Ad agencies and clients clash—inside the rising tension over transparency in fees and services

Ad agencies and their clients are increasingly clashing over the transparency of fees and services as shops navigate the shaky economy and procurement scrutinizes every marketing dollar spent. Holding companies are ramping up efforts to try to mask the exact breakdown of the fees they charge their clients, while marketers, hyper-focused on costs, are calling for more transparency, according to 11 search consultants, marketing-side procurement people and agency executives. While these issues are not exactly new, several executives said they are becoming more rampant and could come to a head over the next several months, with some marketers considering requesting trade organizations look into the situation. Cannes Lions coverage Follow our live blog here Sign up here for email updates See all of the Grand Prix winners here Holding companies have increased their offshoring activities to lower costs, but some don’t want to lower the fees they charge clients as a result because they have to make up for other factors putting pressure on their business, including shrinking budgets and higher salaries that have become necessary to retain good talent, several of the agency executives said. Meanwhile, a talent shortage has left agencies without enough senior executives to service accounts. Combined, such factors contribute to what marketers see as an increasing lack of transparency. One executive who leads procurement across marketing and content for a major consumer goods company said the discounts and rebates that media agencies, in particular, get from a media buy have always been “murky,” but one area agencies have always been transparent in is breaking down their fees. The brand executive said auditors, working on behalf of the marketers, have previously been able to get agencies to disclose their margins, overheads and salaries without protest—it’s standard practice and allows clients to know they are being charged a fair price. But that’s starting to change, they said, having run into issues with getting shops to break down their fees in the recent agency review their company underwent. ‘Creative ways to move money’ Now these issues are becoming more concentrated at the holding company level, across media and creative, due to the slowing economy, several industry insiders said. “It’s a badge of honor to come up with creative ways to move money,” said an ad executive who has spent time at several of the big holding companies and has been in these fee benchmarking conversations. One of these so-called creative ways to move money includes charging for work that is being handled in one location at rates of another location. For example, one consultant who spoke on condition of anonymity said they had a New York-based agency charging one of their brand clients New York rates for work that was being done in India. This consultant said they are increasingly seeing during new business reviews that agencies are refusing to disclose salaries, which shows the seniority of team members that will service the client account, or what margins they’ll make from the business. Clients will ask how senior the people are who are working on their business and in what discipline (creative, strategy, data, etc.) and the agencies simply refuse to tell them, the consultant said. “Then the clients are saying, ‘Well, can you just tell me how much money you’re making? Is it 15% margin? 20% margin?’ And the agencies are saying, ‘I’m not going to tell you.’” Certain holding companies in the advertising space are asking brands to commit to a fee—a predetermined amount for services—but then they won't allow you to validate that fee, the procurement executive said. “Additionally, they're locking down your right to audit,” the executive said, declining to name the specific holding companies. Some holding companies are also dictating what auditors they will let a marketer use, the executive said, reducing the insight the marketer actually has in the process. Then they will come back and say, when it’s done, “‘Yes, the multiplier you're paying is correct,’” the procurement executive said. Ad Age Agency Report 2023 Revenue, listings and analysis for agencies and agency companies Read more here Asking for more information Agencies are putting everything they’re allowing to be audited into a clean room, choosing to share certain information through a “blended rate card” and excluding other items that used to be standard to disclose, such as salaries, margins and overhead, the procurement executive said. “Are they adding a markup onto the cost of their real estate and then charging it back to us?” the procurement executive said. “I don't necessarily need to see [the finances], but I need to have my auditor see it, if that's the way they want to charge us. Otherwise, I would say, ‘OK, I'm not paying the multiplier.’ It's just a trend now; it’s becoming more and more nontransparent.” A second agency executive who spoke on condition of anonymity argued that shops and clients have agreed to move away from cost-plus pricing models, which involves sitting down with procurement teams to go over salaries and overhead costs, and instead adopt more output-based pricing that includes one fixed price for the work that will be delivered. The agency executive said clients often ask for an alternative to a cost-plus pricing model, which can be time-consuming. “It’s a lot simpler for everybody,” this person said. A holding company media executive who also spoke on condition of anonymity said often clients ask broadly to audit the agency’s finances, which the agency can’t allow because that would expose other confidential client information. This person said the agency has to go back and figure out exactly what the client wants and then work together to find a solution that suits everyone. “I don’t want to say it’s pushback,” the holding company media executive said. “It starts as a broad request that we have to narrow down.” These newer transparency issues are popping up even after media agencies received backlash in 2016 following a report out of the Association of National Advertisers that revealed they were receiving certain rebates from media companies and not disclosing or passing them back to their clients, the consultant noted. Look back: What happened after the rebate uproar (from 2018) “We've just gone through media transparency and now they're trying to hide how much they're earning, what their margins are, what their overheads are,” the consultant said. “To sort of sneakily and willfully try and get out of explaining what you're going to do, how you're going to do it—it's just dishonest.” The consultant said several of their clients, which include major consumer packaged goods and tech companies, are just trying to get standard