Correctly concluding that there was “insufficient readiness within the media advertising industry” Nomsa Philiso, group executive of commercial enterprises at SABC, has sensibly deferred the introduction of the zero-based rate card.
This form of agency remuneration dates back to a long gone era, when ‘full service’ agencies offered advertisers both media and creative services. The major appeal of agency commission was its perceived simplicity. It was relatively easy to calculate and administer – assuming that it was only a matter of deducting it from a commission bearing rate card. (There were always a few non-commission bearing rate cards scattered across the industry landscape, ready to ambush the unsuspecting intern or junior buyer. Inevitably too, that intern or junior buyer struggled to master the calculation to gross up the commission. The result was inconvenient write-offs. Fortunately, media with non commissioning bearing rate cards, tended to be smaller peripheral vehicles, so the write-offs were not crippling.)
Commission did not require negotiation between client and agency. Without this uncomfortable procedure obstructing the relationship, the theory was that everyone was able to focus on quality output. Once the budget was agreed, and media plan signed off, then both client and agency were clear on payments.
But, even in the halcyon days of full service agencies, commission was not as simple as everyone believed. With no agreed scope of service, agencies were vulnerable to unscrupulous clients demanding unlimited service. Remuneration was essentially back-end – the agency invested time and resource in campaign development and planning, but only earned commission once the campaign was up and running.
The effect of this could be particularly onerous in the case of new product launches, requiring long and intensive development. If a client or brand budget was small, then the agency may not have made a profit. If a campaign was cancelled, often with minimal notice, then the revenue was lost to the agency, which was still burdened with its resource costs. Seasonal campaigns also presented a challenge, as the agency was remunerated for only a portion of the year, but usually retained full time resources.
Distrust between client and agency
Commission, arguably, fostered distrust between client and agency – if the agency recommended an increase in expenditure, it was often perceived as acting in its own interests. Similarly, as agencies began to move to offering integrated marketing solutions, they were suspected of recommending commission bearing media in order to boost their income, rather than being ‘media neutral’.
It is also worth remembering that full service agencies were not entirely reliant on media commissions, as they were able to apply generous mark-ups on production work, and charge design and concept fees.
Then, of course, once the unbundling began to take place, with creative and media agencies separating out, commission became a much discussed topic. The question was how to split commission between the creative and the media agencies. The lion’s share tended to go the creative agency, which still enjoyed the advantages of additional revenue from sources such as production mark-ups and concept fees. Media agencies, however enjoyed the privilege of investing the bulk of the marketers’ budgets and, with astute stewardship of that money, could earn some decent interest.
Then came the ‘procurement era’ with the intense scrutiny of costs and competitive pitching, resulting in media agencies rebating more and more of their commissions back to clients. However, this focus on cost was also a catalyst for the larger media agencies to begin to explore more flexible and equitable compensation models. Retainers based on direct salary costs, overhead allocation and an agreed profit margin certainly constituted an improvement on commission. Other methods of compensation, such as hourly based fees or project fees evolve out of this approach, whilst performance based compensation offers the agency the incentive to deliver, and are to be welcomed, if they are not simply a device to reduce hard costs.
Of course, in the pursuit of ‘commercial creativity’, (a topic about which Sir Martin Sorrell has addressed the Institute of Practitioners in Advertising in the UK), it has to be admitted that media agencies have delved into the murkier practices of volume based rebates and arbitrage.
What is needed are remuneration models that align both client and agency interest, and that are fair to both parties. This does require hard work from both sides to identify objectives and requirements; it requires hard talk to reach agreement and hard work to monitor and evaluate the agreements on an ongoing basis.
Interestingly, the Institute of Practitioners in Advertising (IPA) in the U.K began energetically tackling this issue in 2013. When Ian Priest took up the IPA Presidency, he undertook to move the industry into a “new era of commercial creativity by joining forces with clients to meet the challenges and opportunities of operating in a fast-moving, ever evolving, ‘always on’ communications world.” One of his areas of focus was on “Performance” (Remuneration). The IPA worked with the agency, client and intermediary community to examine the issue via an “ADAPTathon™”.
The Performance ADAPTathon™ focused on examples of client-agency relationships and remuneration models that had been transformed by a willingness to be open, to change and to succeed. Attendees then worked together testing the draft principles of a Joint Industry Performance Charter principles against time/value/risk-based remuneration models. Besides running the event, the IPA encouraged the industry to become involved on social media and established a hub on their website to facilitate engagement. Research undertaken earlier this year showed that whilst 87% of agencies are still remunerated against inputs, 35% now claim experience of being paid for outputs. Some 20% of agencies are now experimenting with co-investment – being paid on the basis of outcomes. Nearly a third of agencies claim to have adopted new payment models into their businesses over the past two years.
The media agencies should take inspiration from this pro-active approach. Rather than retreating to the defence of an antiquated and largely irrelevant system, they need to tackle the challenge head on. Such a collaborative exercise would not be anti-competitive, as it should result in a variety of options being available to agencies and clients. As Philiso put it in her letter to the SABC’s business partners, “we must have frank and constructive discussions to our mutual benefit as we confront the reality of a rapidly-changing media environment”.
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