Both are faced with make-or-break investment decisions on new business, new technology and, particular to the agency business, the cost of attracting and keeping talent.
To the extent an agency is trying to extract an additional dollar from the client's wallet, the client is, by and large, trying to keep that from happening. Both are equally desperate to be profitable. The obvious field of battle is agency compensation.
Overshadowing the articulated reasons for client compensation reviews is the unspoken unease in the client's perception of the core "value add" of the agency's contribution. There is an erosion of confidence in advertising that-when coupled with an erosion in margins, in marketing budgets and, more subtly, in the client's confidence in the agency's ability to manage its store properly-will ultimately dictate the terms and the atmosphere of compensation discussions.
MAKING HARD CHOICES
The agencies that will prosper are those that will aggressively engage the forces that are reshaping the industry, align themselves with their clients' business agendas and make the hard choices necessary to restore their profitability. Only then will trust replace skepticism and doubt. Only then will compensation fade as the surrogate benchmark, or easy target, for valuing an agency's importance.
Henry Kissinger once described the goal of foreign policy to be "approximately right and not precisely wrong." The same could be said for the pursuit of the right agency compensation system. Can a fair, equitable monetary incentive system be created that actually serves to improve agency service? Can measurement criteria be devised that measure output and results rather than process?
Marketing executives have said that they simply cannot come up with an "objective" measure of performance and that, in the final analysis, "subjective" is probably acceptable if applied by senior management on both sides.
More and more clients are inspecting their systems. Some executives are looking at compensation as a tool to modify agency behavior. Some very significant advertisers are moving away from evaluating process altogether and are going to tie agency compensation to business results and the ability to effectively contribute to the company's strategic deliberations.
A SHARP KNIFE
If client employees and management are being measured against corporate or business unit performance . . . so will the agency. In some cases, this will take a very sharp knife to the agency safety net of "guaranteed billings."
Clients want agency leadership, just as the clients' customers expect it from them. Many agencies have disengaged from assuming leadership on behalf of the client, often because they have fallen behind in understanding the client's business and industry. And they can't afford the investments to keep up.
Without agency help, clients are forced to be their own consultants. And that, again, pushes the agency further away from the position of influence it traditionally enjoyed.
Both sides of the compensation debate need to enroll in a "12-step"-like program to reach consensus.
Clients need to:
Better define expectations and criteria-be they share points, business results, awareness, etc.
They need to evaluate agencies on results and not be overly concerned with the internals of agency organization.
They need to stop shopping for bargains. There will always be someone who can do it cheaper. But clients still have to put their logo on the results.
They need to continue educating new generations of marketing managers on the crucial role of advertising.
They have to discipline themselves in what they want agencies to do, especially last-minute resource-crunching requests that eat up the clock and the dollars.
They should make sure their internal processes are not so complex that valuable and expensive agency time is spent or wasted.
In a world where alliances and joint ventures are becoming the norm, where adversaries compete in the morning and meet in the afternoon, clients should rethink the relevancy of their conflict policies.
They should recognize that the unique relationship between agency and client involves an enormous amount of very close and personal interaction.
And, if they want more agency intellectual and strategic leadership, they have to share more information and be more forthcoming with their agency partners.
What do clients want to pay for? People they see; service and more service; making ads; buying time and results.
What they don't want to pay for? On-the-job-training. The agency's mistakes. 130% of a person. First class. The Four Seasons. People they never see.
They don't want to pay for account team travel to hold the client's hand at trade shows and creative shoots.
They don't want to pay for a dozen people at a meeting . . . to reward the creative team.
They want their agency to be frugal; to be efficient. They want it to say no when it should to unreasonable client demands. The stronger the agency is in defending its economic position, the more authority it will have when defending its marketing and advertising recommendations.
Clients want their agency to link its success to theirs. They want it to risk something. Not everything, since the agency is only part of the client's success, but something.
Is the agency worried about the client's profitability? Will it trim its fees or commission to bail out a client that is in trouble?
Can the agency abandon what some regard as an elitist view of advertising that relegates all other forms of marketing communications to second-class status? Where those other things are tellingly labeled "leave-behinds, collateral and below-the-line"?
This is especially true in the area of integrated marketing communications, where commission-generating media may have only a partial role, and many agencies show only lukewarm committment to non-billing media.
By openly acknowledging that consumer and trade promotions are not the enemy of advertising, an agency demonstrates flexibility, and it won't run the risk of appearing naive and out of touch.
Is the agency prepared to become a general contractor for its client? Can it integrate all the neccessary communications vehicles, with more regard for its client's bottom line than its own?
Can it be flexible? Cut the fat? Revisit its sacred cows?
WHAT CLIENTS NEED TO HEAR
The agency also has to protect its integrity by telling its clients what they need to hear.
Prove your worth. Tell clients your value. Show them that against their sales force, their public relations, their community relations, their trade and consumer promotions . . . that advertising, your advertising, has made a difference, if not the difference.
The agencies that are not building for tomorrow won't have one. Their customers can't reinvent the agency industry. Agencies have to. Or others will.
Clients know what agencies are up against. Many agencies, especially the publicly held firms, are balancing on a loose economic tightrope-with Wall Street holding one end of the rope and the bankers the other. Add to that poor margins and punitive compensation systems, and it's no wonder the agency's focus is all tactical.
This is what I call "institutional Kevorkianism" or assisted "Logocide," where great and noble brands, whether on the agency or client side, are systematically, consciously starved of support and nourishment.
SHOALS OF NEGLECT
The vitality of any brand, no matter how strong its roots, will eventually founder on the shoals of neglect. It will not grow if rooted in the soil of nostalgia and wishful thinking-or expected to be maintained by divine right.
Absent a strong and forceful defense of advertising, other forces are now gathering to explain the agency business to an agency's client. Some companies, in their drive to reduce costs, are now listening to consultants who are claiming that advertising is simply a commodity, like a pen or pencil, and no subjective judgment need be applied regarding levels or spending.
Here's a case where quality and re-engineering programs migrate out of their normal boundaries, like raptors, and start grazing in the fertile, unprotected valleys of advertising.
Following up on their initial success of reducing costs up to 10%, 15% and 20% throughout the corporation, people armed with clipboards want to start treating advertising like a manufacturing commodity, paying the agency on "outputs." Outputs will result in virtual rate cards for your services.
Is it true? Is advertising a commodity? Let's see. Everyone makes 30-second commercials . . . two-page spreads . . . everyone uses the same media . . . the same idea platforms . . . more or less the same client strategies.
MEDIA BUYING A COMMODITY?
Beyond that, what percent of an agency's contribution is truly unique or differentiated? Is media buying a commodity transaction?
This development will disconnect clients from agencies and will more than likely disconnect companies from their brands. It will open the door to agency unbundling, as no agency can survive without a reasonable profit. Incentive structures will be moot.
These contemporary bounty hunters, incidentally, get paid a commission, or bonus, on whatever costs they can get out of the system.
So . . . go tell them about the special relationship.
Their motto: Prove it to me!
Mr. Reilly, principal of Reilly Group, South Salem, N.Y., and senior VP-marketing for Young America, The New York Yacht Club's America's Cup Challenge, is the former head of IBM U.S. marketing communications.