information included in a typical cost-plus pricing model, which is what they’ve agreed upon, and they’re not getting full transparency within it. A large technology company client, for example, had broad daily rate cards with several holding companies and independent agencies it works with and asked the shops to disclose more about how the rates break down, the consultant said. “They wished to understand how the rates were comprised to ensure that a large proportion of the fees were spent on talent costs, rather than unfair profit or wasteful overhead,” the consultant said. While most agencies provided the information without protest, two refused, the consultant said. “The client pushed back, one agency eventually gave full transparency, the other did not. The client is looking to reduce scope with the nontransparent agency,” the consultant said. The pressures on agencies In defense of these practices, 4A’s CEO and President Marla Kaplowitz argued that this isn’t a transparency issue but rather an issue of micromanaging on the part of marketers’ procurement teams. She said trying to do these detailed audits into how an agency is getting paid, what profits they make and where they’re managing work is “inefficient, ineffective, complex and burdensome.” It’s also confidential information, she added. “These are not new issues, on the broader scale of procurement wanting as much detail as possible,” Kaplowitz said. “There are procurement people who ask for disclosures of salaries, by title or person, which is inappropriate. Agencies have real costs; talent costs money. They want to support learning and development. They have to push back. It does not help to acquiesce to micromanaging of the work. If you allow it in one case, then it trickles into other areas. It’s incredibly demotivating and a distraction from the work.” Opinion: Agencies, stop giving category exclusivity to clients Another holding company agency executive who spoke on condition of anonymity said shops are being squeezed by procurement and they’re simply doing everything they can to not have to “lay off everybody.” “Media-wise, margins are getting thinner and thinner,” the holding company executive said. “The media partners, Warner, Paramount, etc., all want more and more money; they’re charging higher rates. Then clients want lower and lower rates. The other part of it is, client spend is dropping. You start questioning where an agency can make money.” The procurement executive, on the other hand, said they are not pushing for the cheapest price possible; they just want to know what they’re paying for is fair. “We don't want to squeeze,” the executive said. “If I get great work that works, I'm expecting a reasonable cost; not the cheapest. But I'm expecting a partnership. If you charge me on a multiplier, you have to be prepared to validate that.” A ‘talent shell game’ The Great Resignation of 2021, when many ad professionals fled the industry, drove the cost of salaries up as agencies started to compete with tech giants that could pay top talent double what shops could afford. While ad salaries are coming down from peak Great Resignation levels, there are still executives who were recruited during that time who are making salaries that are becoming increasingly hard to support, according to several of the people who spoke for this story. “The market can’t afford how they’re currently paying the leadership,” the ad executive said. Meanwhile, ad agencies are also working with very lean teams due to layoffs coupled with the previously existing talent shortage. Agencies are also promising senior talent in pitches and then staffing accounts with junior employees, according to several of the people who spoke for this story. Matt Seiler, managing director of industry talent firm Raines International and a former agency executive, previously told Ad Age that agencies are promising in pitches that they can do everything cheaper than the incumbent to win business and then they can’t afford to hire the number of people they originally agreed to—so they’ll staff an account with 10 people instead of the 15 they promised—or at the level of seniority they promised. Seiler added that agencies will say they’re working on hiring the appropriate talent and blame a tight job market during quarterly updates with clients to keep them at bay for a while. The ad executive who worked across several holding companies said they’ve witnessed this happening at most places they’ve worked at, with agencies phrasing it as “open roles.” The executive said agencies will tell clients, “‘Within our agency we’re growing so fast, we have six open roles on your business.’ As they look for talent, they use less expensive talent. It’s a talent shell game.” Recent news: Ad employment surged in May The holding company media executive argued that vacancies happen on accounts simply because employees quit, as is the nature of the business, but they said they’re transparent about departures when they happen. “That is just a consequence of being able to maintain your entire staff 100% at all times, which is not realistic,” the executive said. “If somebody's not in their seat, it's very hard to hide.” The holding company media executive also said, if anything, they staff accounts with more senior talent than was originally agreed upon, versus the opposite. Kaplowitz argued that clients also get what they are willing to pay for, and senior talent costs money—sometimes more than marketers are willing to shell out. “Senior talent costs more and often procurement doesn’t want to pay for that,” she said. “While client costs are going up, so are agency costs. Talent costs money.” Check out the latest Ad Age events and award programs The move to offshore work Holding companies have also increasingly been offshoring work—including certain creative, media and production responsibilities—to offices and operations in places such as India and South America to drive down costs; the pandemic, which made work-from-home policies commonplace, has made the move easier. Former Dentsu International Global CEO Wendy Clark, now a partner at Consello, said last year that she saw a “tremendous advantage” in offshoring 10,000 jobs. Both Omnicom and Publicis Groupe also ramped up their offshore workforces and offices in India last year. “We offshore roughly 10,000 people, which certainly helps to mitigate some of our costs and mitigate some of that 5% inflation that we're seeing on our permanent headcount. We'd expect to see that increase over time,” former WPP Chief Financial Officer John Rogers said during an investor presentation last year. But industry insiders said they’re not always passing those savings onto their clients. The procurement executive for the consumer goods company said they’ve never seen cost savings from offshore work reflected in their agency fees. “They're