Resisting Fee Reductions Can Benefit Agencies and Clients Alike

Now Is the Right Time for Both Parties to Play Hardball

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Michael Farmer
Michael Farmer

The current economic crisis sets the stage for uncomfortable conversations between advertisers and their agencies. It goes like this: The chief marketing officer and head of procurement meet with the agency. The CMO says, "This is a bad year for us. We are asking all suppliers to cut price. You need to share our pain. We're looking for a 15% cut; no room for maneuver." The agency, no stranger to this script, plays for time: "Let me get back to you." Some time later, in a phone conversation, the agency gives its response.

Is it the usual grovel? The concession to the demand? The predictable "OK, we're good partners and we'll go along with you?" No. This time, the agency pushes back. "We can't live with a simple cut. We need to reconsider ... the way we work together."

It's not an unrealistic scenario. It's true that this year will be a bad one. The 2009 U.S. ad-spending forecasts reported in December by Advertising Age say it all. ZenithOptimedia predicted spending will drop 6.2%; Group M foresaw a potential 3.2% decline; and Robert Coen of Magna forecast a drop of 4.5%. This year doesn't have revenue drivers like the Olympics and the election, and it's the second calendar year of a massive economic crisis. We all know that consumers have tightened their belts. Advertiser budgets are tight. But marketers can't stop advertising. They need to do as much or more with less. And CMOs expect the agency to work harder and be more productive. And more effective, too.

A continuing trend
Wake up, CMOs. This is more than a tough year in the market: It's another in a string of very hard years for Madison Avenue. In the 20 years between 1988 and 2008, according to research by Farmer & Company, agency fees for an average unit of work have dropped by about 40% when adjusted for inflation. Over the same period, creative workload for U.S. agencies grew by more than 60%. Fee levels have dropped while workload has grown in volume and complexity. Farmer & Co.'s research shows that agencies now have to regularly understaff their growing creative workloads to maintain profits in the face of weak fees. The average creative, who was expected to generate three full ads per year in the 1980s (as described in 1983 by David Ogilvy in "Ogilvy on Advertising"), now has to generate five ads or more on an equivalent basis (as adjusted for a greater number of media types). This trend cannot continue. There are limits to the squeeze. Creativity needs are certainly not lessening. Nor is the need for agency financial health to hire and pay for the very best people.

Michael Farmer is CEO of Farmer & Co., a New York-based strategy-consulting firm dedicated to the advertising industry.

Agencies that resist unilateral fee cuts are doing the right thing, both for themselves and for their clients. Now is the time to rebalance the relationship. The 2009 crisis provides an open door for a much-needed conversation that could lead to better conditions for both parties. Instead of simple fee cuts, the conversation should go like this: "Let's plan on how much work we really need to do to meet brand needs." Then agree to a more limited scope of work that matches the new, limited fee. There is room for this -- my research shows that about 15% of work in a typical scope of work is unnecessary -- a waste of time and resources. It also shows that most clients and agencies do not really plan the work that needs to be done, or have hardball discussions that separate workload fluff from workload essentials.

Time to play hardball
Once scope of work is agreed upon, CMOs and agencies need to track what they do together, and if there is a need for more work -- beyond what was originally planned -- then clients should pay for the extra work. Base the agency fee by a new understanding: on workload rather than resources. Reward the agency for productivity improvements. If they can do more work with fewer resources, share the benefits with them.

This is the year for both parties to play hardball. CMOs can seek reduced fees -- that's fair. Agencies, though, must insist on reduced (and better) workloads. Ideally every agency will push back in this way, making it difficult for clients to find softball agencies that will do anything for any price -- at reduced quality levels, of course.

I'm not being an idealist about this. I'm an optimist. I believe agencies that resist fee reductions do a service for their clients. CMOs, listen carefully: Agencies that push back are the strategic partners you really need.

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