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Is There a Trend Towards Consolidating Multiple Agencies
Within a Single Holding Company?

In a recent report by Morgan Anderson in connection with a study for one of its global marketer clients, an issue was whether there exists a trend towards use of multiple agencies residing within a single agency holding company.  We did this work by survey, interviews and our own internal experience in the agency compensation and agency assessments/search areas.

The following is an executive summary and data from the report.

Thank you to those who participated in this effort.

A.  Study Background

1. A first approach for the study was to verify how large multi-national marketers select, and utilize their advertising and other marketing services agencies.  Questions asked by the client for the study to answer:

• Do clients assign their marketing services needs to several different agencies within the same agency holding company?
• Or, do they use them on a more limited basis, opting to select agencies on a Best-in-Class (non-holding company) basis?

2. A second approach was to convene an Insight Group comprised of client marketing and procurement professionals, external industry consultants, and senior agency executives using a customized questionnaires relating to selection and remuneration of agencies.   Areas covered included:

• How agencies are remunerated and current trends
• Use of incentives and current trends
• Use of holding company agencies and current trends
• Agency consolidation by global marketers and current trends

B.  Executive Summary

Key findings:

• No, Not a Trend to Single Holding Company. Major marketers consider using multiple agencies within a single holding company, but, in fact, generally do not end up doing this. When asked to name specific marketers who use multiple agencies within a single holding company, or those who contemplated agency consolidation with this objective in mind, no one could name specific examples.

• Integration by Holding Companies Lacking. While use of multiple agencies within a single holding company or consolidation of agencies under one holding company roof is frequently considered, it is infrequently done due, in part, to the inability of the holding company to integrate talent across its various agencies.

• Economies of Scale? Major marketers indicated there is a high client cost to consolidation of agencies within a single holding company, and the incremental cost of doing so on the order of $1 million plus.

• Agencies Seek its own “Silo” Profit. For the most part, holding companies exist to “hold” agencies, and not to integrate or collaborate them, although they sometimes aggressively market this.  The focus remains on each agency within the holding company to deliver a profit goal; agencies are not structured for integration or collaboration with sibling agencies unless the client is highly motivated and skilled to making this happen.

• “Best-in-Class” Agency Selection Prevails. Clients take a “Best-in-Class” approach for their agency portfolio pretty much without regard to holding company parentage but, rather, for the best agency available for that client’s needs.

• Agency Remuneration a Factor? The form most favored is labor-based fee, or a hybrid of fee + performance incentive.  Also emerging is “value remuneration” but the meaning of this varies so substantially it is in the eyes of the beholder and the variations on this theme are many.  It is however, in Morgan Anderson’s opinion, an area that offers great opportunity to clients, particularly where it is constructed with a fixed retainer fee for part of the annual remuneration plus a variable fee based on project deliverables.

C.  Some Details

Use of Holding Company Agencies: The Facts

Our Methodology: In addition to diagnostics relating to this subject with marketers and other independent consultants as referenced in the 2011 Study, MAC analyzed the use of all agency types (full service, creative, media, digital, PR, promotion, etc.) across a broad spectrum of marketers.  Marketers were selected from Ad Age’s list of the Top 100 Advertisers: a) the largest, b) relatively middle sized, c) relatively smaller sized marketers, and d) we added three industry specific companies.

• Key Finding: “Best-in-Class” is followed in practice: We found no “extensive” use of multiple agencies within a single holding company and no particular trend in that direction.  Essentially, marketers are attempting to select their choice of “Best-in-Class” agencies for each function from many holding companies.  In some cases, there were a few agencies within a single holding company for a particular client, but this was not considerable on any basis.  Some of this has to do with geographic needs (i.e., a global network agency is usually not of equal quality or capability in all markets).

• Key Finding: “Economies of Scale” are not a driving force: Contrary to the query oft times asked by marketers of whether or not there are ‘economies of scale’ enjoyed by consolidating all agency types under one roof, our research and experience show that this ultimately does not prove to be the case.

