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.”

Story as published on American Public Media’s Marketplace click here for the online publication.

Major Retail Marketer

• Brokered agency search finalist staffing, compensation, and contract
• Conducted “on-boarding” of the new agency to achieve “best value” to jump start the substantial work needed within the first several months of the relationship
• Achieved cost containment of 22% ($2.5M) in Year 1

Global Automotive Marketer
For an existing, highly-creative agency where the proposed fee was 28% above new budget, we…

• Evaluated and benchmarked the agency staffing plan and FTEs
• Facilitated “brokering” of the agency’s new contract and compensation terms
• Achieved cost containment of 24% ($8.0M) before adjusting for incentive compensation without diminution of agency staffing quality and scope of work

Global Consumer Marketer
For the client’s existing long-term agency we…

• Assessed the global multiplier for the agency’s contract and compensation
• Improved it through benchmarking
• Provided an Opinion Letter for the client that would be persuasive to, and lay the groundwork for, negotiating the new global compensation arrangement with the agency including the U.S.
• Achieved reinvestment (cost containment) of 18% ($2.7M) phased over a three-year period.

Global IT/Services Marketer
This client-agency relationship was over 10 years old as was their contract.

• It was time to re-assess the contract/staffing/compensation
• We conducted this study for the U.S. plus 12 other global markets
• Utilizing updated contract methodology, full disclosure, and benchmarking, resulted in a $13 million cost containment

YUM! Brands/Pizza Hut Agency Search
Our sister company, Lee Anne Morgan & Partners (LAMP), handles agency reviews:

• Currently advising Pizza Hut and YUM! Brands management on their advertising agency search process
• Completed analyses of related staffing and compensation assessment aspects of their 4 finalist agencies
• MorganAnderson advised on evaluating and structuring agency compensation.

We are glad to speak anytime on a confidential basis to answer questions you may have and to brainstorm issues and needs with you. Reach Arthur Anderson at 212.741.0805 or aanderson@morgananderson.com, Lee Anne Morgan at 212.741.0804 or lamorgan@morgananderson.com, or explore our Case Histories and other background about What We Do by clicking on the links.

Published: October 26, 2009

BATAVIA, Ohio (AdAge.com) — As marketers squeeze every ounce of fat out of budgets, agency executives are decrying the power of procurement executives, fearing that as the discipline grows, marketing — already struggling to prove its value in an age obsessed with return on investment — could see quality nickel and dimed to death.

Yet the agencies that know so much about the CMOs, brand managers and marketing directors that are their clients are a lot less knowledgeable about the procurement people reshaping the business. Often, the assumption is that buyers of widgets and office supplies have been retasked to buy agency creative work.

As it turns out, those notions aren’t far off the mark. An Advertising Age review of LinkedIn profiles of hundreds of marketing procurement people found that only a small handful, fewer than one in 10, list prior experience in marketing or agencies or even marketing degrees in college. To be sure, not all marketing procurement specialists are inexperienced paper-clip purchasers. The country’s largest advertiser, Procter & Gamble Co., which began its first marketing procurement effort with about a dozen people in 1996, today counts 300 in the area globally. Ad Age also found several procurement executives with considerable marketing background and knowledge of the industry, commitment to the profession, and seemingly enlightened philosophies that the lowest price isn’t always the best deal.

Yet while marketing procurement execs seem to be in demand — Indeed.com shows a sharp increase in job listings for marketing procurement and sourcing candidates since the first of the year — there remains a widespread lack of marketing experience among procurement people.

Miriam Frawley, a principal of e-Diner Design & Marketing, New York, “was there at the beginning of aggressive sourcing” when she created a standard rate card for print production services at American Express. She was chosen to lead the effort at AmEx because she had the background in the industry, but she acknowledges that’s not often the case today. “The people doing a lot of the procuring today don’t really have experience in the business,” she said. “What’s happening now is that it’s all data-based.”

