The choice for clients: Price vs value, vendors vs partners, delivery versus excellence

peanuts

Valuing creativity?

It’s easy to find client companies talking about the need  for ‘partnership’ and ‘relationships’ with their agencies.

It sounds lovely.

Except that when it  actually comes to the grubby business of money, the hollowness of much of that talk  is quickly exposed.

Certainly it’s a little hard to take seriously claims that client companies ‘value’ creativity when the downward pressure on agency fees is relentless.

According to research conducted by the UK’s Marketing Agencies Association, clients have succeeded in forcing down agency fees by almost 20% over the past decade.

Now thirty years of the IPA Effectiveness Awards have demonstrated how creativity can create significant financial value for corporations.

Thus, for example, from most recent collection of effectiveness cases, published by the IPA as Advertising Works, Volume 21:

Over two years, advertising in the UK for John Lewis generated £261 million of incremental profit.

In China advertising for Dove generated incremental sales of £25.5 million over 16 months.

While one can only guess what the agencies’ compensation was, we can be fairly confident that when set against the wealth created, it will have been minuscule.

Marketingland it would seem, wants exactly the same returns (if not greater) for ever less.

That’s the opposite of ‘valuing’.

Thinking for free

And then quite aside from being assigned to produce specific and finite creative assets, there are all those brainstorms, hothouses, conferences calls, ideation sessions, and so on that agencies are invited to and expected to contribute their creativity to.

For project fees that often amount to little more than token gestures.

Of course the agency contribution (if it’s a good agency) goes beyond simply responding to requests and producing ads.

Good agencies bring to bear creative thinking all the time to a client’s business. And they do not charge for it.

Clients should recall that all this free stuff was once actually paid for via what used to be called agency ‘margin’.

The very thing that is being tirelessly eroded.

Eroding quality

Clients reading this may be indignant because their experience of agencies is increasingly mediocre and transactional.

Up to a point the indignation is justified.

But they are getting to experience the blunter tools rather than the sharpest minds in the industry box because of  their own industry’s cost-cutting.

It’s rather like the horse-meat scandal in the UK.  We insist on meat being so cheap it’s free, and then feign shock that it’s old racehorses.

The fact of the matter is that you should no more cut great agency fees than you should stop advertising in a recession.

Partners?

To all this pressure, we can now add the newer demand from client companies that agencies submit to new, extended payment terms.

In some instances it will take agencies a full 120 days to get paid.

As the UK’s IPA recently put it it:

It is surely nonsensical that agencies… should act as banker to these major corporations merely so that these corporate giants can demonstrate strong balance sheets to their analysts each quarter. With interest rates at an all time low there is no real commercial value in unilaterally extending payment terms. Those at the receiving end of this pressure are precisely those hired to add value to these major companies through their commercial creativity.”

Demanding that agencies act as bankers, funding the short term cash flow needs of client companies is hardly conducive to respectful, trusting partnerships.

No excuses

While client companies (and agencies) are justly nervous about the economic future, corporate poverty is hardly a robust defense.

According to Forbes, in 2012, U.S. non-financial companies filled their coffers with an additional $130 billion, taking their total cash to a record $1.45 trillion.

According to S&P Capital IQ, 202 members of the Standard and Poor’s 500-stock index have $1 billion or more in cash.

Why do companies have so much cash?

Record profits.

In 2012, S&P 500 companies accumulated  earnings never before seen in history.

Hard truths, hard choices

Client companies can choose to focus on reducing the cost of the creativity they purchase, or they can focus on its value.

They can choose between having vendors or real partners.

They can focus on the efficient manufacture and delivery of creative assets or they can choose to focus on effective value creation.

For ultimately the corporation must recognize that creativity cannot thrive in an environment that treats those who supply it as mere vendors.

And that should concern clients everywhere.

For when their own organization no longer has interaction with a creative, challenging, free-thinking culture, their own quality of thinking will suffer.

So the choice for clients is starkly clear:

Treat (and bully) your agency as a low-cost vendor and accept a low-quality product.

Or treat (and reward) your agency as a premium offering and strive for a high-quality product.

The challenge for agencies, needless to say, is what kind of agency they wish to be.

And what kind of client company they wish to keep.

***

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13 comments

  1. northern

    Blimey, not content with setting us to rights on the fundamentals of how advertising really works, you’re now sorting out the industry itself! Sobering, insightful and, as usual backed with great evidence.
    I’m still reeling from the incredible novelty post.
    Thanks for taking the time to do this, it’s really valuable.
    Even better, it shows Campbell up

    • Martin Weigel

      Well it had to be said! Or at least I needed to get it off my chest.
      Thanks for the nice words… I found the novelty thing a bit of a can of worms, to be honest as some of the other commenters here have highlighted. Where does marketing’s responsibilities begin / end? etc.

  2. Mark H

    I can’t help but thinking that part of the problem is that (some) agencies are willing to accept these terms just to get/keep business in the door – in the vague hope they can improve them or recoup the costs over time.
    Surely it’s time trade bodies (e.g. IPA or ISBA) take a lead in helping to set minimum acceptable terms of business with agencies, which every IPA-accredited agency embraces, limiting options for rapicious procument departments to the few agencies who aren’t accredited? I have sort of felt we need the same rules applied to a code of pitching practice, though it’s probably just wishful thinking on my part…

  3. Cliff Peat

    In essence this is just the “competitive market” at work. If your agency has the sharpest, most creative minds and believes it offers best value but you are not getting the clients you want then the first assignment is for yourselves. That message has to be communicated to prospective clients at the right level and to convey trust and (perhaps) performance guarantees.

