It’s 20 years since I last worked at an advertising agency, that being RK Swamy/BBDO India in their Chennai office. As if that mistake was not enough, I made the blunder of then joining a PR firm in Delhi, Perfect Relations, in 2006. I was always a copywriter in advertising throughout my long career in the industry. I was fortunate enough to have worked in an agency like Ogilvy that saw early enough my skills and capabilities and believed enough in them to also help me develop my understanding of other communication disciplines as well as skills in those areas, and to hone my strategy skills as well alongside.
Some of you might wonder why I would want to address the issue of agency compensation, since I was never in account management and never fully managed an office either. Well, in the long time that I have been away, I have had plenty of time to reflect on what is going on in the industry – from the outside of course – and it pains me to see the industry devalue itself to such an extent that client organisations would now rather in-house advertising. That freshly minted MBAs from prestigious B-schools don’t consider a career in advertising and brand communications anymore. What has led to such a precipitous fall in the industry?
Let me begin with all the usual explanations offered and that are well-known by now, and also offer my observations. First, that thanks to pressure from large MNC clients, agencies separated themselves into creative and media agencies in the early 2000s. This tells me that clients’ focus was more on getting better deals in media than on the creative product. Which in itself should have been a flashing warning sign for the industry that something was terribly wrong. Instead of addressing this problem, agencies kowtowed to clients’ demands and this took place at an international, industry-wide level.
The second big change in the industry is, of course, the technology disruption that we have seen especially with the advent of digital communications. Traditional advertising agencies didn’t anticipate this, nor did they develop expertise and capabilities in these new areas early enough to adapt to the new advertising landscape. I am myself very new to digital communications, but as I have been writing on my blog, the way digital communications has evolved so far should be further cause for concern for advertising agencies. It is not conducive to brand-building as I have been writing, but is fast developing into an effective, short-term sales funnel and this is enough to attract advertisers. If advertising agencies don’t watch this trend closely and act soon enough, we are likely to find that client organisations will use digital increasingly as an online distribution channel and for e-commerce. The tendency, therefore, to in-house digital communications will be even more than is already the case.
What’s more, thanks to the technology disruption, we now also have management consultancies offering advertising services especially in digital communications. Advertising and brand communications agencies are being swamped from all sides, forcing them to reduce costs, and retrench even further. While media agencies are supposedly still being remunerated on the 15% commission basis, creative agencies – which is where the focus ought to be – are deploying various forms of compensation, all of them clearly inferior to the earlier 15% commission system.
If you ask me, I never thought the 15% commission system was the best way for agencies to be compensated. First, it was earnings based on clients’ media spend, and did not fully reflect or compensate for other services that all full-service agencies offered. From account management and account planning to creative and media expertise, none of it was adequately compensated. The second problem with it is more of an ethical issue, in my opinion: client organisations were paying advertising agencies a 15% commission based on what they spent on media, and so in a round-about way it was tantamount to media giving us a commission for placing adverts in their pages and on their screens. This should put advertising agencies in an awkward position vis-à-vis their media partners, shouldn’t it? But nobody ever questioned it, or offered a better solution and so the 15% commission system stayed on forever, around the world.
The result of all this terrible slashing of costs, fees, and resources has meant that the advertising industry is now operating on a barebone cost-plus basis. It has of course, meant that it’s all a race to the bottom, cost and work included. Any wonder why most of the advertising that one sees for brands nowadays is so ad hoc, lacking in any strategy, any thought and idea, poorly written and executed? It is because agencies have been so terribly squeezed on costs and fees that they cannot afford to hire good quality and experienced talent, relying mostly on freshers and youngsters with a few years – if at all that – under their belts. Not the youngsters’ fault, but with no senior and experienced personnel to lead the thinking and the work, to guide and improve it, work has suffered the biggest casualty. I wonder how clients easily accept the sub-standard work, but then again, you get what you bargain for.
Let us look at how advertising agencies – and by that we mean only creative agencies now – are being remunerated nowadays. There doesn’t seem to be a single industry-wide practice, with different agencies adopting various compensation systems. I couldn’t find much intelligent reporting on this online, and from what little I could gather, there are four methods currently being adopted in the industry:
- Fixed retainer fee
- Time-cost based payment
- Per project or assignment-based payment
- Performance-based or sales-linked payment which is relatively new
Of course, there are problems with each one of these options. However, the first two systems of fixed retainer fee and the time/cost payment at least acknowledge the fact that the agency is charging for its expertise in advertising and brand communications. And that there is a longer-term arrangement between agency and client organization; perhaps there are annual contracts drawn up and renewed at the end of each year.
The latter two are clearly sub-par solutions. Project-based payment is too short-term with the agency commitment limited only to the duration of the assignment, and is not likely to produce the best results. It reduces advertising agencies to vendor/supplier status and would force them to act like freelancers. As it is, we have to endure the malaise of short-termism – from corporate earnings to tenures of CEOs and CMOs – and this system would not lead to long-term thinking and value addition on the part of agencies. Performance-based or sales-linked payment is quite ridiculous; surely, we all know that product sales are based on a combination of factors – not merely advertising or brand communications – with most of the factors residing on the client side of the equation. That said, I read that performance marketing is a buzzword in digital communications, with payments based on number of clicks/hits and the like.