We studied U.S.A. marketers based on relative advertising spending to reach our conclusions:

1. Top 10 U.S.A. Advertisers (U.S.A. Spending $2.0B-4.6B): These included P&G, AT&T, GM, Verizon, American Express, Pfizer, Wal-Mart, Time Warner, J&J, and L’Oreal.

None of these marketers placed anywhere near all of their business within a single holding company.  Instead, they used agencies from many sources, including independent agencies. There are some instances where a marketer placed major business within a holding company such as Amex with WPP using O&M and Mindshare, but they also used many other agencies outside WPP.  More typically, J&J used DDB from Omnicom, Deutsch from IPG, and JWT from WPP. There does not seem to be any trend towards consolidating within one holding company. These marketers continue to seek their “Best-in-Class” agencies, as they have for years.

2. Marketers 51-60 (U.S.A. Spending from $630M-743M): These marketers included Progressive, Kellogg, Estee Lauder, Samsung, LVMH, Best Buy, State Farm, BMS, Mars and Wells Fargo.  We included these marketers in order to juxtapose their agency portfolios with the largest marketers (Top 10).

There were a few isolated instances where marketers used more than one agency from the same holding company, but no one used all from within a single entity. Kellogg used Burnett and Starcom from Publicis … but no one else. Mars used BBDO and TBWA from Omnicom … but no one else.  More typically, business was spread throughout many holding companies.  The extreme was Samsung using Cheill (house agency), Burnett (Publicis) and BBDO (Omnicom).  No trend again towards single holding company usage.  Just solid use of ”Best-in-Class.”

3. Marketers 91-100 (US spending from $385M-411M): These marketers included Kia, Dish Network, Clorox, Hewlett-Packard, CVS, Dr Pepper, Burger King, Dell, Fry Electronics, and Colgate. These were selected to delve even deeper to ascertain if the pattern of holding company usage changed as the media spend became smaller.  It did not.

Typical of this group, Dell used Arnold from Publicis and Mediacom from WPP.  Once again there was no trend towards sole holding company usage.

***

Should you wish specifics of the study or to learn more, please give us a call at 212-741-0805 or email aanderson@morganderson.com.

Copyright 2011. Morgan Anderson Consulting. All Rights Reserved.

A Morgan Anderson “Best Practice” Series

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The Backstory

When American Express engaged Morgan Anderson in 1994 to conduct a year-long assessment of global agency fees, they said, if successful, it would be the first time a viable methodology for benchmarking, assessing, and brokering global agency fees was fully accomplished.  In the early 1990s, American Express, along with other global marketers, had failed to attain goals in this area. True, commission arrangements were applied globally, but understanding and negotiating fee arrangements for global agencies was a new challenge for marketing and procurement given 1) the need for an acceptable methodology that could be applied consistently year-to-year to every market, and 2) the lack of agency transparency, especially under the commission and hourly rate systems.

The American Express goals were to: a) analyze agency staffing, economics, and compensation in 40 countries across all regions, and b) develop strategies for brokering a single global methodology applicable to all markets, agencies, and agency offices.

In the collaboration between American Express, its three agencies, and Morgan Anderson, a solution was created that has evolved over the years into a best-in-class approach to global agency compensation for negotiations across all marketing service types as well as other kinds of professional service firms.  Today, with the addition of other advances such as real-time benchmarking, best-practice Scope of Work models, and value-based approaches to compensation — and with transparency now expected by all marketers — global fee arrangements are readily determined. Even a single global multiplier can be devised, negotiated, and applied to all countries for a global agency.

Benefits: Aside from high value-add marketing as a client performance objective, our experience in assessing and restructuring global compensation is that agency efficiency savings can range from 5% to 15+% of U.S. A and Global fee spend.

