Advertising is rarely a manufacturing process, but sometimes it can be
April 24, 2012
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.
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:
- High volume outputs
- Consistent or templated solutions
- 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?
Challenging some of the strategic notions of media agency structures and services
April 22, 2012
Recently the trade press in Australia had a headline that screamed:
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:
- Content agencies like creative and digital agencies
- 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:
- 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.
- 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.
- 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.
- 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?
- 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.
- 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.
- 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.
- 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.
Aligning marketing expectations to marketing budget when establishing the agency scope of work
April 19, 2012
A marketer recently provided their extensive scope of work to their preferred agency so the agency could provide a remuneration proposal. The problem was that the proposal was almost double the marketers budget for the agency fee.
This budget was prepared using the fees paid to the incumbent agency, which was about to lose the account.
The marketer was concerned that the potential new agency was over-charging and they had raised this with the agency. In the end they agreed to engage an independent third party to resolve the issue. Enter TrinityP3.
We took the marketers’ scope of work and using our Scope Calculator determined the level and mix of resources and using the salary and medium and high cost benchmarks for the market determined that the agency fee should be between $2.1 mil. to $2.4 mil. The agency proposal was $2.35 mil. within the benchmarked fee.
So why the discrepancy?
We can all have an expectation of living in a huge mansion in a blue ribbon location, but without the finances you need to be prepared for disappointment.
The marketer had been paying an “all you can eat” retainer of $1.2 mil per year to the incumbent for the past 3 years of the contract. With an “all you can eat” there was no reconciliation against the scope or volume of the work produced. The incumbent had been complaining for the past 12 months that they were under-recovering, but the marketer felt this was just a ploy to increase their fee.
We sat down with the senior marketing team and discussed the scope of work they provided as part of the review and asked them how much it reflected the previous year’s work? There was general consensus that the scope was the same year on year.
However, when we went through the specific tasks in the scope it became clear that there was an expectation that the new agency would take on extra work at no extra cost. We asked each of the brand leads to go away and score the elements of the scope of work based on ESSENTIAL/CORE or DESIRABLE/NON ESSENTIAL.
When we benchmarked the core work it correlated with the incumbent scope of work and was close to the scope of work that the original contract with the incumbent was based. But over the subsequent three years, the marketing team had added more and more tasks to the scope of work and the incumbent agency had taken on this work. We collected data on the scope of work delivered in the prior year from the incumbent agency and was not surprised that the benchmark fee was closer to $1.9 mil. based on high salary costs.
There had been a 58% increase in scope of work delivered by the incumbent agency between the first year and the final year of the contract three years later.
So here is the issue.
Rarely do marketers keep accurate track of the work delivered by their agency. Sure, financial systems within organisations will tell you within a cent how much you spent with a particular supplier, but we are yet to find a system that captures the volume, quality, quantity or complexity of the work delivered by the agency.
Therefore, with a retainer not linked directly to the scope of the work delivered, the marketers can increase their expectation of the agency output without any cost implication. The agency will respond by delivering the outcomes, but will often take actions to minimise the cost impacts to maintain margin.
The question is, where else in life can we allow our expectations to grow, without any direct impact in cost? There needs to be an alignment in the remuneration model so that as the scope of work increases the fee paid to the agency correspondingly increases.
It makes sense, right?
As for our marketing team, we locked in the retainer at $1.2 mil. to deliver the Essential / Core scope of work and then negotiated project fees for the Desirable / Non Essential work to be paid if it was requested by the brand teams.
We use our Scope Calculator and Scope Monitor to do this.
How do you link the scope of work to the agency fee?
Let me know with a comment here what works best for you.
Advertising industry addresses negative connotation, but it could be too little too late
April 17, 2012
Katharine Schafli, Business Director at TrinityP3 Hong Kong sent me a link to this story in AdWeek titled “Advertising gets face lift to attract young talent”.
- Agencies are fiercely competitive, backstabbing and eat their young (thanks Mad Men).
- Agencies invest little in training and mentoring staffers.
- General market agencies aren’t as techie-friendly as digital shops.
- Jobs are scarce.
The solution was not a traditional advertising campaign, but a website because as it was clear to the 4A’s and Arnold that traditional ads wouldn’t bring results for their new “Open Advertising” campaign.
