MEDITATE ON THIS . . .

• All of the 90+ job positions for a major digital agency are now specifically defined for the industry by MorganAnderson and can be benchmarked for digital agencies
• Digital hourly rates are now fitted in accepted industry ranges and are straightforward as well as accessible
• Digital hourly rates can now be benchmarked with confidence given the private and public body of work now available
• Digital agencies prefer hourly-rate discussions and can provide greater transparency for this approach

• Strategic Focus
• Required Creative Content
• Itemized Deliverables (Outputs)
• Agency Performance Measurement
• Priority Ranking
• Complexity Ranking
• Timeline
  

• Fee $ Cost Per Digital Deliverable (Output)
• FTE Per Deliverable
• Fee % Commission Rate Equivalent
• Value Based Compensation

Click Here to View the Patent

The publication is illustrative of many tools developed and used by MorganAnderson to benchmark, assess and audit advertising agency compensation and related matters across all types of marketing communications providers, including media agencies, general advertising, creative agencies, digital agencies, sales promotion, direct marketing, public relations, diversity agencies such as Hispanic, African American and Asian American, pharmaceutical agencies, event/sponsorships, corporate identity, marketing strategy, production and implementation services, graphic design, and a host of other marketing and advertising service providers. Core competencies at MorganAnderson include advertising agency compensation benchmarking, agency performance review, advertising agency search (via Lee Anne Morgan & Partners), agency relationship management, trends impacting advertising spending, value-based compensation methodologies and benchmarking, agency scope of work (SOW) and staffing plan assessment, and best practices in advertising compensation and agency economics such as salaries, FTE, overhead, profit, and multipliers. The approach has not issued as a patent.

A White Paper by

Daniela Raggetti and Arthur Anderson of MorganAnderson Consulting
and Chuck Hatsis of Surge Consulting

Executive Summary

In a recent study by the CMO Council, $1.5 Trillion is the annual global external spend by marketers on marketing communications. This is an upward advertising economic trend and is a large target for marketer procurement to focus on when seeking improvements in how they source, manage and align resources such as advertising agencies and marketing services providers. From our individual assignments, we find there can be a range of a 2.5% to 25% in marketing supply chain efficiency without loss of effectiveness.  Applying that to a $1.5 Trillion global annual spend at the midpoint of range, this means $18 Billion in potential annual advertising procurement savings.

Drawing from our experience on client engagements across many industries, the co-authors identify Six Key Obstacles standing in the way of improving Marketing Supply Chain efficiency and effectiveness.  They are:

1. Marketer Accountability
2. Absence of a Codified Agency Compensation Methodology and Contract
3. Agency Compensation Tied Only to Inputs
4. Agency and Marketer Alignment
5. Media “Group Think”
6. Cost Containment vs. Value Added

Overcoming obstacles requires fundamental changes to status quo thinking relating to marketing and advertising sourcing, reward systems, communications specificity, media selection, and alignment between agency and client marketing/procurement. Variables include corporate culture, knowledge, and implementation skills. Resulting benefits are better execution, lower costs, value added, and, importantly, happier supply chains.

Background

There are many obstacles that prevent marketing supply chains and advertising agency procurement from being more efficient and effective.  This paper focuses on six key ones we have observed in our work as external advisors that, when overcome, make a big contribution in terms of money and resources to a marketer:

1. Marketer Accountability
2. Absence of a Codified Agency Compensation Methodology and Contract
3. Agency Compensation Tied Only to Inputs
4. Agency and Marketer Alignment
5. Media “Group Think”
6. Cost Containment vs. Value Added

The following are some of the facts from a recent study by the CMO Council that illustrate the magnitude of the opportunity and the untapped potential of identifying and correcting obstacles of the type discussed in this paper.

• $1.5 Trillion is spent annually on marketing communications worldwide, providing a large target for Marketers to improve how they source, select, manage, and align their agencies and other marketing services providers
• $330 Billion (or 22%) of marketing communications dollars are allocated to the production, management, and procurement of marketing content
• Around two-thirds (64%) of surveyed enterprises have regular collaboration between marketing and procurement and tighter relationships between the CMO and CPO are evolving
• Nearly two-thirds (65%) of surveyed marketers target print production, warehousing, and delivery of marketing consumables for greater sustainability (carbon footprint) for improvement, yet only 17% of them focus on centralizing diverse marketing supply chains as key to pinpointing waste, redundancy, and improved sustainability
• Only 25% of marketers have undertaken a comprehensive audit and analysis of costs and process efficiencies in their marketing and advertising sourcing
• Few marketers conduct a strategic analysis of marketing supply chain responsiveness, audit cost components, review advertising benchmarks, or regularly review supplier performance and yield
• Marketers looking for marketing supply chain improvements look either to the CMO to streamline this (56% did) or procurement (31% did)
• “Creative” design/development is viewed as the area in the marketing supply chain with the greatest potential for process, productivity, and performance improvements  -  41% of marketers were recently looking to this area as a source of new cost containment

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The Six Obstacles

For each Obstacle we provide 1) a definition, 2) solutions we have used in the field, and 3) a case example of experience-tested examples on how to overcome the obstacle and enhance the marketing supply chain.

Obstacle 1.
Marketer Accountability

Obstacle Defined:
At many observed companies, marketing managers are held to a different standard of accountability than their agency and functional peers are with regard to hitting deadlines and line item budget accountability.  As a result, value is sub-optimized.

Solution:
When timelines slip due to unrealistic marketer planning or poor execution, agencies are often expected to absorb the time overages without additional compensation.  To compensate, agencies factor timeline slippage into the rates they charge and the hours they quote for task completion, costing the marketing organization more than what is possible.

While there is no place for CIOs to hide when a new system implementation is not up in time for a deadline or when a timeline overrun blows the budget, CMO budget overages caused by timeline slips or lack of execution can usually be hidden and offset by canceling or delaying late-year initiatives and canceling Q4 media runs.  To the CEO and CFO, the CMO still comes in “on or under budget.”  And just as it is hard to quantitatively link marketing activity to revenue generated, it’s just as difficult to quantify revenue lost when non-working dollars replace planned working ones, when planned media doesn’t run, and when planned initiatives are canceled or pushed out to future quarters.