What This Paper Covers

In this paper we outline two of the key drivers for several process steps needed to analyze, construct, and broker global compensation arrangements:

1. Determine, analyze, and benchmark agency economics by country market (Chart A.)

2. Development of a customized, best-practice Scope of Work by market (Chart B.)

This paper derives from actual assignments; not from trend data, or industry surveys.  Many marketer and procurement professionals use survey and/or advocacy benchmarks to select a specific number they wish their agency to meet, requesting their agency’s data conform to it.  This is not a prudent formula to follow for it will not yield the ‘best and right’ results for the marketer or its agency. Importantly, it does not provide the “tool kit” of facts and data with which to broker the right fee with an agency, whether global or a single office. The process we recommend, after two decades of continuous and rigorous refinement, is to investigate the agency’s economics and then place those findings in the context of experiential data that has met the reality of client negotiations with their agencies.

A. U.S.A & Global Agencies

Metrics as Tools for Negotiation

Two of the fact-based metrics we utilize as tools for developing global fee arrangements are Overhead Rate and Profit, culminating in a Multiplier, or single fee. These enable a marketer to construct 1) a single multiplier and fee for each country or, if desired, 2) a single fee and multiplier applied across all markets globally, provided weighting adjustments are made for fee spend in each market.  Agency salaries (as the multiplier “base”) are separately assessed for each market and globally and vary depending on the methodology definition used, for example, whether benefits are or are not included.

In addition to Overhead, Profit, and Multiplier, other agency metrics that are analyzed and benchmarked include:

• Salaries by position vs. benchmark
• Hourly rates by position vs. benchmark
• Overhead components vs. benchmark
• Payments to parent and holding companies vs. benchmark
• FTEs per staffing plan vs. benchmark
• FTEs by department vs. benchmark
• Fee cost per FTE vs. benchmark
• Senior/junior staffing ratios

Such analyses can be conducted no matter the compensation methodology, whether annual fixed fee, labor based, commission based, deliverables based, value based, or hourly rate.  The same analysis can be orchestrated to make one methodology comparable to another and to serve as a “double blind” approach for negotiations.

Facts, Tools & Brokering Fees

One of the insights from Chart A. is the wide variance in metrics market-by-market, as well as variances in what agencies “report” vs. benchmark.  It is in the area of “reporting” vs. benchmark that the opportunities for marketers in brokering agency fee compensation reside. The variables are many and complex if a disciplined methodology is not applied.

Chart A Example:  Variables

• “Base Salary” (excludes social taxes and benefits) and “Total Employment Costs” (includes social taxes and benefits) have been conformed and are represented by index = 100.

With this approach, not only does a marketer gain a deeper understanding of how specific agencies operate, but it also enhances its ability to broker agency fees based on facts and driven by facts and benchmarks (Chart A.) and Scope of Work elements (Chart B).  Other process tools for the marketer’s table include:

• Best practice contracts that include high standards for agency transparency and definitions of client marketing objectives and agency performance
• Qualitative metrics and quantitative metrics that can be used for value-based compensation arrangements
• Potential consolidation to an agency’s “best-in-class” country offices that have demonstrated outstanding creative work

B.   The Best-Practice Scope of Work

Foundation Documents

Chart B. illuminates a best-practice Scope of Work (SOW) in schematic form from recent assignments.  Development of a good SOW is an essential foundation for agency staffing and, ultimately, the efficiency of the client’s agency relationship. If a SOW is simply a laundry list of tasks and activities, absent codification, it cannot function as an effective negotiation and agency management tool for the marketer. We advise clients to provide substantial detail in a SOW that enable a clear understanding to evolve between client and agency of the needs, performance expectations, and the requirements for agency efforts.

Chart B. is an abbreviated version covering multiple agency offices where the client has defined its SOW in terms of Complexity, Priority, and Rework Rate.  In addition, specific goals, units of output, and deliverables/projects were indicated in the SOW.

