Under fee pressure from clients, ad agencies are demanding rebates and discounts from owners, writes SIOBHAN O’CONNELL in the Irish Times.
Vodaphone Ireland’s decision to move its €10 million creative account from Dublin ad agency DDFHB to Grey in London reinforces concerns being voiced by Irish agencies and media owners about what the future has in store for the sector.
Financial pressure across Dublin’s adland has intensified in the past two years, with ad agencies complaining they are being squeezed by clients on fees in order to win new business. The agencies in turn are demanding big discounts from media owners on the price of the advertisements they place on behalf of the client.
And the largest media buyers are demanding and securing kickbacks from media owners in the form of volume rebates.
John McGee, editor of Irish Marketing Journal , observes: “Gone are the days when the client was the main source of income for advertising agencies. Instead, agencies are increasingly relying on the media owners for the bulk of their revenues and this has given rise to an environment where volume rebates and long-term agreements have become the currency of media buying.”
A volume rebate is the practice whereby ad agencies receive a percentage rebate of the ad spend placed with the media owner. Paul Moran of ad agency Owens DDB claims media planning objectivity is being compromised by some agencies directing client spend to media offering the largest rebates.
Says Moran: “I am aware of at least one agency group where media schedules are analysed and altered by the head of trading with a view to maximising the volume rebate. My view is that to ensure planning objectivity, the media owners should collectively abandon volume incentives.”
Moran’s view is not shared throughout the business. Alan Cox, chief executive of Starcom Mediavest, one of the largest media buyers, rejects his suggestion, saying: “That would be an extremely sharp and indeed short-sighted policy of agencies to act on those terms.”
Cox adds that volume rebates mean that agencies can charge clients lower fees than would otherwise be the case.
“Our clients can choose from various fee options,” says Cox. “We offer them the full rebate or we charge them a fee and keep the rebate, or a combination of the two. Our preference is to charge a fee based on the hours we put into the account. We tell clients the amount of money we absolutely need to run their account, and that can be made up out of fee and the rebate or just the fee.”
Paul Farrell, marketing director of The Irish Times , says volume rebates are squeezing smaller media owners. “Advertising agencies do offer a good service but they just don’t charge their clients enough for the service. Instead they get the media owners to pay for it.”
Farrell is also concerned about the increasing role played by media auditors. These are consultants employed by advertisers to audit how their ad agency spends their budget and help them choose their ad agency.
Says Farrell: “I don’t have an issue with auditors focusing on price for the client. But you can have a situation where an agency is pitching for an account and is promising 70 per cent off the rate card to the client in order to win the business.
“I would suggest that contracts should be awarded subject to clarification of the price suggested at the pitch with the relevant media owner.”
Media auditor Frances Marsh observes: “Media owners only have themselves to blame because they are delivering the deals to the agencies, so they shouldn’t be blaming the auditors. The media agencies would sell their mothers to win business.
“If things don’t change, what’s going to happen is that more agencies will go to the wall. It is a race to the bottom and service quality is suffering. I see great ideas being presented at pitches but because the agencies are not charging clients properly for their services, they do not have the resources to follow through on those ideas.”
Marsh adds: “Smaller media players are being ignored because they can’t compete in the volume rebate game, even though they might be providing the right environment and value for the advertiser.”
Nigel Brophy, managing director of media consultancy Ebiquity, says some advertisers are not aware that their ad agency is receiving money back from media owners in return for placing an agreed number of ads.
“As clients become aware of the system, they are asking their agencies for the rebate.”
According to Frances Marsh: “Advertisers are demanding transparency and that is why the issue of volume rebates has come to the fore. However, there are many ways for agencies to skin the cat. If they are not earning sufficient income on fees, they are getting it on the volume rebate. If they are not getting it on the rebate, they will get it somewhere else.”
Siobhan O’Connell is the marketing director Business Plus Magazine. This story was originally published in the Irish Times. [www.irishtimes.com]
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