This Obstacle can be addressed by:

• Tying CMO and marketing personnel compensation to objectives that measure direct outcomes and their ability to execute (e.g. the ratio of working to non-working dollars, CPM efficiency, TRPs planned vs. delivered, etc…) in addition to coming in “on or under budget.”

• Negotiating granular contracts, where both marketer and agency have “skin in the game,” where aggressive fees on the agency side are matched by aggressive timelines and performance requirements on the Marketing side.

Case Example:
Situation: A Financial Institution had a sequential approval process for its print ads.  If a downstream approver modified something, it went back to the initial approver to start down the path again.  Agency personnel expended additional hours as the client went through several iterations.

Action: The agency contract was re-negotiated so the marketer received reduced pricing in exchange for marketer commitment of no more than two approval iterations.  After the second iteration, the agency was to be paid for their time at a pre-negotiated hourly rate.

Result: The approval process was re-designed so that all approvers were in the same room at the same time, up front, eliminating iterations.  The client saved money. Agency personnel were freed to perform other activities.

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Obstacle 2.
Absence of Codified Agency Compensation Methodology and Contract

Obstacle Defined:
Usually, agency remuneration definitions and performance measurement processes are not clearly stated and codified by marketers and agencies, leaving them to be resolved ad hoc, creating misunderstandings, and negatively impacting client/agency relationships.

Solution:
While there may never be “universal,” industry-wide accepted definitions for agency remuneration, there are codification “best practices” related to the processes of selecting, calculating and negotiating agency remuneration:

• Focus on the details.  Drop “it goes without saying” when it comes to defining the remuneration.
• Involve and invest the time of an experienced marketing finance person in the type, design, and definition of every component of agency remuneration.  Agency remuneration is a strategic imperative.
• Devise consistent reporting formats, timing, audit, and disclosure requirements
• Codify the above in the agency’s contract using examples and attachments

Case Example:
Situation: The large, global and highly diversified/integrated advertising budget (including traditional media, direct marketing, and digital) of a global consumer products company is managed by a global agency that is part of one of the largest communication networks. Client and agency have successfully partnered for over a decade. Their agency agreement was drafted 10+ years ago and the remuneration model chosen was labor based with calculation of direct hours/staff costs and of a multiplier per country inclusive of overhead and profit.

No specific definition was provided in the agreement for the calculation of the direct client hours vs. indirect and no breakdown was specified in the contract for overhead and profit. Moreover, the by-country multipliers had not been revised for more than a decade.

The marketer assumed over the years that the agency would calculate the fee components “as per industry standards.” Given that there are no universal “standards” for definition of labor-based fee components, the agency applied the methodology they were most familiar with and accepted.

Action: The external consultant was brought in to help resolve the confusion, clarify definition misunderstandings, and to benchmark multipliers. An opinion was issued that focused on the full re-writing of the contract (in order to also include the several amendments issued over the years) with specific and detailed provisions on:

• Calculation of direct client hours, non-client agency hours, and total actual hours
• Calculation of salary used as “base”
• Breakdown of overhead and profit components
• Definition of costs reasonably included in overhead
• Design of quarterly reports with detailed information on actual and budgeted fee components

Furthermore, a comprehensive audit clause to ensure the return of all rebates and discounts (including volume discounts) was developed.

Result: The lack of transparency and focus on assumed “common sense” definitions created tension and waste of management resources for both parties.

The ultimate result was:

• An Agency Services Agreement in line with current best practices to ensure full transparency for agency compensation and audit
• Clear, streamlined reporting procedures
• 5% savings on annual agency remuneration
• An open and fruitful dialogue on agency remuneration and related policies and procedures between client and agencies

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Obstacle 3.
Agency Compensation Only Tied To Inputs

Obstacle Defined:
Critics of agency remuneration models tied only to inputs (salaries, hourly rates, costs, etc.) argue they foster low productivity rather than efficiency; fees go up as staff is added regardless of the actual value produced or the “quality” of the work. On the other hand, models based only on outputs are complex and encompass metrics that are difficult to calculate, track, and manage; these make it challenging to arrive at a fair fee that is value based and economically viable for both parties.

The “golden mean” is a methodology that takes into account and balances both inputs and outputs.  Most marketers and agencies are comfortable with input-based models that cover agency costs and a profit and where an output/performance compensation model provides a balancing element and ties profit to “value”. Some marketers, who have tried to shift to output (only) models, have discovered they require lengthy and elaborate processes and extensive fact databases for design and implementation.  With open dialogue, transparency and goal setting, balanced, multi-faceted compensation systems work well for both marketer and agency.

Solution:

• Tie base agency remuneration in part to performance and “value-add” indicia (e.g., increase in market share and sales, agency performance evaluations, etc.) as these are perceived and acknowledged by marketing and financial stakeholders, employees, customers, and others as appropriate.
• Incorporate qualitative and quantitative evaluative elements identified through diagnostics and testing.
• Involve the agency in all phases of the process: design, negotiation, and data gathering; the agency needs to embrace and commit to everything and you will learn a lot about your agency in this regard.
• We have seen successful examples where an agency proposes a series of SOWs (each dimensioned with a fixed fee and staffing plan) that specifically spells out outcomes, deliverables, accountability, base fees, and rewards, particularly for execution-intensive projects (vs. strategic projects which can be handled differently based on specific agency resources required).
• The client counterpoint to this is independent benchmarking of inputs and outputs so a “golden mean” is achieved.

Case Example:
Situation: A Global Consumer Products company has an AOR global agency aligned with a large agency holding company. Annual ad spending is on the order of $1 billion. The marketer had previously implemented a comprehensive makeover of its compensation model from commission on media to fees linked to inputs and outputs (performance).  Remuneration is calculated by country and brand at headquarters.

