Are agencies being screwed on fees?

New research suggests that agency remuneration may have reached crisis point, John Tylee writes.

The disconnect between the high-minded intention about how agencies should be remunerated and the way in which many actually are is starkly illustrated in two newly published pieces of industry work.

One is the latest best-practice guide on how to pay agencies, drawn up by leading industry bodies including the IPA and ISBA.

Among the principles set out in the guide is one that declares: "A client should expect to pay, and an agency should expect to earn, equitable remuneration, including a fair and transparent profit."

But if new research by the Marketing Agencies Association is any indication, clients are squeezing agencies until the pips squeak.

Based on figures supplied by the finance directors of MAA member agencies, the research suggests clients have forced down agency fees by almost 20 per cent over the past decade, with creative departments bearing the brunt of the cuts.

According to the survey, the hourly fees paid by clients for creative, account planning and account handling have fallen from £129.55 in 2002 to £105.68 last year - a drop of 18.4 per cent.

Clients' disinclination to invest in creative work is even more marked. The MAA figures claim that hourly fees for creative talent over the same period have plunged by 26.5 per cent.

It begs the question of whether agency remuneration has reached crisis point.

"There's a real danger that levels are becoming unsustainable," Tom Knox, the DLKW Lowe joint chief executive, warns. "Clients are under pressure to deliver more for less and that isn't going to go away."

Also here to stay is a fiercely competitive industry that has often been the architect of its own misfortune in its eagerness to take business at knock-down prices.

James Murphy, the Adam & Eve partner, says: "It's not uncommon for a client to tell an agency it has won the pitch but won't get the business unless it can match the price that another competing agency has quoted."

There are certainly no easy answers to a situation for which both clients and agencies are partly culpable and whose impact on adland is uneven.

Start-ups, whose overheads are generally low, tend not to be affected in the same way as big network agencies. They suffer the double whammy of revenues being eroded while being limited in what they can pitch for because of conflict.

Is anything to be done to break the cycle? One answer could be to make the most of depressed revenue streams with new technology that allows more to be done with fewer people.

Another may be to encourage clients to pay more for the services they need most urgently, such as high-level strategic advice. The MAA survey says client fees for planning rose almost 9 per cent in 2011 year on year.

"We work with several clients in an almost totally strategic consultancy capacity," Murphy says. "But you need clients with an appetite for it."

Knox, though, believes it would be an administrative nightmare for network agencies, where clients are paying for full service. "It would be difficult to unbundle," he claims.

In the end, agencies may just have to make the best of things. "I never look at agency rate cards," Jeff Dodds, Virgin Media's executive director of brand and marketing, says. "I expect to pay properly for the most effective output. What agencies choose to do with their remuneration is their own affair."

Got a view? E-mail us at campaign@haymarket.com

CLIENT - Jeff Dodds, executive director of brand and marketing, Virgin Media

"I'm surprised by the MAA's figures. Perhaps they reflect the fact that clients have been doing a lot more of their day-to-day marketing communications in-house.

"You could also argue that you can only charge for your creativity what the market is prepared to pay, that the market doesn't value creativity as much as it used to and that today it's more about the numbers than building brands.

"Perhaps what has happened is just a function of recession and investment will go up again. Clients want the best people and the right level of focus from their agencies. There's no point in screwing them down."

AGENCY HEAD - Tom Knox, joint chief executive, DLKW Lowe

"Pressure on remuneration means time has to be managed better. Client briefings need to be tight and strategy mustn't be decided on the back of creative work.

"If clients want more for less, they must work with us collaboratively to ensure we all get it right first time.

"At the same time, more agency remuneration needs to be based on the success of their work. Most clients are willing to share their success and there's a case for more payment by results.

"The industry hasn't done itself any favours by taking unprofitable accounts. It really undermines the value of what we do."

INDUSTRY BODY HEAD - Debbie Morrison, director of consultancy and best practice, ISBA

"The fact that hourly fees have dropped is partly a symptom of the tough and changing times in which we live, but also because of the growth of results-based remuneration models. Payment by results was included in only about 30 per cent of agency agreements 16 years ago; now it's 80 per cent.

"Compag, the ISBA procurement group, has been looking at new value-based remuneration models. The problem is that agencies are very conservative in the models they will adopt. And they are much too nervous about having robust, open and honest conversations with their clients about fees."

INDUSTRY BODY HEAD - Scott Knox, managing director, Marketing Agencies Association

"What's encouraging about the MAA survey is the rise in planning rates, suggesting clients do see it as important investment.

"However, the drop of more than 25 per cent in creative fees is hugely worrying. Agencies need to do more to prove the value of their creative output.

"Maybe they should also be saying 'no' to clients more often than they do. Maybe they should also show clients the spreadsheets and ask them where they think the cuts should be made. And maybe they should look more closely at small entrepreneurial clients capable of flourishing in a tough climate with the right marketing support."

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