Dollar sense
Chuck Hatsis, president of Chicago-based Surge Consulting, who himself worked in marketing for Bank One before turning to marketing procurement, including on the corporate side with Nationwide Insurance, said that having marketing experience “allows you to make more enlightened tradeoff decisions.” But unfortunately, he said, it’s also relatively rare in the industry, which leans toward treating marketing services “like another category to be managed like office supplies and travel.” The tendency, he said, is to approach the job as a straight exercise in fee and cost reduction.

There’s also a good chance procurement people at the negotiating table may not want to be there much more than the agency people on the other side of the table want them there. In fact, many career procurement people would rather be buying equipment or commodities on the belief that they can more readily get quantifiable savings that will help them advance their careers, said one former corporate procurement executive who is now a consultant.

None of this is necessarily good for agencies or marketers. The result, he said, is that marketing procurement people are often younger, less experienced and highly motivated to make a quick hit by negotiating big, easily quantifiable rate reductions that they can then leverage to earn a more desirable posting.

All of which is contributing to a growing reservoir of industry horror stories about procurement practices — like the large package-goods company that annually demands its global agency of record cut fees by 5%. That’s actually an enlightened view according to others, who report demands for 20% fee cuts this year have been the norm. Beyond that are bold negotiating stances ranging from requests for detailed salary information to a demand, reported by an executive of one digital agency who’d already completed an assignment for a major marketer in one country, to retroactively cede global intellectual property rights for no additional fee.

Ms. Frawley cites a recent client who, in a request-for-quote process, noted that her hourly rate was higher than the average, but her hours required were lower. Though that still resulted in a lower cost than other competitors, she said the client’s procurement person still asked that she lower the hourly rate.

Ms. Frawley, who now also consults for Morgan Anderson Consulting at times, said she’s not going to be lowering the rate and will probably lose the pitch.

New systems
The more sophisticated marketers with more experienced procurement people and larger brands — the companies that tend to send people to Association of National Advertisers finance conferences — are gravitating more toward compensation that is based on upfront-negotiated value of the work, something found in the new compensation models of Coca-Cola Co. and P&G, Mr. Hatsis said.

Their systems also tend toward less micromanagement of agency work, he added. “If I can get the result I’m looking for and the agency is able to staff it with junior people and do it in two rather than four weeks, I don’t want them to have to artificially add manpower. If they can make a higher margin and get the results faster, that’s higher value to me.”

Value, of course, is in the eye of the beholder, and the value of procurement executives themselves, might also be coming under scrutiny. Some in the industry say procurement people themselves are also starting to get the squeeze as corporate staffs that bulked up in recent years began thinning ranks.

A system where someone can say ‘yes’

Kim Kraus, who as strategic relationship optimization manager at P&G has led the charge to overhaul the company’s agency compensation model, has never been in a marketing job per se, but she’s spent nine of her 21 years in P&G procurement working on marketing services.

Beyond that, she did get her undergraduate degree in marketing at Ohio State. That’s far from making her an expert, she concedes. So when she began her second tour of duty in marketing procurement seven years ago, she spent a month as an intern at Saatchi & Saatchi and other Publicis Groupe agencies.

“I’ve also done two- or three-day deep dives at other agency types,” she said. “It’s great to see what they do, but I also like to see how clients behave with them. I learned more in my assignment at Saatchi about the things clients do to them, or cause, vs. what is it we buy.”

She spent about three quarters of her time shadowing clients other than P&G (non-competing), she said. P&G people tended to be more immersed in marketing than some of the other marketers, which helped. “Where we were hindered,” she said, “was that we had a lot of people who got involved.”

That was part of the impetus for developing the brand franchise leader model, in which a P&G general manager is in charge of the brand equity and agency relationship on a global level and a broader system that outlines who’s in charge of other elements.

“You’ve heard the saying ‘Lot’s of people can say no, but nobody can say yes,’” she said. “We tried to move toward a system where one person could say yes very clearly.”