Action: Consultant is asked to assist, particularly with benchmarks, given client needs to avoid an “agency review” of the agency due to its outstanding work.  Consultant helped determine agency costs, FTE levels and other inputs that could be compared to benchmarks, as well as develop benchmarks for performance outputs.  Consultant ultimately asked to provide a “fairness” opinion on agency compensation arrangement that would address internal auditor’s question:  “Is this agency’s scope, staffing and fee ‘good value-for-money’ and ‘fair’ for us?”

Result: The approach needed to ensure a disciplined remuneration system that worked for both parties and was understood by both parties in the same way.  Definitions and methodology were key.  Since the agency’s work was considered “outstanding” by the client, through use of a “fairness opinion” rendered by an independent third party, this approach was intended to avoid an “agency review” that would otherwise be required by terms of the agency contract.

It was essential that outputs and inputs be holistically considered in evaluating compensation so a “value approach to compensation was in place. The approach taken was several-fold by assessing and benchmarking a) agency inputs (scope, staffing, salaries. overhead, and profit, and multiplier) and b) value outputs.  It was formally determined by the third party that compensation was indeed “fair” and in the context of these findings: 1) the cost of average agency FTE was +39% above benchmark due to staffing senior skew, 2) overhead rate was below benchmark, 3) profit was much higher than benchmark, 4) multiplier was within benchmark range, and 5) a sample of cost/deliverable showed none had a variance above + or – 10% of benchmark.  In conclusion, the agency compensation methodology was also revised to have more based on performance/value (outputs) than had been assigned to inputs (labor/overhead).

_________________________________________

Obstacle 4.
Agency and Marketer Alignment

Obstacle Defined:
In difficult economic times, all can feel stressed and taken advantage of when things do not work out as planned and when blamed for outcomes beyond their control.  Advertising and other marketing communications professionals are especially sensitive to this, as neither marketers nor agencies have good measurement tools in place yet, though some progress is being made.  When agencies suffer from this, it often leads to a “victim” mentality.  Marketers often go to the other extreme and adopt an attitude of “we know what we’re doing, so do what we SAY and not what we DO”. There not only is lack of alignment, but in our experience, partnerships that are outright adversarial.

Within the marketer organization itself, the disciplines of marketing, finance, audit, and procurement are often not aligned.  None of this is beneficial to marketers or agencies.  Lack of alignment negatively impacts an agency’s work product effectiveness and efficiency and can be particularly detrimental to Brands and their relationships with customers.

Solution:
Resolution of this obstacle takes different forms.  Here are some:

• Reduced to its essence, it is about honest communication between client and agency.  Each needs to be candid with the other, not worrying about temporary hurt feelings. Candor only occurs in a minority of cases.
• Agencies need to be willing to negotiate larger risk-and-reward ranges to remuneration.  Agencies (except, typically, for smaller ones) are by nature risk-averse and avoid putting “skin in the game” in legally binding ways.
• Agencies need to evolve their models, structures and strategic investments so they can generate economic results for their clients (and, of course, do well for themselves and their owners).  This is something the agency needs to do.  Clients can guide and provide input but cannot do it for the agency.
• Many advertising agencies are still structured to create broadcast TV commercials, and for this type of agency:
  • In legacy model supply exceeds demand
  • Their economics become commoditized
  • They devolve into the role of the “unappreciated” (e.g., dictated fees, overly aggressive audits, work without payment, turnover through account reviews, etc.)
• Many large agencies still have senior-management intensive structures that are no longer realistic: they’re too expensive to maintain, not responsive to client needs, not good for morale, and hinder the agency’s creative talent pool. Senior account managers, in particular, need to demonstrate their worth to clients and to colleagues to avoid elimination.
• The good news is that many digital/interactive agencies have figured out how to deliver measurable value, are highly profitable, are fun places to work, and are able to walk away from clients’ lowball offers and work elsewhere.
• Other professional services firms such as management consultants, lawyers, and architects, as well as a handful of agencies, have gone on the offense and are pro-active. Those that deliver economic value and thought leadership thrive.

Case Example:
Situation: The client was Automotive, and its global creative agency is part of a major holding company.  Procurement is very unhappy with the agency’s annual fee (even more than one would expect). Client marketing is very satisfied with the agency’s work, as are consumers measured in terms of sales. All agree something is “off” with agency staffing and fee although opinions differ dramatically.  The agency thinks “everything is OK.”

Action: Agency requests, and client totally supports, a third party expert’s staffing and agency compensation benchmarking and assessment (i.e., “fairness” opinion).

Result: The independent experts’ fairness opinion concluded that:

1. The agency’s economics were within a reasonable industry benchmark range for salaries and multiplier although agency profit margin was at the lower end of range and overhead at the higher end;
2. Fee cost per deliverable was way above high end of range, and, importantly;
3. The client’s Scope of Work for the agency was insufficiently detailed (“poor”) creating slippage in timelines and deliverables where inefficiencies and ineffectiveness materialized; and,
4. The client’s approval process was burdened with hierarchy driving agency’s costs upward to meet client’s processes.

However, once these were identified, with everyone on the same page in concurrence, changes were made with quarterly monitoring becoming essential to keep matters on track.  Adjustments were also made to provisions of the client’s contract in the areas of transparency and reporting.  There was cost containment too — 21% of agency annual fee would result in client fee savings and re-investment but agency’s projected profit margin was substantially increased.

_________________________________________

Obstacle 5.
Media “Group Think”

Obstacle Defined:
Many advertisers sub-optimize their TV investments by advertising on over-priced programs.  They often choose high reach, high profile, high cost programming that are justified by arguments of “environment,” and “audience engagement.”

Solution:
The problem with these arguments is that there is very little empirical data to support that high CPM (cost per thousand) ads are worth the premium price paid and intuitive arguments that suggest that they’re not.  For example, if asked what program you were watching the last time you saw a GEICO caveman ad, would you remember?  Chances are that you’d remember the ad but not the program you were watching.  If one remembers the ad but doesn’t remember the program, then placing the spot on a few carefully assembled “efficient” CPM TV programs might be able to deliver the same number of impressions for significantly less.

