Sharing the Cost Burden

It’s still a relationship business. But the terms of the contract between agencies and clients have changed. Personal chemistry, experience, and track record may get an agency in the door, but clients are seeking partners that can provide sales-building insights while minimizing costs.

Agencies are being forced to examine their resources and goals as clients conduct lengthy, intensive searches for long-term strategic partners. A shop’s internal costs have become fair game as clients try to standardize the rates they pay for creation of that free-standing insert or shelf talker.

Take Nabisco. In its recent six-month agency search, the company sought detailed breakdowns of agencies’ costs for everything from creative development to premiums. Agencies were asked to “budget out,” or provide estimates for more than 300 programs, so the snack giant could “benchmark” what those services should cost.

The process played out at on a senior level, with representatives from financing to purchasing to public relations joining promotion managers in the review. A committee surveyed agencies’ rate cards trying to arrive at “best practice” prices, say agencies who participated.

“All the agencies were measured against a very specific set of criteria, and (a current relationship with the company) was not one of them,” says Brad Esty, president of Alcone Marketing, Irvine, CA. Alcone was one of six new agencies named to the account.

Though the review was arduous, Esty says the final result was “fair.” Nabisco sought shops that could deliver “a fully integrated product that starts with strategic insight and translates into appropriate end solutions,” says Esty.

“There were two sides to the review,” says Jay Farrell at Chicago-based Davidson Marketing, another of the agencies Nabisco signed. “Nabisco was looking for quality agencies that could bring quality solutions who, at the same time, were willing to work with them to drive efficiencies into some of the costs.”

Number crunching

The pay might look reasonable to some. But agency compensation has declined over the last 15 years as marketing departments – under corporate value-analysis campaigns – consolidate agency assignments and press for lower costs.

“Over the last 10 years, margins have generally gone down in agencies’ packaged goods business, because profitability has gone down at those [manufacturers],” says Farrell.

Payment for services has declined as clients have sought to standardize costs, says Caren Berlin, promo group president and director of new business development at Greenwich, CT-based Clarion Marketing. “Companies in the mid-1980s were paying $35,000 to $40,000 for an FSI. Today, they’re paying $10,000 to $20,000, and the cost of production hasn’t come down proportionately,” says Berlin.

Fees that once equaled 15 percent of the total promotion budget have dipped below 10 percent, she says.

Compensation consultants enlisted by clients are prone to view services as commodities without considering the value agencies can bring to the table. “They will try to pigeonhole an agency into an advertising compensation philosophy,” setting fees based on percent of the total budget in the range of nine to 11 percent, notes Alan Maites, president of agency Robinson & Maites in Chicago. “It puts a squeeze on us because we can’t staff their business appropriately. Through-the-line services like direct and event marketing take more time to develop and execute. That percentage needs to be higher,” says Maites,

As agency income shifts from commissions on products and services to a fee-for-service model, clients want to understand how agencies are building those fees. So in the early stages of increasingly extensive RFP processes, they’re probing the health and financial business methods of agencies. Brands don’t want to pay for top salaries to perform nuts and bolts tasks.

“Clients are saying `We will pay for senior talent for strategy and program development, but not for executional work,'” notes one client consultant. “That can be disruptive to a lot of agency models, which are built heavy senior/light junior.”

Whatever the blended hourly rate, agencies can get burned if the client’s budget doesn’t allow enough project hours.

“I think a lot of clients feel that, agency to agency, the number of hours required for a project won’t vary that much. But there is a lot of variation,” such as the amount of work that needs to be freelanced out, says Jim Holbrook, president of The Zipatoni Company in St. Louis.

For direct mail and telemarketing campaigns, “we have to make very firm projections on financial return before they are even allowed to invest the money. Clients have become much more sophisticated in integrating financial controls,” says Sanna Mattson MacLeod, senior vp-account services at Jerry Schmidt in Smithtown, NY.

Watching the clock

Agencies are selling themselves for creative/strategic services and as agents for streamlining processes. Clients want agencies to help them set internal methods that speed project approval. For example, the agency may stipulate that if demands for more than two revisions on a shelf talker emanate from the client-side hierarchy, the client gets a revised estimate, notes one agency exec.

“The really smart clients are looking for ways to improve the working process between the agency and client, so fewer hours are consumed with the same result,” says Chicago-based Frankel & Co. executive vp-chief operating officer Dan Rose. “The client has a profound impact on a day-to-day basis on the number of hours required to finish a project.”

In recent months, agency execs say, more contracts have featured incentive clauses in which, for example, the agency has a chance to earn 10 percent above the retainer based on sales – or cost reductions – achieved. Results-based compensation works best in projects where results are most easily measured, such as a co-marketing program involving heavy sampling and couponing.

Rose sees a trend toward “value pricing,” where client and agency agree up-front on prices for projects with tight specs. The strategy makes costs more predictable for the client, incents the agency to hold down costs, and simplifies the process since “you don’t have to run back and forth getting estimates approved,” he says.

“(Value pricing) is not very far along, but as agencies and clients get more sophisticated in tracking costs, they will become more comfortable with it,” Rose adds.

Involvement of financial and senior-level executives in decisions that used to be made purely by promotion managers and marketing departments supports agencies’ efforts to get paid for valued-added services, says Maites. “Since [promotion spending] is now a line item, you get the attention of various departments, at higher levels, which allows you to discuss compensation as partners.”

“You can’t look at agency services like a commodity,” says Rose. Compensation consultants sometimes aren’t involved past the review process, so there is no one around to see if the client is getting value for the dollar. “If you’re seeking a long-term relationship, consultants’ compensation should not be based on how much they knock down the agencies’ services, but upon the balance between what the client is paying and what it is getting,” he says.

The shift in recent years to formalized, time-extensive RFP processes forces agencies to examine their own business goals more closely. “You can’t afford to be unfocused in your mission statement. We are looking for fewer, bigger, in-depth partner relationships,” says Alcone’s Esty.

Forays into less traditional channels or into regulated industries, which are keen to try new tactics, still yield better results for agencies feeling constrained by the by-the-numbers packaged goods procedures. “These [companies] are more willing to take the marketing risks and go outside the box,” says Maites, whose agency gained GTE as a major client last year. Clients in the business-to-business area especially are “spending dough,” adds Farrell.

The lengthy agency search that Kellogg Co. concluded last month with the help of consultant A. T. Kearny required an extensive amount of time and effort, says Berlin at Clarion, which was named for project work. “What Kellogg did was very similar to what all our clients are doing. They are involving purchasing people to a much larger extent. And they are trying to standardize what they pay for certain creative elements.”

However, Kellogg was primarily looking for great ideas. “People were not eliminated because of costs. They were eliminated in the early rounds because they didn’t have the resources or the strategic thinking,” says Berlin.

Reviews are forcing agencies to evaluate the financial management of their businesses, which can lead to profitability.

Yet agencies – who are staffing to provide the strategic solutions clients seek – may fairly ask to be rewarded for their work.