Focusing on value and innovation

Three years ago, Stewart Atkinson was in charge of manufacturing laundry detergent for Procter & Gamble in Europe. Three months ago, he took charge of the company’s $7.5 billion advertising budget (including around $1 billion in agency fees), which constitutes the biggest media outlay on earth.

Recently tapped as manager-global marketing purchases, Mr. Atkinson, 52, assumes responsibility for media and other communications purchases and P&G’s media agencies. In that role, he replaced Bernhard Glock, a career media and marketing manager who left P&G as VP-media last month. Mr. Atkinson has a dual report to VP-Global Purchases Rick Hughes and Global Brand-Building Officer Marc Pritchard.

While he’s never been in a marketing job, Mr. Atkinson has been involved in marketing procurement at P&G off and on since its earliest days, in the mid-1990s, as part of the original group that looked to get its hands around the giant marketer’s spending. He’s also been part of global management teams in the U.S., Europe and Asia that deal extensively with marketing issues.

“It’s different than being in the marketing area, but it is where you put the discipline and rigor and process into place for the category general manager to bring the product innovation and marketing messaging in a way you can take it to market,” Mr. Atkinson said.

He’s not, he said, approaching his new job with an agenda to blindly cut costs. “It’s really about the value that gets created, and that starts with how you’re able to out-innovate the market,” Mr. Atkinson said.

Chemicals vs. marketing
His most recent experience on marketing services procurement was centralizing and streamlining how P&G purchases shopper-marketing displays, programs and agency services, including customization by retailer and chain.

Before that, he spent years buying chemicals for laundry detergents, doing deals with contract manufacturers for new oral care categories and setting up some of P&G’s earliest efforts in buying and selling supplies and products on the internet, in addition to a stint as a human resources manager.

He acknowledges some big differences between those things and buying media or marketing services. With industrial chemicals, “you’ve got a long history of how work gets done,” he said. “Things are clearly specified. There are very disciplined forecast processes in place, so you’re dealing with knowns. In marketing services, it’s less known. Therefore the skills of being able to [really] define what you have to buy are that much more important. Internal relationship skills carry a premium. Some people are able to make that shift, and some people are not. … A lot has to do with dealing with ambiguity.”

Buying media may not really be as complicated as it’s made out to be, and has probably become more complicated than it needs to be, he believes.

“This is after 90 days of getting engaged with it,” he said. “Everything on the outside looks very complex. I really think there are a few simple things I’m beginning to understand that we can look to more clearly define. And then in terms of building scale, bring the right parties together in the right way. I’m just not sure we’re doing that as well as we could right now.”

He’d like to get media decision-making closer to P&G’s businesses and brands, he said. “I just came back from a lunch with one of our media AORs and that was the whole topic — how can we get our agencies more in touch with the brands and the business leaders so we can think more clearly what the priorities are. … We just have to bring everyone closer to the consumer.”

One might expect a less-than-enthusiastic reception to bringing a procurement person into a role once headed by a marketing person. Mr. Atkinson said he’s not seeing that. “If you can demonstrate you’re creating value, perceptions change rather quickly,” he said. “I feel like our relationships are good, and they’re getting better and better every day.”

Procurement: learning the language

The growing number of marketing procurement specialists also go by a growing number of titles. Here’s a field guide to some:

STRATEGIC SOURCING: A k a in Procter & Gamble parlance as BBSS, for brand building strategic sourcing.

PRODUCT SUPPLY: Some marketing procurement people are attached organizationally to the manufacturing and logistics organizations, sometimes also known as “product supply.”

STRATEGIC RELATIONSHIP OPTIMIZATION: It’s not just about buying, this title points out, but about getting the most for the money.

FINANCE: Many marketing procurement executives are part of corporate finance departments.

MARKETING OPERATIONS: Procurement is a big part of the operation.

INDIRECT PROCUREMENT: As opposed to “direct procurement,” usually applied to goods, “indirect procurement” often refers to services, ranging from lawyers to ad agencies.