This Obstacle was overcome by:

• Testing the effectiveness of high-reach, premium priced programming vs. high efficiency programming to see if the premium is truly justified (e.g., was there better re-call, higher consideration, higher likelihood to recommend, etc.).
• Testing the effectiveness of high efficiency programming to see if there is any degradation to awareness, consideration, likelihood to recommend, etc. (e.g., did the baseline measures of any of these drop or was there no change).
• Asking one’s self if a single exposure during the Academy Awards, NFL Football, or NCAA Finals is really worth 2 or 3 times more than reaching the exact same viewer thirty minutes prior, after, or on another day of the week while watching another program.

Case Example:
Situation: This Financial Services Company favored high-profile, high-reach, high-cost sports programming.

Action: A portfolio of efficient TV programs was carefully re-constructed that satisfied the planning parameters (e.g., target demographic, TRPs, day-part mix, etc.,) that the client had given to the agency.

Result: The efficiency program, when compared to the one recommended by the agency, cost 25% less and delivered the same number of impressions to the same target demographic. The client chose to divert a portion of its high-profile TV budget to more efficient TV programs to test its effectiveness.  A year later, it concluded that there was no detrimental impact to the brand, awareness, etc., dropping $8M of efficiencies to its bottom line, and altered its go-forward TV media program strategy.

_________________________________________

Obstacle 6.
Cost Containment vs. Value Added

Obstacle Defined:
Procurement brings value to the Brand through economics and cost assessment and process management.  Striking the right balance between efficiency and effectiveness is learned over time.  Those that do not create this equilibrium can wreak havoc on Brands, marketing communications, and agency relationships.  Everyone on the client side, including supply chain, needs to know what motivates or de-motivates talent and what the Brand’s needs are.  Marketer internal alignment whose goal supports Brand betterment and wealth is a critical element towards obtaining the best client-side talent and external agency talent.

Solution:
Great talent (“superstar”) is expensive at any senior level, particularly when done by an external agency or outsourced … although there is nothing wrong in doing it this way if it returns measurable “value-for-money”.

There are different ways to approach this Obstacle:

• Determine which internal resources would not survive without perennial external support and then replace them or wholly outsource their roles to eliminate redundant cost.
• Employing internal “superstars” vs. paying 3X for the same talent on the outside.  Marketers can use a few flexible “superstars” at entry and mid-levels vs. solely at executive levels.  This can save not only 75% per person (vs. hiring as external) but also produce the same or better value.
• The case can be made for outsourced superstars for solving a specialty issue or to add value that cannot otherwise be obtained.
• External agencies can and must add value, and be aware the risk inherent in internal brand management.  A marketer brand director sometimes assumes he/she knows how to manage an ad agency better than the agency itself.

Case Example:
Situation: Client is a Major National Retailer.  Its large digital/interactive agency is part of an agency holding company.

Action: Metrics were recently developed for comparing a digital agency’s staffing, fee economics, and deliverables to industry benchmarks for like agencies.  Procurement’s task was to determine whether the agency’s annual retainer fee is fair agency compensation, i.e.,

1) Within a range of “reasonableness” so the company does not have to engage in an otherwise mandated agency review, and

2) Given the level and type of agency talent provided to the client account whether “value” was being delivered for services rendered for the client’s brands.

Result: Independent experts determined a) client’s Scope of Work was viewed inconsistently by the parties and hence at variance, b) client and agency did not use the same definitions when developing the agency’s staffing plan, and c) although the client thought the agency’s fee costs were “high”, in fact when benchmarked independently they were within a reasonable range.  Marketing agency benchmarking required agency positions to be aligned to industry definitions and agency economics compared to like agencies in like manner so there was comparability.

The agency’s fee did not change as the consultant gave the client its opinion that the agency’s fee was “fair and a good value”.

_________________________________________

In Conclusion

Six Obstacles stand in the way of improved Marketing Supply Chain efficiency and effectiveness:

1. Marketer Accountability
2. Absence of a Codified Agency Compensation Methodology and Contract
3. Agency Compensation Only Tied to Inputs
4. Agency and Marketer Alignment
5. Media “Group Think”
6. Cost Containment vs. Value Added

Overcoming these obstacles requires fundamental changes to status quo thinking relating to reward systems, communications specificity, media selection, and alignment between agency and client marketing/procurement. Variable include corporate culture, knowledge, and implementation skills. Benefits are better execution, lower costs, value added, and, importantly, happier supply chains.

•••••

The Authors:

Daniela Raggetti and Arthur Anderson are Principals at MorganAnderson Consulting, New York, which is a marketing communications financial management and agency compensation/contract advisory firm.  Arthur, as co-founder of the firm and with a background in law and finance, focuses on advertising agency benchmarking, value-based agency compensation, and marketing communications financial management for marketers. Daniela, as a former global agency CFO and with an economics, CPA and operations background, focuses on advertising agency compensation and contracts, digital agency compensation, and trends in advertising economics. She/he can be reached at draggetti@morgananderson.com and aanderson@morgananderson.com.

Chuck Hatsis is President of Surge Consulting, Chicago, a firm specializing in Marketing Procurement.  Prior to Surge he was Senior Manager in the Strategy and Operations Practice of a “Big 4” consultancy, AVP Supply Management Services at Nationwide Insurance, and SVP Business Services at ABN AMRO.  He can be reached at chatsis@surgeconsulting.com. Also see www.surgeconsulting.com for further information.

In the past year, it has become possible to benchmark digital/interactive agency fees, staffing plans, economics, scopes of work, and deliverables. This not only provides a handle on digital agency efficiency and effectiveness, but also contributes to developing strategies for agency compensation and performance arrangements that are fair and provide value-for-money.

Trends below were developed using MorganAnderson proprietary data followed by Case Examples derived from actual MorganAnderson assignments across multiple marketer clients.

TRENDS

Marketers are re-balancing their advertising spend more and more towards digital channels. Zenith Optimedia projects U.S. Internet spending to increase to 13.1% of total spend in 2010 and 17.1% in 2011. Internet spending as a percentage of total U.S. ad spending increased from 6.0% in 2005 to 16.6% expected in 2010.