Allow me to now recommend what I think could be the best way forward. At the very least, an idea worth considering if advertising agencies and their marketing counterparts are to revive their status and secure their futures. I wonder why it is that nobody in the advertising industry thought of being compensated for the value of the expertise they provide. Now that media has gone its own separate way taking the commission system along with it, agencies ought to have been compensated for their strategic and creative expertise which still resides in the agency. Provided, of course, that the strategic and creative expertise is of an order that can command good fees.
Not all advertising agencies focus on beefing up strategy skills and capabilities, preferring to rely on client organisations’ strategy strengths. I suspect that this trend might have grown, what with agencies not being able to hire top-notch MBAs and experienced planners, while advertisers continue to attract good talent. This has perhaps worsened the asymmetry between agencies and clients, when our industry ought to have people who can hold their own with clients and interact with them as equals. I reckon this might have pushed us further into vendor status. This, when we also have management consultancies with their expertise, not merely on marketing strategy but on the entire business, competing with us.
Then, there is the entire creative function of brand building and communication, which advertising agencies consider their final product. And indeed, that is what client companies buy from agencies, along with strategic inputs on brands and on growing their businesses. But guess what? We have been giving these away for free all these years! What I mean to say is that all, or most of the work that creative agencies do for brands, is in the form of intellectual property that clients own and that are part of the brand’s life and future growth. From brand name, brand identity and product-related ideas that might come from the advertising agency, to packaging designs, campaign ideas and communication that run across all media, these are valuable intellectual property that we advertising agencies create for client companies. And we have been giving them away, gratis. Or for whatever paltry sums we put on our rate cards, and that our clients are willing to pay.
As I have written before on my blog, while writing about the book, Capitalism Without Capital by Jonathan Haskell and Stian Westlake, brands and advertising campaigns and communication ideas are intangible intellectual property and valuable brand assets. We can see from the US Fred chart above, that business investment in intellectual property in the US has grown rapidly since the 1980s and is around 5.5% of the country’s GDP now. I tried searching for how much of this investment in intellectual property is product and brand-related, but couldn’t find this specific information. The BEA (Bureau of Economic Analysis) in the US has data on the growth of private fixed investment in intellectual property from 2015 to 2022, but strangely products and brands are not listed as a category; they have software, R&D (manufacturing and non-manufacturing) and even entertainment, artistic and literary originals. It’s hard to believe that the US which leads the world in product and brand innovations and their IP, doesn’t have a category for intangible intellectual property such as product design, process, and brand-related assets. However, from another BEA table, you can gauge the extent of inflation even in these listed intellectual property types. Surely, US companies have a way to also account for it in their annual reporting.
This certainly needs a serious relook, and agencies ought to make clients see the value of all that intellectual property that they’re vested with and perhaps haven’t ever bothered to license, or monetise, in any sensible way. In fact, I would suggest that we in the advertising and brand communications business ought to find ways for clients to create more intellectual property in the form of brand assets, and be fairly remunerated for it. Which means that in addition to account planning and account management as well as creative personnel, agencies will now have to hire IP experts as well as finance professionals who know what brand IP assets can be created and how they can be valued.
Similarly, client organisations who might already have legal and finance professionals well-versed in these matters, will perhaps have to beef these resources up. And together, agencies and clients can build brands through strategies that are truly differentiated and through communication and brand properties that become long-term intellectual property for our clients. I had written a blog post on some brands and their communication being long-term brand properties.
The advertising and brand communications industry needs to stop being distracted by every new technology or trend out there, and focus on solid, deep and serious work on brand strategy and creative that, together, differentiates our clients’ brands and grows their business. And when our clients’ marketing or digital heads get distracted by these new fads or new tech developments, we ought to bring their focus back to the brand, and what any of this new tech does, to help the brand thrive and grow.
In terms of agency compensation, I think the best solution would be for agencies to charge for their expertise and work. Therefore, fees for strategy and creative work separately, as well as remuneration for intellectual assets created for clients’ brands. All clients may not need the full solution; some might need agencies to only help with the strategy part and others might require only creative. The ideal and best solution always is that the same agency works on strategy and creative ideas, but clients must be made to realise that they have to remunerate separately for both. And, also for the IP assets created by the agency.
My own work on brands, which I have been doing quietly on my own and which I share on my blog site for free, leads me in another new direction. And that is how individual product and service brands are linked to the corporate brand and vice-versa. This is even beyond marketing because it is inextricably linked with how the corporate brand (read company) works, its strengths and weaknesses, its relationship with all stakeholders and more. So, if splitting strategy and creative is a piece-meal solution – just as hiving off media was decades ago – then splitting product brands from the corporate brand is just as piece-meal and fragmented, in my opinion.
The times call for holistic solutions, even if our clients can’t see beyond this quarter’s results. It is up to us how we manage to win their confidence in our capabilities and our expertise in growing their business along with them.
Peripatetic Perch 