often managed by separate and distinct functional teams using separate specialist agencies and service providers.

What this means is that the customer experience can often be disjointed, unless the marketer is able to achieve alignment and collaboration between the various stakeholders and agencies.

What are your thoughts on alignment of paid, earned and owned media? Let me know by leaving a comment.

A client’s procurement team asked me to review their current services contract to ensure it reflected current ‘best practice”. Apart from the usual problems with intellectual property, the clause that jumped out was that the agency would deliver a 5% per annum decrease in costs due to productivity efficiency improvements.

That is that the agreed annual fee would be reduced by 5% per annum over the term of the contract to reflect these improvements in efficiency. I state that twice because I had to read the clause twice before I asked them why?

“Well, advertising is a manufacturing process and with all of our manufacturing suppliers we add this clause” was the overly confident reply.

Advertising is a manufacturing process if everything you produce looks the same.

Firstly, the agency fee was significant and 5% was about $150,000 per annum.

Secondly, there is an underlying assumption that the primary cost of “manufacture”, in this case being people, would not increase in cost each year.

Thirdly, where did anyone ever think advertising is a manufacturing process?

What most agencies produce is bespoke solutions to specific marketing, advertising and communication problems.  Each solution will often require a unique execution and therefore if you were to consider it a manufacturing process then it would be one where every production run requires total tooling up from scratch, meaning that economies and efficiencies are difficult to deliver.

But there are some parts of advertising that can be seen as a manufacturing process.

The usual way to identify these opportunities is to look for:

1. High volume outputs
2. Consistent or templated solutions
3. Heavy production requirements

This is usually in categories like retail or financial services or telcos. Areas with high volume, consistent, production heavy outputs like sales catalogues, brochures, flyers, direct mail letters, e-dm and in some cases traditional media production like television, radio, press and magazines.

But to deliver the economies of scale and the efficiencies, be that 5% per year or even more, then the marketing team must be engaged to accept the compromises and changes in process required.

1. Templating: Rather than inventing from scratch each time, templates are developed for the various executions and then the focus is populating these with the required content as cost effectively as possible rather than focusing on strategic and creative innovation each time. eg. Retail price and item advertising or Catalogue page grids.

2. Production Uncoupling: Packaging production requirements to achieve economies in production using the same suppliers providing volume discounts. Again, this means limiting options in suppliers used and therefore limiting range of quality. eg. Catalogue photography or video post production etc.

3. Automation: Many labour intensive and therefore often expensive production processes can be automated. There are many tried and proven print management systems that use pre-agreed templates allowing marketers and other end users to select from pre-agreed options and templates to create cost effective outputs. eg. Local area or local store marketing, catalogue production and even video production can be automated.

4. Off-shoring: Labour costs are often the single largest component of the advertising production budget and therefore these can be minimised by moving these services from markets with high labour costs in the west to lower labour cost markets like India, China, SE Asia, Eastern Europe and Russia and Central and South America. The important consideration in management systems and ensuring the appropriate skill sets in these markets. eg. Many companies are offering off-shoring services to their larger clients for both print and especially digital production.

The thing to note about all of these options is that the more you identify the manufacturing component of the advertising process, the more you need to limit the options to deliver the cost efficiencies. As Henry Ford is apocryphally reported to say when he developed the production line for the Model T Ford, “You can have any colour you like, as long as it is black”.

So before you demand efficiencies from your agency, make sure you identify the areas and the limitations you are willing to accept.

What areas can you be more efficient?

Recently the trade press in Australia had a headline that screamed:

“Woolley questions RACQ agency consolidation”

The story linked my opinion on agency consolidation, which is that it is not right for everyone, with the fact that the RACQ in Queensland was undertaking a pitch to do just that – consolidate their creative agencies.

Across the region and increasingly across the globe we are discussing with clients the ideal agency roster. Is it better to have a single global agency network across multiple markets? Or different best of breed agencies in different markets?

There are very different thoughts depending on if you are talking about:

1. Content agencies like creative and digital agencies
2. Channel agencies like media planning and buying agencies.

You see if it is content, economies of scale can be delivered with having a single network, where one strategy or idea is developed and then implemented across the network, with a focus on localising the implementation within the globally agreed framework for the brand.

But what about the channel agencies handling media planning and buying?

Last year the WFA surveyed their members on media agency remuneration and one of the interesting results is that 4 out of 5 of the advertisers said that they appointed media agencies on a national or market basis, while only 1 out of 5 appointed global media agency networks. This is steady from the pervious survey in 2008.

Lets look at the reasons why more global advertisers would be choosing media agencies on local market basis than going for a global roster.

The obvious reasons are:

1. Agencies of all types can vary on a market by market basis, but media agencies have very market specific metrics especially around buying that can quickly highlight the inconsistencies in performance of an agency network across different markets.
2. Even global digital media owners like Google, Facebook and the like have market or regional sales teams to negotiate deals on a market basis rather than specific global deals.
3. In fact, very few media proprietors are global. The political nature of most paid media is it is very much local, or at the most regional, as countries look to exert some level of control over the media in their territory.
4. There is little benefit in appointing a global agency using the argument for economies of scale, as the agency in each market needs to resource to deliver the services in that market, and with the agency fee typically 2% – 3% of media billings for traditional media this is a relatively small opportunity to reduce the cost of business.

The idea of achieving efficiencies through a global media network is not one practiced by the majority of global advertisers. Consolidation with a single network does provide convenience in that there is one go to person for when the relationship is under-performing. But the convenience comes at what cost?

1. Often the network of agencies will have patchy or inconsistent quality across that network, leaving the advertiser hoping the poor performers are in the less significant markets.
2. The few global media opportunities can be negotiated by the media agency in the market where the head office of the global media proprietor is based on behalf of all markets.
3. Rarely are the economies of scale achieved negotiating an agency network deal. In our experience the network will need a layer of management to co-ordinate the agency network internally leading to additional cost.
4. When savings are delivered they are often through an impost on the quality of the resources applied to the business on a market by market basis, exactly where you want quality people negotiating savings on a campaign basis.

What is your ideal approach? Have you successfully delivered efficiencies and savings through media agency consolidation? Or did it come at the cost of effectiveness? Let me know what you have found by leaving a comment here.