The main reasons for the continued expansion in our opinion are:

• Many marketers find Internet ads more measurable than ads in other media and, today, measurable criteria are preferred, particularly when budgets are tight.
• Internet ads are seen as delivering behavioral, demographic, and regional targeting and this means more efficient spending.
• Marketers continue moving a greater share of spending online to more closely match the increasing time people spend there (especially younger audiences).
• The internet offers speed and flexibility to respond to changing advertiser needs and spend and is particularly appealing to cash strapped companies.

Growth within Internet channels is uneven given video advertising, for example, is still rapidly gaining ad dollars, while marketers will spend substantially less on static display ads (banners) in 2010 than just the year before.

It is well for a global marketer to keep in mind the variances between regions that Internet spending is as a percentage of total spend and how this is expected to change …

• Zenith Optimedia projects that in 2009 U.S Internet spending overtook Western Europe as a percentage of total spend.
• By 2011, both U.S. and Asia Pacific are expected to exceed Western Europe as percentage of total spend.

CASE EXAMPLES

Below are from recent digital agency assignments which have been sanitized:

1) Conforming Digital Job Definitions. A key to benchmarking digital agency economics is to conform definitions of digital job positions so they can be benchmarked properly. Job position salaries are, after all, the “base” for traditional labor-based fees.


For example, if a Digital Project Manager has a benchmark hourly rate in the range of $135 to $149, then for purposes of benchmarking and comparability, the definition of this term must be clearly differentiated from a Senior Project Manager with a benchmark rate of $160 to $177, and a Digital Traffic Manager with a benchmark rate of $124 to $136.

To give this aspect of fee assessment granularity, it is now possible to compare 90 digital agency job positions to benchmarks.

2) Benchmark Hourly Rates. Once job positions are defined and benchmarked, it is possible to take an agency staffing plan and benchmark it to hourly rates so an agency’s proposed fee can be proposed to benchmark.


For example, if a digital agency fee is within + or – 5% of benchmark fee, this is considered fair and equitable and if there is a variance, as is often the case, then discussions with the agency are in order to sort out why, using the variances as guidance.

3) Benchmark FTEs. Fee cost per digital agency FTE can also be benchmarked as one means of providing a fee “value”. This can be done by a) agency department, b) client channel, and c) overall.


For example, for a client’s digital channel, an overall fee cost per FTE of $218,000 would be a reasonable benchmark for the combined account services, creative, production, research, and planning departments.

4) Benchmark Fee Cost/Deliverable. Deliverables for a digital scope of work can be defined as well and reduced to a per deliverable fee cost.


For example, an agency’s deliverable(s) can be compared to other agencies comparable deliverable costs as a perspective on your agency’s value-for-money equation.

We always invite your questions and comments,

Arthur Anderson
aanderson@morgananderson.com

Daniela Raggetti
draggetti@morgananderson.com

by Arthur Anderson & Daniela Raggetti,

MorganAnderson Consulting

On behalf of marketer clients, MorganAnderson periodically draws upon its own and reliable third-party intelligence to trend global advertising spending and agency economics.  In this white paper, we provide trends from 2009 through 2014.

We intend this to help client-side marketing, procurement, finance, and legal with budgeting and to aid their negotiations with marketing services agencies.  In the paper, we deal with advertising spending trends, agency economic trends, and the substantial link between GDP trends and advertising spending. We may update 2009 trend data as agency holding companies report their actual 2009 results and indicate what 2010 may look like.

Macro Trends:  Advertising Spending

• Global advertising spending by clients in 2009 suffered the sharpest decline in any single year since the Great Depression
• The outlook for advertising going forward is one of subdued recovery across spending/media disciplines
• Media spending in the US declined by 12.9% in 2009 as estimated by Zenith
• 2010 will see a decrease in total spending although we anticipate healthy growth for digital/interactive, events, and PR
• Global growth for digital/interactive in 2010 is estimated at 9.2% by Zenith

At Table 1 below, comparative U.S. and Global advertising media spending growth is set forth for 2008 through 2011, and we work with estimates by three major global media agencies.

The most likely economic scenario for the U.S. is a slow-paced recovery with high unemployment. This will keep growth in check by hampering consumption in the mid-term, especially in the U.S. where 70% of GDP is, directly or indirectly, generated by private consumption. Weak consumption means lower revenue for marketers, and this is a concern of many major global advertisers. Many industry analysts expect “frugality to stay, among consumers, for a long time” in the U.S.  Sir Martin Sorrell of WPP, when he announced a drop in profit of 47% for 2nd Q. 2009 at WPP, noted that it would be some time before marketers begin to spend as they did several years prior.  It will be interesting to see what the chairmen of the holding companies predict for 2010 when they report upcoming 2009 final data.

Globally, projections for 2009 of steep revenue decline in the advertising industry have been industry specific (e.g., finance, automotive, and business travel), but not for others (e.g., retail, consumer goods, and value products). Of the 79 countries covered by Zenith, 25 were still growing, in 2009, with many of these small, young markets, but it also included some large markets such as China and India. China will likely soon overtake the UK to become the world’s 4^th largest advertising market, while India will overtake Norway, Mexico, and The Netherlands to become the 14th largest.  Predictability of timing, however, is poor.

Digital/internet advertising was holding up better than expected in 2009, and its characteristics have proved more attractive in a recession than traditional disciplines.   Internet ad expenditure is forecast to grow 10.1% globally in 2009, and Zenith by 2011 expects it to account for 15.1% of all ad expenditure, up from 10.5% in 2008. Most of this growth is expected to come from paid search.  In the U.S., search advertising is expected to grow 20.0% in 2009, with traditional display expected to grow 3.0% and classified 1.8%.

There is said to be an 81% relationship between advertising spending and GDP and other macroeconomics, and we provide data to 2014 at Table 5 below.

Micro Trends:  Agency Economics

Although some agencies are reluctant to provide granular data on their economics even to clients, confident agencies provide such information in the spirit of transparency if they are given reasonable assurances that non-disclosure will be honored. It is fortunate, however, that useful agency economic information is obtainable from publicly available reports and modeling, notwithstanding whether an agency provides data to its clients or not.