SOW variables differ from client-to-client and from business-to-business depending on objectives, marketing programs, and the category.  For global agencies and multiple brands, a schematic format such as the following is useful for the application of the necessary factors and variables.  Done correctly, the SOW and benchmarking serve as underlying negotiating tools for the marketing and procurement professionals.

Chart B.   Scope of Work Variables

Chart B. reflects a particular client’s variables of Priority, Complexity, and Rework Rate for its SOW:

In Conclusion

Agency compensation approaches can be analyzed, benchmarked, and brokered using a range of fact-based metrics, tools, and strategies.  These provide a marketer with the opportunity to better understand and manage its agency relationship and its agency fee spend in order to determine whether the investment is fair and reasonable or deserves to be re-configured with the agency. This can be done for global fee arrangements as well as country-by-country. Although effectiveness of marketing programs is a very important goal for global compensation arrangements, likewise is efficiency of fee spend and overall value-for-money in the agency relationship.

At the beginning of this paper, we told the story of American Express and how the collaboration among client, agencies, and consultant served to accomplish the early-on groundbreaking work in the analyses, benchmarking, and development of brokering strategies for global agency compensation. We have since applied this approach to a host of other global marketers.  This is not accomplished in a vacuum.  Rather, industry benchmarks are critical, client-agency-consultant “collaboration” is essential, agreement on objectives is crucial, and a “willingness” to provide transparency, accountability, clarity, and solution-based results for this type of initiative, and for these types of critical relationships, represent a foundation which leads to success.

Arthur Anderson & Lee Anne Morgan

About Morgan Anderson Consulting

For two decades Morgan Anderson has served as leading marketing communications advisors to marketers in the areas of U.S.A. and global agency benchmarking and assessment for all types of marketing services agencies in all business categories. Contact is Lee Anne Morgan at lamorgan@morgananderson.com or 212.741.0804 and Arthur Anderson at aanderson@morgananderson.com or 212.741.0805.

www.morgananderson.com

A Morgan Anderson “Best Practice” Series

This is one in a series of Morgan Anderson papers devoted to best practices for compensating agencies and other professional services firms.  In this paper, we take issue with the “fiction” of PR agency hourly rates and discuss case examples using fact-based knowledge and actual assignments from marketers – rather than using agency surveys and trend analyses.  We intend this paper to enable clients to negotiate fact-based PR agency compensation where transparency and benchmarking are part of the solution and agency cost containment and performance results are objectives.

Background

PR agency compensation has been a challenge for marketing and procurement executives given a) the lack of transparency, and b) the misconceptions that are inextricably linked to the inexpert PR hourly rate syndrome.   Recent developments now resolve this.  Among them, are new types of Annual Scopes of Work and the de-construction and benchmarking of PR staffing plans and agency costs and economics.   When using them, cost reduction over a 12 to 18 month period can range from 10% to 20% of annual agency fee paid. Such efficiencies can then fund additional client programs, drop to the bottom line, or provide funds for implementing agency incentive programs to drive PR results and value contributed by the agency.

This is necessitated by the increasingly huge sums spent on Public Relations as PR becomes a full partner in a client’s marketing communications arsenal and an important marketing tool.  Morgan Anderson estimates Global PR agency revenues to be $12 Billion in 2010, and we expect this to double by 2016 to $24 Billion.

Here are questions clients ask:

• Hourly Rates: “Are the hourly rates charged by our PR agencies reasonable and competitive compared to comparable agencies and industry benchmarks?”

• Transparency: “How do we get transparency from our PR agencies that is fair and reasonable  …  and does it work for both parties to the relationship?”

• Productivity/Containment: “What opportunities are there for productivity and fee containment with our agencies?”

• Fee Methodology: “Is the hourly rate methodology (or labor-based fee for that matter) used by our PR agency the best and right one given our needs and objectives?”

• Agency Performance: “How should we best assess and increase agency performance and value  …   and also link this to agency compensation?”