passing off work to different markets but we're not seeing that benefit back.” “We have seen ‘fixed rates’ for work done outside the U.S. that look good when compared to New York but we know are not the base cost associated with the work,” a second consultant said, “that the agency is making a larger margin. But because it was lower than the going rate it was not flagged.” Artificial intelligence will likely play a role in lowering the cost of creating certain assets in the future, but the holding company executive said the technology is not quite there yet. More news: Agencies using AI should get advertisers’ permission Instead, the holding company executive said offshore work is the best way to cut costs now, although the term has become “such a dirty word.” The person said for every one person located in a major U.S. city such as New York or Chicago, an agency can get 10 people in India for the same cost. “Also their work ethics are different. Teams we run in India, Costa Rica will get in at 8:55 a.m. and, by 9 a.m., they’re drilling it hard. It’s part of their culture,” the person said. The ad executive who has worked at several holding companies said agencies will try to spin how they’re offshoring some work to employees out of the U.S. to act like clients are benefiting from having access to talent across the world, and so they don’t have to lower fees associated with that work. “Agencies are good at putting a name on it so it sounds wonderful,” the executive said. “Borderless creativity” is one phrase commonly used by WPP agencies, while Publicis Groupe phrases it like so: “Our clients benefit from a borderless, seamless service that drives the alchemy of creativity and technology.” WPP and Publicis spokespeople declined to comment. The first agency executive and holding company media executive said clients absolutely know where their work is being done and see the cost savings reflected in their pricing. Kaplowitz argued agencies offshore work to teams and offices in other countries in part because they can keep work going around the clock, which is a benefit to clients. “Is it up to a client to understand that? I don’t believe so,” she said. “It is up to the agency to decide how they get the work done and it shouldn’t matter to a procurement person how that’s happening.” Some in the industry, though, believe that the cost savings should and could be more equally realized on both sides. “The growth of nearshoring and offshoring should not be a win for agencies, but rather profit neutral,” said Greg Paull, co-founder and principal of consulting firm R3. “The fact that work can be done effectively in India or Costa Rica is something the client and agency should mutually align on, rather than the agency doing it for arbitrage.” Brian Dolan, CEO and founder of industry staffing firm WorkReduce, said he helped an analytics firm recently offshore some European operations to Latin America, which resulted in 30% to 50% cost savings for the company. “That's a conversation between the agency and their client,” Dolan said. “I don't think it really should matter where [employees] are. I can definitely say there’s continuing to be a huge amount of cost sensitivity right now and that there’s a lot of uncertainty that agencies are facing.” A call for new compensation models Graham Douglas, co-founder and creative director of ad agency Gus, said he sees the argument from both sides—having spent time at shops including Droga5 as well as on the client side as the head of creative for Vimeo for two years. Douglas said he’s always pushed for performance-based compensation, something he sees as a solution to the problem, because then agencies are being paid for measurable outcomes they produce. “I never, ever asked for a staffing plan,” Douglas said, referring to when he was at Vimeo. “I never asked for an hourly breakdown, a fee breakdown. I tried to do everything as a value-based pricing which created accountability for the agency I was working with. You're on the hook to deliver this thing at this level and I don't care what your margins are. If you do a killer job and you can do it with four people, amazing.” A growing cohort of ad professionals are pushing back on what they see as antiquated payment models based on billable hours and costs per head, and some have argued that shifting to a compensation model where agencies’ payments are more closely aligned with clients’ goals will fix these issues between agencies and procurement teams over fees. The 4A’s and the Association of National Advertisers recently put together the Alternative Compensation Model Task Force to come up with new agency payment models including pay-as-you-go options, fixed-based pricing like the ones referred to by the agency executive, and performance-based payments. “We have to focus on output, deliverables; not get into the minutiae of who is doing the work, the fine details of how many hours people work,” Kaplowitz said, noting that a lot of agencies have already moved away from using timesheets to clock people’s hours to then bill to the client because, in part, employees are not great at filling them out so they aren’t accurate anyway. The ad executive who worked at several holding companies said he doubts though that holding companies will ever be able to fully move to a performance-based compensation model because they’re publicly traded and it would require a major reset. “You can’t go to Wall Street and say you’re making money one way and to buy our stock and then make money another way,” the executive said. The only way this person sees the battle over fees resolving itself is by “something dramatic” happening. “A big piece of business would have to get lost and, until then, it’s not going to change,” the person said. The first consultant said there is a lot of talk going on among major marketers over these issues, and warned agencies to be wary of such a loss. “All major advertisers are comparing notes,” they said. The procurement executive said they’ve dropped the issues they’ve had in obtaining certain information from certain agencies eventually because they weren’t getting anywhere; it was a constant back-and-forth. But this person said the company is considering firing the nontransparent agencies they work with. “I mean, obviously, in the end, it's not my decision,” the person said. “I'm within procurement. It’s marketing that makes that decision, but questions have been raised why a partner would be so nontransparent and increasingly so.” Become an All Access subscriber Get access to exclusive resources including Leading National Advertisers, World’s Largest Advertisers, Agency Report, Agency Review Tracker and TV Pricing Report. Click here

Ad agencies and clients clash—inside the rising tension over transparency in fees and services

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