In this white paper, we focus on comparative agency profit margins as the metric to use in this paper for trending.  Other metrics we can use are comparative staffing equivalents (FTE), agency salaries, agency overheads, and cost per defined deliverable.

At Tables 2, 3, and 4 below, we trend pre-tax profit margin comparables for a) global holding companies, b) regional operating agencies, and c) large operating agencies in two major markets, U.S. and UK.  Although profit margin is but one element of agency compensation and the tip of the iceberg at that, it is one both agencies and clients give undue focus to these days. Information for these tables was obtained by publicly available sources.

In summary:

• For the public global holding companies, Publicis and Omnicom exceed WPP pre-tax profit margins and these three exceed IPG margins (Table 2)
• For large operating agencies by region, North America profit margins exceed Europe and AsiaPacific/Other margins (Table 3)
• For large agencies in two major markets, U.S. profit margins exceed UK margins (Table 4)

Tables 2, 3, and 4 were compiled by MorganAnderson using its modeling, publicly-filed SEC reports, UK government company reports, Morningstar, trade publications, and other sources deemed reliable by MorganAnderson.

It is likely that several years will pass before agency profit margins return to levels of the mid 2000s.  Perhaps this will not happen for a number of years.  However, if non-traditional disciplines such as digital/interactive, events, and PR experience strong growth, as seems likely to happen, and if innovative agency business models are adopted, agency profit margins could be the beneficiary.

Macro Trends: GDP & Related Metrics

Given there is an 80% correlation between GDP and advertising spending, it is highly useful to look at trends in GDP and related macroeconomics (Chart 5).

Most macro indicators for major (OECD) countries point to the end of the most severe recession in decades as growth has resumed in recent months, albeit at a moderate pace and with sharp differences between countries. The recovery was driven by the broadest, biggest and fastest demand-supporting government response known. Failing banks were supported by trillions of public cash and guarantees while central banks drastically reduced interest rates. These extraordinary interventions, carried out consistently by the major world economies, helped control panic, support the financial system, and ebb the fall in private demand.  Area-wide unemployment is expected to continue to rise well into 2010 and to fall only modestly in 2011 from its peak.  Some see a double dip recession as well although there is certainly no consensus on this.

The expectation is for moderate recovery going forward.  2014 Global GDP is expected to underperform 2007 for both advanced and developing/emerging markets (Chart 5).  Given the substantive relationship between advertising spending and GDP, as new GDP numbers are reported, we intend to update these trends and correct to market.

If you have a question or wish to discuss any aspect, please feel free to contact us.

Arthur Anderson, aanderson@morgananderson.com

and

Daniela Raggetti, draggetti@morgananderson.com

Copyright ©2010. MorganAnderson Consulting. All Rights Reserved.

SHRINKING the ‘ELEPHANT’ in the ROOM

• To continue as a finalist until such time as Client’s search process is completed
• Agency can use public-domain material for presentation purposes
• Work product presented by Agency not to infringe on third party rights
• Ownership of copyright and other IP on work product presented to Client during search process resides with Agency
• If/when appointed as Client’s Agency, copyrights and other IP transferred to Client
• Agency not to use work product presented to Client for itself or third party for TBD period after search process is completed

Comment

This commentary is by David Rae in an AdAge article by Jack Neff on marketing procurement and cites MorganAnderson in its reference when stating “fewer than one in ten marketing procureres have experience in marketing.”   In addition to the comment by Mr. Rae, there are comments by Jonah Bloom, AdAge, and Darren Wooley, P3 Australia

MorganAnderson Consulting

Article

January 26, 2010

The relationship between marketers and their marketing communications agencies has come a long way, particularly in the area of agency compensation. Unfortunately, there is still too much conflict, resulting in too many agency “reviews” that often result in a marketer switching shops without making a serious attempt to align the financial interests of both parties.

Changing agencies usually is a disruptive process for the brands involved. With the recession making everyone’s business decisions ever more critical, a more thoughtful approach to the marketer/agency relationship is in order. Although the bottom line is still of paramount importance, more attention needs to be paid to the day-to-day communications and expectations that define the relationship and drive the compensation model.

The nice thing about the 15% media commission model that marketers used to use for compensating agencies was that it was simple. Take the 15% commission and apply it to the media spend. But as client spending shifted increasingly to other types of marketing communications from media advertising—whether it was promotion, direct marketing, digital, events, or PR—the commission model fell out bed.

Of course, it didn’t help when media inflation came along and clients began to understand that agency profits for large accounts escalated beyond normal and, more important, that there was little if no link between agency compensation and agency staffing on the account. In the late 1980s, there was a shift toward new “labor-based” fixed fee models. These were based on a description of services required, staffing plans and FTE’s (Full Time Equivalent employees) but they generally fell short of best practices for both advertiser and agency.

Along the way in the continuum of compensation models, one thing has changed very little: agency non-transparency. As clients have become more sophisticated about agency economics, their requests for transparency have increased.  Adding corporate procurement people to the mix has served to increase these requests. However, masters of consumer psychology that agencies are, they have proven to be adept at masking their cost structures—from overhead to staffing to profit.  Whereas at one time it was standard for an agency to apply the same cost criteria to all of its clients, it has become standard for some agencies to customize their cost model to each client. What used to be an apples-to-apples comparison is now fruit salad. Adding to the marketer’s dilemma, now the agency holding companies are negotiating their operating agency’s compensation and contracts, and some holding companies have implemented “rules” forbidding transparency.  How long this will last is uncertain, but it adds to a marketer’s suspicion that it is not being treated fairly. An unfortunate side effect of this is that the focus of the discussion between client and agency is “money” (agency economics), rather than the quality and performance of the agency’s work.

What are marketers to do?  Barring a sudden end to agency non-transparency, the alternative consists of new methodologies, compensation processes and performance metrics. Someone armed with the right arsenal of quantitative and qualitative measures of the marketer/agency relationship can, in virtually all cases, independently benchmark them against industry standards. Such an approach also serves to help shift the focus of the discussion from “money” to quality and performance of the agency’s work and its impact on the client’s business.

