Wednesday, April 21, 2010

Agency Deals - how the industry has failed to grasp the digital opportunity

The media industry has been through a lot recently. Assailed by digital, hunted by procurement, squeezed by the recession, media agencies have had their fair share of these problems; but a new development in recent months spells the end for the model. And far from seizing on the opportunity digital presents to reinvent their business, the industry seems bent on applying a discredited system to the new world too.

To understand why, we need to turn the clock back.

When the great schism between media and creative agencies occurred twenty years ago, the key sales proposition of the newly created media agencies was value. They focused on screwing down rates, and delivering them with cheaper staff.

And on the client side, fuelled by media auditors, procurement were given renewed focus on this newly accountable sector.

The media guys were making big promises, and getting paid less for them. Somebody had to pay, and media owners stepped up to the plate. Agency deals were honed and sharpened, and the market shifted around to accommodate their power.

Broadly an agency deal works like this. An amount of money, or a level of share is granted to a media owner. In return, an amount of media value is granted. The agency then divides this up amongst its clients.
But that division isn’t even. And it isn’t everything.

Some clients get more than others. For every client who’s getting pricing below the average, there has to be another who’s overpaying (or two smaller ones). Even matching clients’ complementary requirements to balance the books isn’t enough, with a rumoured £300m overtraded last year in TV alone.

But the agency tries not to give it all away. If they don’t commit the whole dealbase, they can keep the difference – substantial sums that make up for the uneconomic fees their clients pay.
So why do clients wear this?

For some, being able to report a cheap fee to the board is enough; they’d prefer it if the agency was making money on the side. Others calculate that because they’ve made heavy demands in their appointment negotiation, they’re on the benefit side of the deal book, and therefore ahead on the game. Some are simply being mercilessly exploited.

So even though advertisers get media to fit the agency’s deal rather than their marketing objectives, enough will wear it to make it work, and this has enabled agencies over the years to respond to procurement pressure by steadily reducing their fees.

What’s changed?

Two things.

First, fees have hit a new low. One global media account is rumoured to have changed hands recently for 0.5%. Nobody on the board of that client is asking what they get for that amount, but the answer is simple. They get junior people. Simple media solutions, stacked high and looking cheap. Agencies’ hope that by defining the service tightly, they can make extra by charging for out of scope work. But inexperienced staff don’t know how to spot business development opportunities, and the out of scope rarely appears. And of course there’s the slush fund in the media dealbase to subsidize the fee.

And here’s the final nail in the coffin. Big advertisers have started to abandon the media pitch, instead auctioning the media to lowest bidder. In effect, these advertisers have twigged that the multi-round auction process will cause agencies to cannibalise the slush fund until there’s nothing left.

A few pioneers see digital as the way out of this mess. By focusing on value outputs rather than cost inputs, both advertisers and agencies benefit. But on both sides, many have simply imported the old model. 

Rock bottom fees. No out of scope work. No subsidisation from the deal base. Dumbed down staffing. What’s left for the media industry, and what’s left for GSK’s last-to-the-party media review?

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