• Benchmarking: “How should we benchmark our agency’s Scope of Work, staffing plan, and its costs and economics so we are assured they are reasonable and relate to industry benchmarks?”

Challenges

Problem: PR Fee compensation proposed by agencies often lacks transparency, is rooted in fiction, and not linked to benchmarks

Not only is the annual investment in PR fees huge, but, also, there are special problems when hourly rates are used for compensating PR agencies.  However, when assessed and resolved, there is a range of 10% to 20% in cost-containment opportunities embedded in PR fees, or an industry total of $1 Billion to $2 Billion in PR fee cost containment.

Reasons why PR rates baffle clients:

• PR agencies did not spring from general advertising agencies who provide full disclosure and transparency to clients, but rather developed as independent, entrepreneurial agencies
• PR agency use of hourly rates established a superficial level of confidence in clients, but, in fact, suffer from lack of transparency and defined terms
• PR hourly rates are not transparent or benchmarked and clients assume (incorrectly) that an hourly rate at one agency is the same as the same rate at another agency when, in fact, they are not
• PR contract compliance audits rarely assess how hourly rates are developed and how their components compare to other agencies and industry benchmarks

Solutions

Non-transparent hourly rates present a special problem. These are an agency’s “ask” whereas few clients, until recently, had knowledge bases they could use to present an “offer”.  Solutions such as best practice Scope of Work (below), defined staffing plans, and agency cost/economic analyses are now in the client’s toolbox to use. There are also sophisticated metrics (below) that can be used for hourly-rate and labor-based fees to shine the light on PR agency compensation. This paper discusses two solutions:

1) Protocols by client and agency in the development of a best-practice PR Scope of Work

2) De-constructing and benchmarking PR agency hourly rates.

1. Developing a Best-Practice PR Scope of Work

The following is a best-practice Scope of Work case study in graphic form.  Morgan Anderson emphasizes carefully defined development of a client’s SOW document. It is the foundation for the agency’s staffing and economics. If it is merely a laundry list of tasks and activities, absent of any codification, then it cannot be used as an effective negotiation and agency management tool. We advise that clients provide more detail in their SOW to enable a clear understanding between client and agency of the needs, expectations, and absolute requirements in the work ahead.

Due to space limitations, the following is not the actual SOW, but, rather, an abbreviated version of an assignment involving multiple, comparable PR agencies where the client applied factors of Complexity, Priority, and Re-work Rates, as well as, PR goals, units of output, activities and deliverables,  to designate what the PR agencies were to do for their annual SOW.   SOW variables will, of course, differ depending on specific client objectives, the brand/business unit, and category.  With multiple PR agencies and brands in particular, a schematic grid, such as the following, can be very useful to practical application of the factors and variables listed above. Again, the SOW is a living document – not a précis or detailed list of tasks – to be used as a “tool” for dialogue, negotiation, and improved client management of its agency, as well as, enhanced productivity from its agency.

2. De-Constructing/Benchmarking PR Hourly Rates

Agency transparency and benchmarking analyses are key drivers to this process.  As the chart below shows, the range between seemingly comparable PR agencies is huge, and actual variances present opportunities for understanding negotiating PR agency compensation.

There are three elements needed for de-constructing PR hourly rates:  1) a best practice Scope of Work (see above), 2) a defined Staffing Plan, and 3) disclosure of agency economics per a structured methodology, utilizing real-time benchmarks.  These open the door to informed PR agency fee negotiations and achieving cost-containment objectives. The structured methodology can be used to de-construct and benchmark labor-based fees as well as hourly-rate based fees.

The following is from Morgan Anderson assignments where comparable PR agencies were assessed.  The big surprise here is the very large variances between similar PR agencies in how they report information to clients.  All data below is using the same methodology and definitions for a similar Scope of Work.  The culprit, in the case of hourly-rate based compensation, is that hourly rates suffer from the lack of transparency and, until recently, independent industry benchmarking.

