"Our agencies have been very cooperative" to provide GM with data on their profits, said Christopher "C.J." Fraleigh, GM's executive director-corporate advertising and marketing. "We have a very open relationship. Candor is the name of the game."
The two holding companies handling the bulk of GM's work are Interpublic Group of Cos., including agencies McCann-Erickson Worldwide, Troy, Mich., and Campbell-Ewald, Warren, Mich., and Publicis Groupe, through its newly named Chemistri, Troy, Mich. (See AdAge.com QwikFIND aao51e). Agency contracts are signed annually by calendar year, but can be changed as often as monthly if the scope of work changes, said one agency executive.
GM has continually tried to cut costs across its operations, especially now that it is allocating more to generous vehicle-buying incentives that eat into profits. GM's 2002 U.S. spending in measured media was $2.5 billion, a 12.5% jump vs. 2001, according to Taylor Nelson Sofres' CMR. In a regulatory document filed last week, GM reported spending of $4.6 billion worldwide, up 7% over 2001.
But coming to its current agency-compensation agreements has required a good deal of research, and at times has rankled not only its current agency partners but also shops that do not work for GM. In the past 18 months, GM hired as many as six outside consultants to develop "a benchmark on agency compensation," Mr. Fraleigh said.
"GM wanted to understand its agencies' costs in order to determine fair compensation," said one consultant familiar with the company's efforts. "GM wasn't happy with the amount it was paying."
Shortly after his arrival at GM in Jan. 2001, Mr. Fraleigh said he wanted more incentives to improve creative. In an interview last week, he said, "We don't want to overpay. I don't think we do."
Consulting firm Ernst & Young last October contacted the 50 largest U.S. ad agencies, requesting their participation in a blind survey for a client referred to as a Fortune 100 Company, which a high-ranking industry executive identified as General Motors. An E&Y spokesman would not identify the client. "The weakened economy and pressure on corporate profitability have resulted in increased pressure on advertising agencies to justify their compensation arrangements to clients," wrote E&Y Partner Kathleen Eagan in the questionnaire cover letter, obtained by Advertising Age. The goal is to gather "current, unbiased, relevant data on agency-compensation matters."
In addition to asking the industries in which each agency's Top 10 clients operate, the questionnaire (also obtained by Ad Age) probed agency revenues, costs and hours. Other questions included average base salaries for junior and senior employees, and overhead rates and the components included in each agency's definition of overhead. E&Y promised to keep all survey responses completely confidential, and said that participants would receive a copy of the final report.
Several questionnaire recipients contacted the American Association of Advertising Agencies for advice on whether to provide proprietary data. While noting that project participation was up to each agency, said one executive familiar with the trade group's response, the 4A's noted that "this type of database-building by an advertiser could provide data that is subject to misinterpretation and could well be detrimental to the interests of agencies." The 4A's declined to comment.
One agency executive said the questionnaire would have required some 40 hours in data collection and calculations. "Nobody would open their kimono. Why would they? These consultants make money screwing us. You bet GM wasn't very happy," this executive said. Mr. Fraleigh did not respond specifically to E&Y's efforts. "We try a bunch of different pathways. You know some are going to work," he said.
GM's agency-compensation system has evolved over time. In the late 1980s, it re' `80s, it reduced commissions from the traditional 15% to 9%, plus fees for added services. In 1999, after a 1996 pilot of non-commission-based pay for Leo Burnett USA, GM initiated a standard system for all its agencies that introduced incentives. It also paid labor-based fees.
The incentives, Mr. Fraleigh said, are based on "better service, better creative and better results." Although he declined to provide specifics, one measure is advertising effectiveness. He also declined to comment on whether the incentive pay was shifted from other agency fees. The marketer treats agency compensation "like any other piece of business," he added.