    If you succeed and get to the stage of negotiating a deal with a client you can say “we’ve been ultra effective for ourselves in getting this far with you and now are going to do the same for you”. Your fees turn from being a cost to being an investment for your clients.

    It’s not just agencies but most service providers have this challenge.

    • Martin Weigel

      Hi Cliff,
      I like your idea of reframing the agency fee in the minds of clients.
      From being the cost of asset creation.
      To being an investment in competitive advantage.
      Nice.

  4. Phil Adams

    Sweeping generalisation alert.

    There is only one viable agency business model.

    1) Get lucky at launch with one or two anchor clients that want great work.

    2) Do great work.

    3) Attract more clients that want equally great work.

    4) Say no to clients that don’t want great work or that won’t pay for great work.

    5) Repeat.

    As for partnership, actions speak louder than words. In fact the clients that say it are rarely the ones that do it. Partnership belongs in the same insincere, devalued language folder as “fresh”, “premium” and “home made”.

    • Martin Weigel

      Completely agree, Phil.
      Of course having a culture, and the absence of a holding company make all of that easier.
      Or if not easier, then at least easier to remember.

  5. Pingback: Linkness. What we’ve been reading | July 26, 2013 | NEXTNESS
  6. Neasa

    Great post and a really important discussion for agency land.

    Ultimately, as you say, it’s about what company we choose to keep. I’m not sure we can blame clients for seeking to hire agencies at the lowest cost they can get away with. The responsibility lies with agencies to prove their worth and reject clients that offer insulting terms. It’s the exact same scenario with employers and staff: management need to keep costs down, employees need to justify their value or be prepared to go elsewhere to find someone who does value them. The best clients choose the best agencies, in the same way the best companies get the best staff.

    The problem is when the relationship becomes too imbalanced with one side artificially holding all the power (like in a poor job market). But that’s not really the case in advertising – there are lots of agencies but also lots of clients.

    Our low perceived value is partly our own fault. We’ve lost our place at the top table in business because, IPA papers aside, we’re not very good at joining the dots and demonstrating the effectiveness of our work on business. So many agencies are still peddling myths and waffle instead of drawing on the really excellent evidence that we have at our disposal today, and that creates a bullshitter image for the industry as a whole. And so much poor work is produced on the back of concessions and compromises (just look at an average TV Ad break), that we end up relying on the outliers, the Nikes and Apples of the world, to show how more creative advertising could work. But clients know that they aren’t Nike or Apple.

    • Martin Weigel

      Hi Nesea,

      All great points, and I find myself agreeing with pretty much all that you say.

      I certainly agree that the best clients choose the best agencies.

      And that agencies have done a poor job at demonstrating their value.

      But…

      I do blame clients for trying to hire agencies at the lowest cost they can.

      As Cliff has commented here, if you are a client, agency margin is not your enemy.

      Is it not something to be pillaged and squeezed.

      For margin allows your agency to invest in attracting and keeping the best, brightest, sharpest, people in the industry.

      Margin allows your agency to give its people best in class training that ensures they stay equipped for an ever-changing world.

      Margin allows your agency to invest in technology so that its people are able to work as efficiently as possible.

      Margin allows your agency to invest in experimentation and prototyping, to explore nascent possibilities, acquire invaluable knowldege, develop new best practices, to be at the front of the train, not the back.

      In other words it keeps your agency smart, and ahead of the game.

      Of course, if you’re amongst those who’ve succeeded reducing agency margins the years, you haven’t merely reduced your costs.

      You’ve undermined (assuming your agency is a good one) what should have been a competitive advantage.

      As Oscar Wilde wrote, “Nowadays people know the price of everything and the value of nothing.”

  7. matt

    Martin, I find myself disagreeing with you for the very first time – it may be heresy, but I see the problem as stemming from agencies themselves.

    How many agencies would be willing to forgo their fee if it was shown that the advertising wasn’t effective?

    Despite our continual rhetoric that we are the most forward thinking and progressive of industries, our business and fee structure has remained staunchly resilient to change over the last four decades. How many creative agencies still base their fees on time, or even worse a percentage commission?

    Further to that, how many agencies use the same ‘relationship’ and ‘partnership’ language as their clients, while knowing that the reality is nowhere near. We like to imagine ourselves as creative consultants, sharing and solving business problems and demonstrating tangible value back to the business. The reality is that we are too often suppliers, filling a client need for creative copy, a media plan, even a ‘big idea’ that can be packaged up and sold for an agreed price up-front.

    Is it any surprise that procurement departments often view us as another supplier, and consequently see that they can return money to the bottom line by renegotiating contracts down to the minimum mutually acceptable level (I believe they call it ‘Most Economically Advantageous Tender’ or MEAT for short – surely proving that procurement managers have a dark sense of humour!). I agree that there is a certain perverse logic in this race for the bottom (low prices inevitably mean lower quality, which will ultimately affect the client’s business in the long run), but it’s a fact of modern business that touches every part of the supply chain (though not in Japan, according to this article http://www.theguardian.com/commentisfree/2013/feb/13/horsemeat-scandal-japanese-car-manufacturer-lesson – perhaps we should be taking notes?)

    If we are to be seen as true consultants – as people who solve business problems, and have a commitment to delivering value back to clients’ businesses – we need to renegotiate this relationship, and a good place to start would be a different fee structure for agencies based on risk and reward, showing tangible commitment to our client’s success.

    If you believe in yourself, your agency and the power of creative communications to change your client’s business why wouldn’t you.

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