The foregoing variances, though they may appear extreme, are indeed fact-based and selected from actual assignments for marketers using an identical, comparative approach. When taking a fact-base approach the opportunities are advantageous:

• Client Efficiencies
• Accountability of the parties to each other
• Cost Containment
• Transparency
• Fact-based  dialogue between client and agency, and
• Improved client-agency relationship

* Variance =  (Agency 2 – Agency 1)/Agency 1

Note – information in this chart is not comparable to other data sets unless the identical assessment methodology and definitions are used.

Outcomes/Benefits

The outcomes and benefits of this approach enable marketers to negotiate fact-based hourly-rate compensation for their PR agencies, as well as activity-based fees, using standard methods and benchmarking when stewardship, efficiency, transparency, cost containment, and business results are objectives.

In the past, hourly rates proposed by agencies presented impediments to achieving this, but as demonstrated here, recent approaches now overcome the impediments. And, worth repeating is that fee cost containment over a 12 to 18 month period can range from 10% to 20%, and in some instance 25%, of PR fees paid under traditional hourly rate methodologies.

Other outcome/benefits in these studies were:

• Best-practice contract provisions including definitions of transparency and full disclosure

• Value-based (incentive) fee compensation

• Possible PR agency consolidation to those best-in-class

• Assessment of Out-Of-Pocket reimbursements — reimbursements in this study ranged from a Low of 2% of fee-paid to a High of 28% of fee-paid, presenting other opportunities for cost containment

Morgan Anderson Consulting

For two decades, Morgan Anderson Consulting has been the leading marketing communications advisor to marketers in the areas of global agency evaluation, agency compensation, and agency search and selection for all agency disciplines cross all business categories and throughout the world.

Contacts:

Lee Anne Morgan at lamorgan@morgananderson.com or 212.741.0804

Arthur Anderson at aanderson@morgananderson.com or 212.741.0805

QUESTION:

How does a marketer determine fair compensation during an agency search?

ANSWER:

Talk about it.

by Lee Anne Morgan

Sound simple? Then why is it not done more frequently with candor, good intentions, and the absence of angst? Why is the prevailing mantra ‘get more for less’ rather than ‘value-for investment’?  Well, most marketers and their procurement teammates are under real pressure to deliver the most for the least cost. The human psyche (and dare I say soul?) would rather move towards the inspirational than the Excel charts of comparative profits, overheads, and salaries. We want to talk about strategies, insights and innovation, the digital space and social media and not look at pages of analyzed numbers. Yes, we know we have to deal with this at some point … but not now.

Well, it is now. After conducting agency reviews for over two decades, I can say that the earlier you begin to talk about staffing and compensation in the search process, the better for the marketer and the agency. A good consultant can facilitate this dialogue and analytical work because they understand a variety of agency operations and how they need to work.

However, during the course of an agency review, the sexy stuff beckons: the excitement and juice of meeting with agencies, hearing about new strategies and insights, seeing creative efforts and their supporting media strategies, and witnessing these idea generators wrestle with the ever-changing digital and social media spaces. But, the time inevitably arrives when the marketer, consultant, and finalist agencies review and deliberate the proposed staffing and fees of each. And for many, it is a time of deflation, not exhilaration. It is all about numbers and is often perceived as the ‘elephant in the room’.

Yet, these numbers, these deliberations, form an important fiscal cornerstone of the new client-agency partnership. They lead to how much the marketer will pay the agency, how much profit the agency will make for its efforts, and who the dedicated talent is that will serve the marketer’s business and, hopefully, help build or sustain the wealth of their brand.

Where Do You Begin?

In order to have a candid, robust, and transparent dialogue about fair agency compensation, there is a critically important foundational element that must be laid: it is the agency’s Year I SOW. Really? We already know that! We provide a very thorough SOW.

