As someone who spent 19 years at an agency, and my last 18 years consulting with clients on their agency compensation agreements, I read Rance Crain’s recent opinion piece and conversation with Gary Burandt with much interest.
In it, Gary argued that “losing the 15% media commission was the biggest game changer in the ad business since it started,” adding that “in retrospect it would have been better for the agencies to voluntarily agree to a lower commission of 10% and keep a system in place that was working well.” He also noted that the conversion to client fees and hourly rates “has made no one happy and has become a distraction on both sides.”
While I greatly respect Gary’s industry experience and smarts, I have to respectfully disagree with most of his arguments on the commission system, and can see no scenario where a move to a 10% vs. 15% commission rate would have made any difference.
First, while “inflated media costs” and “fat profits” for the agencies were one of the factors that triggered marketers to move to fees, this was only part of the story.
The much bigger part of the story was the evolution and fragmentation of media. We have moved away from a complete reliance on “paid” mass media to a mix of digital, social and other “earned” and “owned” channels that come with relatively little or no media investment on which to base a commission. The use of commissions would have rapidly declined regardless of media spending or agency profit considerations.
Related to this was a growing marketer concern with an agency’s “media neutrality”; i.e., under a commission would an agency be biased towards recommending big, paid media channels like network TV where the commission revenue relative to agency time and cost would be very favorable? (Certainly, Gary’s point about the unbundling of media services came into play as well.)
Second, the commission system did “work well for decades,” but not so well for marketers or agencies from about the 1980s forward. This was partly due to the media evolution I referred to above. But, also partly due to many situations where marketers rapidly and significantly cut their spending in tough times.
Many agencies were left holding the bag with small commission revenues that did not come close to covering their costs. If you were able to get agency chief financial officers to talk with you candidly and not spout the politically correct “fees suck” line, they would tell you they greatly prefer a labor-based fee agreement that allows them to cover their expenses, and at least has a chance of earning a negotiated profit target vs. the vagaries of a commission system where they could earn windfall profits one year, but lose their shorts the next. That system, by the way, would never properly cover their costs for the growing number of important activities not tied to a large media spend.
The growth of the procurement discipline in the marketing and advertising space happened well after the shift away from commissions. And, with or without procurement involvement, many of the marketers who were still using commissions had already negotiated rates below 15% or a sliding scale rate tied to spending volume. The notion of a standard 15% commission rate any time after, say, 1985, is an illusion.
But, let’s hypothetically assume procurement was actually involved in the move away from commissions. Those procurement executives “rewarded for squeezing more and more out of an agency” would not have stopped at 10%. I deal with procurement executives all the time, and there are many good ones who have actually taken the time to understand the agency business, and who are rewarded for creating value, not cutting costs. But, there are certainly many others, and those folks would not be satisfied with stopping at 10%. We’d be having debates around 7% or 8%, if not lower.
As important an influence as the ANA and the 4A’s can be, they do not represent everybody, and many of their members look out for their individual cost interests first and foremost. No majority of marketers would have accepted a 10% commission guideline. And, my sense is that most agencies would not want their hands tied by that either.
While it is sad that many agencies have cut back on their training and talent investment, it is not for lack of financial ability, at least not at the holding company level, or amongst the successful agencies. The good agencies generally earn somewhere north of 15% profit (or north of 10% on very high volume accounts).
I have found that the “rancor” between marketers and agencies has never been about the method of compensation, rather it is about the amount of compensation.
Gary and I would probably both agree that this is certainly different than years ago when agencies could reasonably count on increasing year over year client spending in mass media, and client marketing budget increases did not demand the degree of agency financial scrutiny and accountability in the highly competitive global economy we operate in today.
I do fully agree with Gary on his points about independent vs. holding company agencies. They do have greater financial flexibility in serving their clients, and this is a competitive advantage they can and should leverage.