Sidebar:Downturn puts pressure on compensation
Sidebar: HSR Business to Business clicks with Kodak
The slumping economy is putting pressure on b-to-b marketers that are looking for agencies to handle their communications needs.
“Budgets are tighter and expectations are higher,” said Mike Kust, chief knowledge officer at Carlson Marketing Group, a marketing communications agency based in Minneapolis.
The economic downturn has forced many companies to cut marketing budgets and staff, while creating demand for more cost-effective marketing programs. These pressures are being felt during the agency selection process as companies search for partners that can deliver more bang for the buck.
Virtually every aspect of the selection process is under scrutiny, from the mix of services expected to agency compensation.
A proven track record
Both clients and agencies agree that strong experience in b-to-b marketing, and specifically in the client’s industry, is a prerequisite for winning an account.
“A track record with b-to-b is very important,” said David Redhill, global director for brand strategy at Deloitte Consulting, which selected DDB Worldwide as its advertising agency last June, following an extensive review.
“The account team’s willingness to dive into research, and its familiarity with b-to-b issues, are almost more important than the creative team,” Redhill said, noting that the account supervisor needs to be an advocate of research and analysis.
As for the creative team, “It helps if the copywriter and art director have backgrounds in b-to-b, ideally in your sector,” Redhill said. “They need to distill complex issues into easily comprehensible, compelling ideas.”
Courtney Buechert, exec VP-general manager of McCann-Erickson, San Francisco, also acknowledged the importance of knowing the client’s business, inside and out.“There are a lot fewer business [accounts] moving around and a lot fewer companies relying on advertising to carry their entire communications load,” he said. “Among those looking at new agencies, there is a conservatism in looking at lists. New business is going to people they know or trust, or people with unbelievable track records.”
Increasingly, companies are looking at full-service marketing communications agencies to handle their needs. The reasons: efficiency and consistency.
“In our selection process, part of the prerequisite was the ability to handle a breadth of marketing elements,” said Darren Stordahl, director of marketing at Triniti Corp., a San Diego-based company that provides consulting and e-business software implementation for the semiconductor manufacturing industry. Triniti had used several different independent contractors for Web site design, marketing collateral and other marketing communications services, but it wanted to find a single partner to provide all these services.
“Consistency matters, from point of contact to sales completion,” Stordahl said. “I needed an agency to provide soup-to-nuts execution and share that vision.”
After a review, Triniti last month selected Hodgson/Meyers, Kirkland, Wash., as its full-service marketing communications partner to handle brand development, Web design, collateral and signage.
Stordahl said Triniti is not doing any advertising right now because of high costs. He said the most effective marketing the company can do now is to educate customers and prospects at different points in the sales cycle through marketing collateral and online information.
Bob Milroy, president of Alexander Marketing Services Inc., Grand Rapids, Mich., also noted the move toward full-service agencies. “Because of the economy, staff resources on the client side have shrunk, so clients and prospects are looking for legitimate full-service partners,” he said. Services being sought include traditional advertising, direct marketing, public relations, community outreach and employee communications, Milroy said. “Clients have fewer resources, so they’re leaning on agencies even more,” he said.
Scott Palmquist, VP-product management and marketing at CipherOptics, a Raleigh, N.C., encryption company that recently conducted a review, also wanted a full-service agency to handle its marketing communications. “We were looking for one partner to handle our short-term needs, [one] that had the capacity to handle our longer-term needs,” Palmquist said.
CipherOptics, a start-up with limited resources, in November selected Koroberi Inc. to handle media relations, analyst relations and marketing communications support for the launch of its new product, Security Gateway.
Demonstrating resultsBeyond a proven track record and the ability to handle a full slate of services, marketing agencies are increasingly being asked to demonstrate the effectiveness of a campaign before it takes off.
“[Clients] are looking for the ability of their partners to link strategy to execution,” said Carlson Marketing’s Kust. “It’s measurement before and during the design, as much as measurement after the strategy is deployed. You have to create an index that gives them leading indicators instead of lagging indicators.”
Kust said more work is also being done in pilot mode, with clients wanting to test a campaign regionally or locally before committing to a national launch.
Buechert of McCann-Erickson agreed that agencies must show clients how they will create effective marketing solutions with proven results.
“The high point [in a review] used to be spec creative,” he said. “Now clients ask, ‘Have you shown [the spec work] to anyone, and what were their reactions?’ There is more pressure to see, in a measurable way, the result.”
He pointed to a speculative campaign McCann-Erickson developed for Advanced Micro Devices in March, when the technology company’s account was in review. McCann won the business, and the campaign it originally developed on spec is still running.
“It used to be a capabilities review, then strategic insights, then ‘show me the campaigns,’ “ Buechert said of the review process. “Now, you’re almost encouraged, if not required, to go through the development of the work, show it to consumers and do primary third-party research.”
Combine an already tight economy with today’s cost constraints on clients and ad agencies, and you’ve got a pressure cooker atmosphere in the negotiation room. At issue is how to fairly compensate ad agencies for work done at a time when clients have more pressure than ever to generate sales, and agencies have limited resources to produce the work.
“The economy is certainly putting pressure on compensation and compensation discussions,” said David Beals, president of advertiser consultancy Jones Lundin Beals Inc., Chicago.