Not necessarily so. Most marketers present a litany, or laundry list, of deliverables. The usual SOW, though perhaps many pages, can be interpreted in different ways by each agency. If it is not precision-driven, it runs the high risk of resulting in a wide range of proposed fees and staffing. Some top heavy with seniority; others laden with juniors; and still others with totally unnecessary staffing requirements.

Four Steps, Four Solutions

So, here are four steps and solutions for opening vital and productive agency compensation dialogues during a competitive search:

• Start Early: Submit your Year I SOW at the finalist agency briefing. Don’t wait until the search process is in its final stages.

• Be Precise: Know which of the deliverables is reality … what’s in scope and what’s not. List them accordingly. Rate, weight, and apply re-work levels to each deliverable. A lot of work, but a consultant can help.

• Ask for the Right Data: The Staffing and Compensation Questionnaire is developed early in the process as well and accompanies the SOW. It should request relevant, not unnecessary, agency staffing and economic data. Be certain that definitions of agency positions are uniform and accepted by advertising agency industry standards for comparison purposes.

• Benchmark the Data: Benchmark the staffing and agency economic components of each submission. Do not be insular using only your data. You’ll merely be talking to yourselves.

Okay. If the SOW is a true precision document and the Questionnaire is clear, thorough in its requests, and structured well so that it yields apples-to-apples comparisons, now you have the information, the platform and the tools you need to begin a dialogue about agency compensation.

Why a Dialogue?

Well, there is money on the table and it is not only the best thing to do, it is the right action to take for a win-win. And, you will need to have a couple of chats because things happen: even with a precision SOW and uniformity of the Questionnaire, agencies by virtue of philosophy and culture, work and operate differently. Some agency responses cluster in a fee range but have varying levels of senior-to-junior staffing ratios. Overheads may not vary but salaries will or vice versa. Then you will have outliers who submit almost double the fee of those in the cluster.

How do you sort through this? At the risk of being self-serving, a good, qualified consultant can really help. (Oh, did I mention that earlier? Well, it bears repeating.) In the end, you will circle back to that foundational element I referred to in the beginning: the Year I SOW. Through this “tool”, and it is a cool tool when done well, you will learn about each agency’s operation, style, and accounting methods.

If they are way off base for your needs, tell them how and why. Ask for more detail. Without illumination of the facts for all concerned, there is no real dialogue but only opacity. And, opacity is contrary to clarity, truth-on-the-table, and is certainly antithetical to a sincere dialogue. Let the agencies know exactly where they stand. Their guts tell them when a marketer is offering truth or merely attempting a cost squeeze.

Some Final Thoughts

It is incumbent upon the consultant as an independent, third party to bring objectivity, perspective as well as accuracy and intellectual capital to the table. It is the marketer and procurement teams’ responsibility to be certain that they have peeked behind the curtain and have not only seen the show but understand it and applaud it.

Do marketer and agency live happily ever after … probably not or at least not without challenges. But as in any good relationship, business partnership, and the basic human condition — clear, candid, and well-intentioned communication is a major key to success … even when it’s about money.

For more information on this subject or any other client-agency matters, please contact:

Lee Anne Morgan  212.741.0804 lamorgan@morgananderson.com

Morgan Anderson Consulting provides a depth and breadth of best-in-class agency search services and search-related matters. Our agency search practice ranges in work from small to large, complex assignments in the U.S. as well as globally. Our experience of more than two decades pioneering best practices in the agency search, review and selection space makes MAC a leading practitioner of these services.

The agency commits to reviving a soccer franchise

Published: August 23, 2010

Anomaly’s Carl Johnson likens his agency’s brand development projects — including its latest push to revive the storied New York Cosmos soccer club — to long-term, stock market investments and acknowledges that without traditional client relationships, Anomaly couldn’t play in this entrepreneurial space. In fact, Anomaly funds most such ventures via its profits from retainer clients like Nike, Motorola and Sony.