One of the newest tools is the “best practice” Scope Of Work (SOW), a structured document linking deliverables, media spending and agency resources to the brand(s), process and results.  Although the concept of a SOW document has been around since the demise of media commissions, only recently has it been given a full context of definitions and metrics to make it a key performance indicator for agency efficiency and effectiveness. For advanced marketers, a best practice SOW is also a key component for constructing the new coin of the realm, Value Based Compensation.

It is not uncommon for an agency to propose assigning, say, 132 full-time employees (FTEs) on a $250 million account that, based on similar accounts, could do just fine with 100 FTEs. Such disparity can easily represent a difference of $5 million in fee costs over a year’s time, as well as increasing senior agency’s management needs. Moreover, each agency has its own opinion as to not only total account staffing levels, but the seniority of each individual staffer involved. Without benchmarking to industry norms, who’s to say what level of staffing is appropriate? A best-practice SOW document results in an optimal staffing resources plan that can be benchmarked while, at the same time, encouraging constructive dialogue between client and agency rather than “money” talk. It also embraces client marketing for a critical role rather than leaving it solely in the hands of client procurement.

In this difficult economic environment, agencies are well advised to be proactive and collaborative in their clients’ efforts to bring greater transparency to the table. Yes, a “bad” client can use it against the agency, but a “good” client will appreciate the candor, and it will enhance the client/agency relationship. If an agency is reluctant to talk about underlying economics, the path open to marketers will be to talk about SOW, staffing resources and work processes. Done correctly, a best-practice SOW document is win- win for agency and client.

Above all, a best-practice SOW is a “living” document and a communications tool that can help to forge dialogue and transparent negotiation from its inception and throughout the year. It is a touchstone document for the effective management of the agency as well as discipline tool for the marketer.

Arthur Anderson is a partner and co-founder of MorganAnderson Consulting. He can be reached at aanderson@morgananderson.com.

Comment

Mr. Dru puts it out there which I admire, agree or not. And Tim Williams offers up a methodology that can be used by data-rich mega marketers, but can we get rid of the word “value-based compensation” please? It’s about performance and results.

Can agencies: be proactive; take financial risk to get reward; measure impact of deliverables; provide transparency (which is declining); and,yes, look at cost of resources (transparent hourly rates are one way) and benchmark these as one of multiple metrics to evaluate? Some already do these things. There is no silver bullet. Mr. Dru makes good points, and properly doesn’t put it all in the lap of procurement. Why doesn’t the 4As establish a Roundtable of non-agency experts to recommend solutions to the problem? It’s about performance and results, not only money.

Arthur Anderson
MorganAnderson Consulting

Article

Self-destructive. This is the best way to describe clients’ attitudes when it comes to the thorny subject of agency compensation.

By now, most of the industry has spoken out to say that our clients have gone too far in their agency negotiations — that often, these discussions have sunk to an intolerable level. The squeeze on pricing undoubtedly has negative consequences, and not just for agencies. I believe these never-ending negotiations will reveal themselves as profoundly counter-productive for our clients. The future will show that such dealings will undermine clients’ strength in the market.

There is no arguing the business realities; nearly all companies have suffered in this economy. But there comes a point in time when by being exclusively focused on cost-cutting, we miss out on the big picture. We risk value erosion.

It has become fashionable for everyone to blame “procurement” for their problems. It’s an easy way for others to off-load responsibility. The real decision-making, however, lies with CEOs and marketing directors. They’re merely leaving the dirty work to procurement. Procurement execs are often given no other option than to squeeze for more so-called efficiencies, year after year. In doing so, they have created a death spiral, making it impossible to attract and compensate the talents we need to deliver the value-creating ideas our clients demand.

This pressure has had one benefit: Our profession has become a model of productivity. In this business, people work very hard and increasingly fast. That’s why Charles Handy, respected professor at the London School of Economics, said that all companies would do well to look at how advertising agencies work.

That said, in recent years we have passed below an acceptable threshold. Recommendations are now written in just a few days and campaigns are conceived in hardly more, whereas it has taken two or three years, if not more, for the R&D department to develop a new product. This imbalance is an aberration.

Agencies don’t dare to denounce it openly for fear of being seen as being badly managed, but all of us are painfully aware of the dead end towards which our profession is heading.

Back when advertising agencies still bought media space, I used to remind our clients of a forgotten truth. If the agency commission paid was 10% of the total advertising costs, the work produced by this 10% is what gave the value to the 100% invested. It was a good argument to fight against too-heavy revenue reductions. Today agency-fee negotiations and media-rate discussions are separated. By considering these two activities separately, our clients have lost sight of the fact that one actually multiplies the value of the other.

This has taken on particular resonance. Thanks to the interactions between all communications disciplines and the growth of digital channels, we all know that we can obtain the same level of effectiveness with partially reduced media investment. But this has a price, and our clients must understand that a part, even minor, of the savings realized in media spending should be redirected towards strengthening creative resources.

The media landscape has shifted and the structure of our business has been modified both dramatically and permanently. Ratios are no longer the same and the need for creative resources has exploded. We now have a myriad of new opportunities for creative expression. The volume of creative output at agencies is increasing with no end in sight. More content being conceived and produced should result in more remuneration, but the opposite trend has taken hold. And this scissor movement is deadly.

We’re paying for the years of the apparent frivolity of some (as has been so well caricatured in “Mad Men”). We are paying the price of being in a creative business. We are paying the price of belonging to an industry which has not learned how to protect its own interests. We are our worst enemies.

To top it all, the holding companies that head many agencies don’t always protect them as they should. Under the pretext of offering certain clients “group holding-company solutions,” agencies are too often dragged into negotiations where the amount of cost savings becomes the determining factor. In so doing, holding companies undermine the very networks they want to see grow.

They are undermining their clients as well.

Our profession is poorly defended and relatively poorly paid. When you compare the hourly rate of a top-tier consultant (think McKinsey, Bain) to that of a senior ad-agency executive, the ratio is two to one. This gap is not justified. I know what they bring to clients, and I know what we bring.