“We didn’t even think about it because we need a dialogue, not a monologue,” said Arnold CEO Andrew Benett.
But the question is, is it enough?
One of the issues affecting attracting and maintaining talent in the industry is the downward pressure on advertising costs means the financial rewards of advertising are less attractive than many other industries.
And we are not just talking about salaries. Training, mentoring, corporate philanthropy and career planning all cost money. Revenue that many in procurement are increasingly less willing to be covered by overhead and profit margins and multiples.
If marketers and procurement only talk about sustainable remuneration, but are unwilling to support it and continue squeezing the margins, then no matter what the industry does to try and change perceptions, it will likely be unable to fund and deliver a reality.
Now I know that many will point to the recently reported profit margins in the holding companies like WPP, Interpublic and Publicis, but when you look at the numbers the increase is not strategy and creativity providers it is in digital, media, research, production and other marketing services.
So as any good marketer knows, a great advertising campaign is a fast way to kill a product that does not deliver to the hype. Could it be that in changing perceptions and raising expectations without agencies being able to deliver due to decreasing margins they will actually speed up the decline in attracting and keeping talent?
What do you think?
It is difficult searching agency details unless you know where to look
April 15, 2012
A marketer was questioning the cost of us providing a market review of agencies suitable for their requirements as they had a comprehensive list of suitable agricultural specialist agencies already. I asked how they developed the list and was told it came from the recommendations of the team at a prominent financial services company.
I immediately offered to review the list for them for free.
The findings were that every single agency of the 12 on the list had competitive conflicts. How? Because all of the people in the team had worked with these agricultural specialist agencies at previous jobs in the same category.
A better question is what type of information do you need about the agencies to be able to select the right ones? Beyond basic contact details you need to find out: current clients, key staff, core capabilities, number of staff, financial performance, company philosophy, offices, affiliations and networks etc.
We use a number of databases to keep track of more than 100,000 agencies and companies across the globe including:
- TrinityP3 Global Agency Register - which is our own 8 year old database with a comprehensive list of agencies and marketing services companies in the Asia Pacific region.
- Adstrument Online Agency Database - is available to us through the Marketing FIRST Forum and has an extensive list of agencies in Europe, North America and Asia.
- AdForum.com - is a subscription database through the AdForum Worldwide Summit with a broad listing across global markets.
What other sources are available?
Here are some other sources of agency information:
- Online directories – there are a number of online directories, mostly associated with trade press or publications. These are usually limited in the amount of information provided and often only include the most basic contact details, but nevertheless can be a good starting point. eg. AdAge, Adforum, BradInsightsUK etc
- Industry bodies – Organisations representing advertising agencies in each market will often provide details of their members and their services. While not comprehensive, it can be insightful into the agencies established enough to commit to supporting their industry. But remember that often there are separate organisations representing media, digital, promotional etc so make sure you find the right organisation for the services you require. eg. IPA, 4As, Communications Council etc
- Trade press – Every market has some type of trade press coverage and in some cases there can be multiple publications both print and online. These can be invaluable sources of information regarding agencies and their account wins and losses, appointment and award wins. This can be used to research agencies you have already identified as potential participants. eg. Advertising Age, Campaign, AdNews
- Agency websites – Most agency sites will provide their contact details and showcase their work at best, but agencies are hesitant to list incumbent clients or provide details of key staff beyond the new business director and the CEO / Managing Director. But agency websites give you an idea of how they position themselves in the market. After all the way they promote their own brand and design the user experience is an insight into what they can do for you.
- As colleagues and peers – Obviously avoid asking people that work in your category as most of their recommendations will lead to agencies with conflicts. But asking peers and colleagues working in other categories is definitely worthwhile.
- Ask the agencies – while some people suggest sending out formal RFIs to fifty or more agencies, this is wasteful and can be unproductive. It also flags to the industry that you are about to review and can hijack the process, especially if the incumbent has not been informed. Also in regards to capabilities, the agency will be inclined to be experts at everything. But a confidential discussion with the CEOs of the agencies you are considering is definitely worthwhile.
What other ways are there for getting information on the agencies you are looking for? Let me know by leaving a comment here.
Of course if it is all too hard, then you can contact us and we can do this for you.