Endless Pressure on Price Traps Agencies, Clients in Death Spiral

Viewpoint: TBWA Worldwide Chairman Jean Marie Dru Decries the Growing Influence of Procurement

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Jean Marie Dru
Jean Marie Dru
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.

Jean Marie Dru has been in the ad business for 40 years. He is chairman of TBWA Worldwide.
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