“Clients’ pressures to be cost-efficient can rub up against what they want from agency relationships,” said Beals, who wrote “Selecting an Advertising Agency” for the Association of National Advertisers last year and is the author of “Evaluating Agency Performance,” to be published this year by the ANA. “When this rubs up against agency shareholder pressure, it makes for sometimes tough negotiations.”
Beals, whose firm advises clients on agency searches and agency/client compensation and relationship issues, said there are two main pressure points in compensation negotiations.
The first is the mix of services and level of agency staffing requirements, including everything from whether the client needs trade show representation to the number of people on an account team. This point usually can be negotiated without too many problems, Beals said.
The second issue—the agency’s profit margin—is the real pressure point, Beals said. “It’s got to be fair to both sides, or there will be a relationship problem,” he said.The American Association of Advertising Agencies recommends a profit margin of 25% for agency compensation. However, Beals observed that current economic pressures have flattened that to between 15% and 18% for the largest agency holding companies.
While profit margin is a key consideration for all agencies, there are different compensation structures to arrive at the desired profit. To help agencies and clients structure fair deals, the ANA and the Four A’s last month published a joint position paper titled “Guidelines for Compensation Agreements.”
The guidelines identify two basic compensation structures—fees and commissions.Fees can be structured as fixed fees, hourly rates or cost-plus fees, which are direct costs plus profit. For each of these structures, the agency and client should mutually agree on the detailed scope of work, and should set up a review and adjustment process, according to the guidelines.
Commissions are based on a percentage of standard gross media and/or markups on production spending, and can be structured as standard commissions, reduced rate commissions or on a sliding scale basis. The guidelines indicate that commissions work best for large brands that spend significant amounts on media buys.
In the b-to-b space, where media spending is down significantly, there has been a move away from commission-based compensation and toward fee-based compensation.“Our clients would rather pay us for how much work we do, and not how much of their money we spend,” said Bob Milroy, president of Alexander Marketing Services Inc., Grand Rapids, Mich.
Milroy said clients have less to spend these days, so they’re adjusting by taking “nice-to-have” services off the table. For example, some have deferred plans to significantly enhance their Web sites. Trade magazine advertising is falling off as well, he noted.Darren Stordahl, director of marketing at Triniti Corp., a San Diego software company that recently hired Hodgson/Meyers as its agency of record, said he prefers project-based fee structures for agency compensation.
“My goal is to assign value to value and pay for the unique services the agency offers,” Stordahl said, pointing to design, strategy and execution activities. “As long as we can understand together where value is created, then we have integrity.”
Stordahl added that in the past he’s paid agencies on a cost-plus fee structure for such things as phone calls, direct mail and airline tickets, and he doesn’t like to pay markups on direct costs.
The ANA and Four A’s guidelines recommend a third-party audit as an option in the negotiating process. The guidelines also note: “Too much time spent debating the compensation arrangement can impair results and hurt the relationship.”
Rick Segal thought he was cooked.
The president of HSR Business to Business Inc. had reached the final round to land the advertising account for Eastman Kodak Co.’s professional division. Kodak had eliminated dozens of agencies during a five-month review, and it was now down to HSR and two other agencies. From what Segal could gather, it looked as though the other agency’s presentation had won the Kodak account. That is, until Segal got his shot.
“We were able to present a program that was more compelling and more rational,” Segal said. “It’s more than just showing some ads. You need to show a strategic platform and a completely integrated approach to the campaigns.”
Kodak was impressed, and in November awarded the advertising account to HSR—the biggest chunk of business in the Cincinnati-based b-to-b agency’s 21-year history. HSR replaces Saatchi & Saatchi, which held the account for years, as agency of record for Kodak’s professional division, which targets professional photographers and commercial processing labs in North America. The account budget was not disclosed.Pressure to provide ‘total solution’
Janice Gaub, chief marketing officer of Kodak’s professional division, said HSR presented the most comprehensive marketing package—and one well suited for the current ad climate.
“As the b-to-b part of the company, there’s pressure to provide a total solution,” she said. “I’m not going to go to one place for a banner, another for a trade advertisement and another for direct marketing. I want one place that can link all programs, that is largely metric driven and can tell us what impact we’re having with photographers working in the film and digital markets.”
The first test for HSR will be campaigns tied to the Photo Marketing Association’s annual conference, to be held in March in Las Vegas. The event draws 25,000 to 28,000 attendees representing almost every segment of the photo/imaging industry, including mail-order photofinishers and corporate and institutional labs.
Marketing vehicles for other ad campaigns this year will include trade titles such as Digital Imaging, PDN, Professional Photography and Studio Photography & Design. Segal stressed that HSR made it clear to Kodak representatives that the agency’s top management trio would help steer the ad campaigns. “What was attractive to Kodak was that they would be working directly with the H, the S and the R of our business,” Segal said, referring to himself, Mike Hensley (the agency’s exec-VP) and Tom Rentschler, executive creative director.
Gaub said she hopes the partnership develops into a long-term relationship.“[A review is] a rigorous process and a drain on resources,” she said. “A lot of time and energy went into making sure we made a good choice.”