GM hammers agency costs

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General Motors Corp. is asking all its roster agencies to define overhead costs using specific components in an effort to standardize and better understand its agencies' cost structures, according to executives familiar with the matter.

The request is the next phase of the automaker's ongoing effort to determine compensation (AA, March 17). It comes five months after a speech by C.J. Fraleigh, GM's executive director of corporate advertising and marketing at Advertising Age's AdWatch:Outlook 2003 in which he called agency holding companies "flabby" organizations that have become "more revenue models than consumer-solution models."

GM, under intense competitive pricing pressure, has been tightening its belt. North American net income in the third quarter fell from $533 million a year ago to $128 million, which the company attributed to a 5% production decline and pricing woes. Worldwide net income, however, improved to $425 million in the third quarter vs. a net loss of $804 million a year ago.

The automaker has been one of the most aggressive automaker in offering buyer incentives.

GM, the country's largest advertiser, spent $1.49 billion in measured media through August, according to TNS Media Intelligence/CMR. Its roster includes Interpublic Group of Cos.' General Motors Mediaworks, Warren, Mich., Lowe, New York (GMC and Saab) and Mullen, Wenham, Mass. (certified used vehicles); Publicis Group's Chemstri, Troy, Mich. (Cadillac and Pontiac) and General Motors Planworks, Detroit; Omnicom Group's Goodby, Silverstein & Partners, San Francisco (Saturn) and independent Modernista, Boston (Hummer).

due date

Executives familiar with GM's project said that the carmarker is gathering data on shops' overhead via questionnaires sent to agencies. Responses were due last month. The questionnaire asks shops to categorize and detail overhead in five subcomponents: indirect labor; space and facilities; corporate expenses professional fees and client non-billables.

Mr. Fraleigh said only that GM's agency agreements are confidential and the automaker believes strongly in fairly compensating shops and rewarding them for above-average work. GM's 2003 contract allowed it to cut costs while offering new performance-based incentives to its shops.

The potential financial impact on agencies is unclear currently, but the carmarker is a significant client for Interpublic-in 2001, GM contributed 7% of 2001 revenue.

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