Perfect Ratio of 'Nonworking' to 'Working' Spend Is an Illusion

As Marketers Hunt for Cost Cuts in Content-Creation Fees, Some Argue it's Not a Move for Modern Times

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Agencies, did you know your work is unproductive?

Technically the term is "nonworking media spending," a phrase from the "Mad Men" days. It is once again en vogue as marketers and their procurement departments at companies from Unilever to Pepsi hunt for cost cuts -- and land on agency content creation fees.

Unilever and PepsiCo are among the major marketers that have talked in recent months about their efforts to squeeze so-called nonworking or nonproductive marketing spending. For those not familiar with these dusty terms of art, nonworking media spending is the money spent on creating advertising and content. Working media spending is the money spent to run that content. And many marketers are quietly tapping consultants in hopes of cutting nonworking spending. "It's always been an undercurrent, but for some reason lately, it's gaining more prominence," said David Beals, CEO of Chicago-based consulting firm R3:JLB. "I've got several clients where this has suddenly surfaced as a big deal."

Clients keep asking to cut nonworking spending, he added, despite his best efforts to dissuade them of it. "The whole descriptor itself is ridiculous," Mr. Beals said. "The whole idea that the agency-fee dollars are nonworking and the media is working just doesn't make sense. Anybody who has enough experience knows if the agency comes up with a crummy idea, not only does the media become nonworking, it can be negatively working."

That the terms are resurfacing now is odd, to say the least. Mr. Beals and others see a surge in nonworking media relative to working media as inevitable, thanks to digital and social media. Ads or content compelling enough to get people to share it can generate millions of free media impressions -- the phenomenon increasingly known as earned media. But while that earned media may be "free," creating that sort of content certainly isn't. Agency and production fees are also the backbone of creating brand websites, Facebook pages and other increasingly popular custom content commonly referred to as "owned media."

But despite all the recent lip service to the power of creativity and the importance of data and research, for decades the conventional wisdom was to limit the nonworking spend on creative, research, strategy and production in order to devote as much as possible to "working media." The lower the nonworking to working ratio the better, by this logic. Acceptable levels fell in the 10% to 20% range. That in turn helped institutionalize the old compensation formula where agencies got paid a 15% commission on an account's media spending.

Mr. Beals said clients approaching him lately still want to contain nonworking outlays to 10% to 15% of marketing budgets.

Estimates of industry spending suggest that the macro numbers still fall into that range. Publicis Groupe 's ZenithOptimedia estimates U.S. companies in 2011 spent $356.7 billion on major media and marketing services combined. Ad Age 's latest Agency Report estimates total 2011 U.S. revenue of 900-plus marketing-communications agencies -- advertising, marketing-services and media agencies -- at $33.2 billion. That indicates that U.S. marketers last year spent about $390 billion on media and marketing services plus agency fees/commissions, with agencies capturing 8.5% of the pie. The figures don't include production costs or some smaller agencies, which would likely push the so-called nonworking spend above 10% broadly.

Not every consultant is trying to hold back the groundswell against nonworking spending. Some actively encourage it. A whitepaper from Philadelphia-based procurement consulting firm Procurian promises consumer-products companies that "with the right level of focus and support" they can "reduce these nonworking costs by as much as 25% and convert the savings into active marketing investment dollars."

On a February conference call, Unilever Chief Financial Officer Jean-Marc Huet said, "We've significantly reduced our nonproductive spend during the year," describing that as money spent on production costs and agency fees "not directly driving the exposure of our brands to the community and consumers."

At her investor conference a week later, PepsiCo Chairman-CEO Indra Nooyi outlined the company's war on nonworking spending even more forcefully. She said the company had allowed nonworking spending to squeeze out working outlays.

"So we went to work and we cleaned house," Ms. Nooyi said. "We reduced agency relationships in North American Beverages from 150 to about 50," helping reduce agency fees in the process.

At Unilever, squeezing "nonproductive" spend obviously hasn't been painless for agencies. Fees and margins have declined so much in recent years, according to people familiar with the matter, that agencies are actually losing money on Unilever brands in some countries.

The focus on nonworking spending is only part of the issue, these people say. Simultaneously, Unilever executives have become more focused on ensuring that ads beat copy-testing benchmarks, more often asking for revisions and sometimes new creative teams to do them, though budgets don't expand to encompass the additional work.

Marc Mathieu, senior VP-marketing at Unilever, said in an email statement that rather than look at use of the term "nonworking media, I believe that it is more relevant to look at whether the agencies feel valued for the work they do. We believe in working in partnership with our agencies, and many of the longstanding relationships we have are a testament to that . Their work is valued."

The reduction in production costs and agency fees, Mr. Mathieu said, comes from a broader efficiency drive that includes eliminating duplicated work and unnecessary costs globally "without necessarily reducing agency or production fees."

Bob Gilbreath, author of "The Next Evolution of Marketing," had his eyes opened to the drawbacks of the nonworking ratio when he was chief marketing strategist at WPP's Possible Worldwide. He was told by the manager of a billion-dollar Procter & Gamble Co. brand that it couldn't pay the agency to work on its Facebook page because that would throw off its nonworking-media ratio.

The former P&G brand manager, who left Possible last year and is now executive in residence at CincyTech USA, a public-private seed-capital investment firm, said such thinking has held back investment in digital, mobile and social media.

Mr. Gilbreath pointed to estimates by Exane BNP Paribas that the 12% nonworking ratio common with traditional media needs to be more in the 15% to 20% range for search and 55% to 60% range for mobile and social media.

P&G Global Brand-Building Officer Marc Pritchard said the company no longer uses the term nonworking. "We obviously look at all of our costs," he said. "But the reality is that production is something that creates value, and creativity is another source of value creation."

Ratios of production or content development to paid media probably will vary over time and by brand, Mr. Pritchard said. "There's probably not a blanket answer, because what's interesting is that we're seeing a broader range of content providers," including the growing importance of consumer-generated content.

Jordan Bitterman, senior VP-social-media platforms at Digitas, predicts that the growing importance of earned and owned media will shift the nonworking ratio -- which might better be termed "content development" -- to 50% or more of marketing spending.

"If the goal is to get people to participate in the brand, you're going to have to invest," he said.

One thing that could turn the nonworking vs. working notion on its head, Mr. Bitterman said, is a recent series of statistical analyses by a Publicis sibling agency whose name and process he's not at liberty to divulge. That research has shown consistently on a case-by -case basis and in the aggregate that among paid, owned and earned media, earned media consistently drives the most purchase, followed by owned, then by paid, he said.

In other words, the media with the highest so-called nonworking budget ratios actually tend to work better.

"That doesn't mean earned and owned can work without the paid," Mr. Bitterman said. "Paid is still extremely important in the mix. It's just not the only thing in the mix any longer. ... Working media no longer works as hard on its own anymore."

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