This industry cannot avoid a reinvention of its business model. We have to change the paradigm and invent value-based compensation systems.

Consider this. Online, an idea can actually become its own medium. When this is the case, when the idea is so powerful that it becomes a medium, is it not legitimate to remunerate not only the idea, but also its capacity to generate millions of contacts? Must we really give it away? When an advertising slogan becomes the motto of a company and influences corporate strategy or the brief for new product development, must we give it away? And when we develop an iPhone application that changes the nature of their transactions, there again, should it be for free?

To all these internal industry questions must be added the considerations linked to the world that surrounds us. A world in a profound state of change. We are approaching times of a new kind of growth, which will be more qualitative and will take account of social issues such as the environment, health, ethics and diversity. It is up to us to help our clients to decipher these complicated times and to find their successful way. This will be the new mission for agencies.

We are faced with a paradox. On one hand, clients have never leaned upon their agencies more. On the other, never in our industry history has it been more difficult to justify a decent level of remuneration.

I therefore would like to start this new decade by formulating the following call to action for both clients and the agency community: that 2010 be the start of a new era where the subject of agency compensation be addressed both objectively and calmly.

About the Author

Comment

The consultants and ANA are speaking to two different aspects of the client/agency equation. Bob Liodice is surely correct in that periodic performance reviews of an agency are critical so long as the perspective is timely shared between client and agency. The challenge is to have credible qualitative and quantitative criteria in place that can be compared over time. Likewise, the consultants are correct in that “musical chairs” agency switching is costly in terms of time and money. There are far too many agency searches conducted these days. It is often a waste of time as client behaviors often do not change.

Other aspects of the equation are, for starters, agency transparency; defining “value” (performance) in the relationship; and a best-practice Scope of Work with variables such as deliverables, spending, rework rate, resources (FTEs) articulated by client and agency working together.

Arthur Anderson
Partner, MorganAnderson Consulting

Article

NEW YORK (AdAge.com) — For some marketers, a new year means a new agency. If that’s your company’s annual resolution, you should know that line of thinking will lead to a bad reputation in adland.

Agency new-business executives and industry search consultants report a growing blacklist of sorts, composed of marketers that tend to put ad duties into play every year or two. Thanks to rapid turnover in the chief marketing officer seat (a CMO’s tenure averages 28 months, according to the most recent figures from executive search firm Spencer Stuart) and pressure to perform amid the troubled economy, long-lasting agency-marketer relationships are becoming more rare.

“I have a huge disagreement with people changing their agencies like they change their underwear,” said Jane Bedford, partner at the Bedford Group, a consultancy based in Atlanta. “Our clients tell us it takes them about three to six months for them to get fully engaged with their agencies. It’s very difficult for an agency to get up and running, and totally please the client, within the first year.”

And that’s coming from an exec who actually benefits when accounts go into review.

Take Chipotle: In January 2004, the burrito chain tapped Mother, New York, to be its first advertising agency. Six years later, that account has cycled through four different shops: After Mother came TDA Advertising & Design, Boulder, Colo.; Devito/Verdi, New York; Butler Shine Stern & Partners, San Francisco; and, its latest, hired this month, Compass Point Media, a division of Campbell Mithun in Minneapolis.

Thinking twice
The regularity with which Chipotle changes its agencies is more than most. But it’s hardly the only marketer with a penchant for flitting from shop to shop. Retailer Ikea and luxury automaker BMW are known for frequently reviewing their creative and media accounts, and Mitsubishi Motors North America moves its ad business around a fair amount as well.

Too many reviews could also mean that, over time, the very best shops will think twice before going after those accounts. “Agencies do a risk assessment when deciding whether to pitch an account, and there’s definitely a toxicity factor they look at. If [a client] does a lot of reviews, the client gets blacklisted,” Ms. Bedford said.

Even at a time when agencies are hungry for more revenue, such flip-flopping has consequences: Two different new-business executives said two accounts they wouldn’t touch with a 10-foot pole are 1-800-Flowers and Quiznos, as the businesses seem to be too volatile, regardless of their billings. The marketers did not respond to requests for comment.

Another consequence is cost: Constantly opening reviews can be incredibly costly and disruptive to both the marketer — for whom travel and other fees associated with agency reviews racks up — and the agencies, which shell out thousands of dollars in the hopes of crafting the perfect pitch that could win the business. If they do land it, there’s often an added cost of having to quickly ramp up freelance and full-time staff to work on the new account.

Michael Houston, chief marketing officer at Grey, New York, said the window for agencies to prove themselves has lowered dramatically.

“Results in our business are no longer evaluated on a semi-annual or quarterly basis, but on a monthly, weekly and sometimes daily basis,” Mr. Houston said. “Couple that with the level of dollars attached to the advertising line item on a client’s balance sheet, and we find clients forced to justify their marketing ROI in a way never seen before. In that process, agencies sometimes become the scapegoat, with the easy solution being to call an agency review.”

Consistency
What’s more, “serial reviewers” risk damaging their brand with inconsistent marketing messages.

“Clients shouldn’t be constantly jumping ship,” said Lisa Colantuono, managing partner at AAR Partners. As communication between consumer and client evolves, “they need to work together with their agencies. If that foundation is constantly changing, the marketer is hurting themselves in the long run in terms of building brand loyalty with the consumer.”

The Association of National Advertisers, the marketer’s trade group, doesn’t exactly see it this way. The ANA’s position is that conducting formal agency evaluations on a regular basis offers the best chance for fixing problems before frustration sets in. It believes that the companies that have two-way assessments at regular intervals have the most-productive relationships. “Having a formal agency evaluation process is always imperative but even more so at a time of heightened focus on marketing accountability,” Bob Liodice, president-CEO of the ANA, has said.

Said Grey’s Mr. Houston: “Desperation may be something new to many industries in the recession, but it’s something the agency business has known, embraced and perpetuated for decades. Agencies only have themselves to blame by playing right into the hands of these serial agency-review ‘players’ [and] making it too easy for the client to bully us.”