The New York shop is among a still relatively small number of agencies pursuing such “skin-in-the- game” deals, which, when successful, can enhance the entrepreneurial reputations of executives known largely for making ads. By taking equity or a cut of revenue in these ventures, agencies such as Trumpet, The Brooklyn Brothers, Deutsch, Crispin Porter + Bogusky, Berlin Cameron United and Anomaly eschew traditional client compensation schemes and demonstrate a willingness to take risks with the potential for longer-term rewards.

“That’s what clients are asking agencies to do — share some of the financial risk. Lawyers do that,” said Arthur Anderson of Morgan Anderson Consulting in New York. “I think there’s a very large market out there . . . Wouldn’t [a client] rather have a skilled advisor who has some real skin in the game and hopefully will be motivated in large part by making you successful?”

Anomaly’s Cosmos venture is among its most ambitious, involving the establishment of a limited liability company, the creation of a 120-page prospectus, the wooing of investors and the recruitment of international soccer icon Pelé. Johnson, as CEO of the New York Cosmos LLC, is central to the effort and the intellectual property deal, which, for Anomaly, began a year ago with a meeting in New York with Cosmos rights holder Paul Kemsley and ultimately aims to bring the Cosmos back to life as a franchise in Major League Soccer.

The obstacles to winning a place in MLS are formidable. The Cosmos will need a stadium, at least $40 million to enter the league and much patience because the Red Bulls franchise in New Jersey has exclusive rights to the region until 2013, according to Johnson. And if the Cosmos gain entrance into the league, Johnson estimates that the team will need hundreds of millions of dollars to operate.

Then there’s the larger question of saturation: Can a market that already fields a dozen professional sports teams support a second MLS club? Johnson obviously thinks so, but Terry Lefton of Street & Smith’s SportsBusiness Journal isn’t as sure, particularly given that other teams are spread out across the U.S. and Canada.

“Their last four or five franchises have great buildings, really deep pockets and outstanding ownerships. So, just because you’re the Cosmos doesn’t mean a lot to me when you’re stacked up against those guys,” said Lefton, who covers sports marketing and sponsorships in New York. “You need to have good financing, a path to a new stadium and a really good plan.”

Right now, the Cosmos company is focusing on building credibility and reestablishing roots in the New York City area. In June, Pelé signed on as honorary president in exchange for a stake in the operation. (Anomaly also has equity in the Cosmos — described by Johnson as a single-digit percentage of the company. To date, the agency cost has been time: a core group of four or five top executives work on the project, with help from another three or four when needed. Johnson, for example, works 18-hour days, seven days a week to manage Cosmos-related business, his agency and key clients.)

Other Cosmos principals include Kemsley, as chairman; Anomaly brand strategy director Dan Cherry, as executive director of marketing; and d irector of soccer Terry Byrne, who has longstanding ties to players such as David Beckham.

Additionally, after an early round of fundraising, the Cosmos has invested in two soccer academies and purchased the annual Copa NYC tournament. Cosmos principals also are talking to New York City about providing soccer equipment and facilities for children interested in playing the game.

Of course, fundraising continues to be paramount, given the entrance and operations costs as well as the price of building a new stadium. Cosmos principals are eyeing Queens as a potential home, given the availability of land and that the borough is “one of the hotbeds of soccer in New York,” Johnson said.

Anomaly’s sports brand marketing experience has proved invaluable; the shop handles creative duties on Nike’s Converse and Umbro brands and provides marketing and business advice to the Manchester City soccer club in the U.K.

Such credentials were key to Anomaly earning the trust of Kemsley when the blunt U.K. real estate mogul first met the shop’s principals in August 2009. And, in sizing up the opportunity, Anomaly “felt that the potential of the New York Cosmos was huge,” Johnson said. “It’s a global play with significant external funding where we are central to the outcome and it’s in our wheelhouse of what we know. It really is bang-on. So, you can say with real confidence, we know how to do 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

_________________________________________

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