Published: October 5, 2009

For all of marketers’ obsession with digital, and smart talk about media taking a more central role in marketing, the agency-world economy still looks a lot like it did 50 years ago: The Don Drapers of the word, aka the top creatives on Madison Avenue, still charge clients far more than other agency roles.

According to a survey from the 4A’s, large agencies with more than 500 employees reported that their chief creatives in 2008 billed clients $964 an hour. That’s more than double what an executive media director at a media agency bills (a midrange high of $392) and what a senior-most person at a digital specialist agency charges (an average of about $400 an hour).

It’s a wide disparity that seems destined to change. “It’s a legacy of Madison Avenue and the days of the creative director at a traditional agency being the most valuable player that gets the biggest salary,” said Tom Bedecarre, CEO of AKQA. “That’s shifting because the role of traditional agencies is changing–media isn’t there, and often times interactive skills aren’t there.”

The survey–the first on labor-based rates the 4A’s is sharing widely–represents a rare look into how much marketers are willing to pay their agencies, even in the throes of a recession, and it shows that the Big Apple remains dominant. A chief creative based in the New York Metro area billed an average of $751 an hour last year–more than double the average of what a chief creative in other parts of the Eastern U.S. or in the South bill, at $319 an hour. In the central part of the country, a head creative billed an average of $420 an hour, and in the West, an average of $461.

Even so, the $964 average for creatives generally beats what the lead attorney on Chrysler’s bankruptcy, Corinne Ball of the New York law firm Jones Day, reportedly raked in this summer: In the frenzied first month of the bankruptcy, during which she worked an average of 15-hour workdays, including weekends, Ms. Ball billed the automaker $900 an hour, according to Reuters.

Still, for some huge shops, that’s chump change: The survey cited the mid-range high for a top creative at a big shop at a whopping $1,420 an hour (“mid-range” means after the top 20% had been shaved off the numbers).

More than 230 agencies, including Crispin Porter & Bogusky, BBDO, JWT, MediaVest, Y&R and Carat were represented in the survey. They reported hourly rates billed to clients in 2008 for some 130 positions across 14 service departments, such as creative, media services, account planning, research and print production.

Of course, hourly billing rates are just one metric. Arthur Anderson, of Morgan Anderson Consulting in New York, points out that “inherently, hourly rates are not transparent, they are opaque. Just comparing the amount of the hourly rates doesn’t tell you what it’s made up of . There’s a profit margin built in there, salaries and overhead, so it’s just the tip of the iceberg.”

Still it’s a helpful tool, and especially when you consider that–despite mega marketers such as Coca-Cola experimenting with value-based pay arrangements for their agencies–labor-based billing is still the predominant method of agency compensation today.

Experts say the numbers track with agency labor-compensation trends for several years. “Typically, the creative folks make the most money on per-hour basis–though sometimes a really good strategic planner will be right up there too–followed by account services, then media services tend to be the lowest paid,” said David Beals, president-CEO of Jones Lundin Beals.

To be sure, some of the gulf in pay between senior creatives and other roles is partly due to the legacy of the ad business. Despite the growing importance of media agencies, they are still playing catch-up with creative shops. “There’s no question media agencies are becoming more important and more valuable to clients as the media landscape becomes more complex,” said Lee Doyle, North American CEO of Mediadege:cia. “However, creative and ad agencies started out at the top of the food chain and we are still working our way up that food chain.” Mr. Doyle added that agencies share part of the blame for making the work look too easy and not conveying the complexity of what they do for clients.

Some industry observers think agency economics are ripe for upheaval–though the changes won’t come fast. “Prices won’t reset overnight, but I think over the next 10 years you’ll see a change in who makes what, and who is perceived as having the big ideas,” said Russel Wohlwerth, principal at consultancy Ark Advisors.

He added, “The industry is in a state of flux and the value  proposition of different marketing firms is going to change–what the creative agencies are worth now and what they’re worth ten years from now may be very different … there’s a high likelihood that the relative value of each kind of marketing firm will be rejiggered.”

Contributing: Michael Bush