The Client- Ad Agency Relationship: Where is it going?

To investigate the changing dynamics of the client-agency relationship, one needs to delve into a bit of history.

Until the 90s, ad agencies for almost a century were compensated by a 15% agency commission. While it might seem that it was the client who compensated the agency, the 15% commission was actually paid by media owners to ad agencies who bought space or time on conventional media.  In a sense, therefore, it almost seemed like the media was compensating the advertising industry rather than the clients.  Of course, there was no doubt that such a compensation became available as a result of the client’s media spend.  The compensation covered both media and creative services. While there was no official demarcation on how the media and creative compensation was to be divided, the rule of thumb was that media compensation was 2.5% and 12.5% was for creative services.

Perhaps ‘agents’ was not a very complimentary term, the Cambridge dictionary defines it as ‘ a person who acts for or represents another’, but this was actually the nature of the relationship. However, in real terms, clients and agencies worked together on their marketing objectives and therefore worked more like partners. Clients perhaps always had an upper hand,  but they showed a lot more respect for their agencies and there was a sense of equality in the partnership.

Come the 90s and there were 3 distinct forces that colluded with each other which would change both the agency compensation structure and with it the client-agency relationship. First, the agency commission broke down. Combined with this there was a process of dis-aggregation at the agency’s end, with media and creative being separated.  This naturally created a new dynamic on how to divide the compensation between media and creative.  The third force was rising costs which impacted the way the clients looked at agency commission. Advertising increasingly was one of the top costs for a number of advertisers, and along with other costs, there was increasing pressure to bring these costs down.

Almost like a parallel force the new compensation structures and the disaggregation of creative and media somehow also seemed to change the dynamic of the client-agency relationship as well. Maybe there is no straight line between compensation and the relationship, but around the 90s the client-agency relationship also went through a change. 

Several models appeared.  The newly formed creative agency developed a fee structure with clients which was based on actual work done rather than a flat commission.  This was sometimes combined with an incentive for performance.  The same model was followed on media. The fee was supposed to be a function of time spent on the business + agency overheads + profit. While in overseas markets this became the standard for compensation, the Indian market started quoting fees randomly without a scientific method.  As a result undercutting of fees seems to have moved agency compensation into a downward spiral.

Lack of Top Quality Resources

This often meant that agencies were operating at unprofitable margins just to win a business from another agency. Often agencies felt under-compensated and started under-resourcing accounts.  They were no longer able to afford top-notch MBAs from business schools.  Once upon a time, ad agencies competed with the largest companies in the top business schools.  In the early 90s, for example, JWT India ( then HTA ) recruited as many as 55 to 60 MBAs every year from across the country.  But no longer.  

Once upon a time ad agency jobs were attractive and were paid well.  But it does seem as if on a global basis agencies are no longer able to remunerate their executives as well as other firms and competing businesses. 

In turn, poorer pay scales have meant that the resources in agencies are not the best in the market. This probably has, in turn, affected the quality of the work produced by agencies and the client-agency relationship.

The Toxic Procurement Department

Another factor that has affected compensation resulting in poorer relationships is that twenty years ago, the marketing head decided how to compensate the agency. With the advent of strong purchasing departments affecting the balance of power in marketing, often ad agencies are required to negotiate with the what is now called  Procurement, a far more toxic word than purchasing.  The problem with procurement departments seems to be that achieving a great deal with an ad agency is secondary to providing an optimum solution for the marketing department and the ad agency.  Most agency folks have horror tales to tell of the procurement departments of large clients.  The biggest problem with Procurement is that they don’t see any difference between buying ad agency services and buying a few tonnes of soya bean.

Short-Termism

The face of business and marketing has changed substantially over the last 2 decades. Companies are all under pressure to show short-term results to their shareholders. This has led to marketing being more tactical than ever before.  The emphasis is always on short-term sales, (what is being referred to humorously as QSQT i.e.  ) and that means more promotions than brand building activity.  It also means lack of innovation and those innovative ideas from the agencies might not see the light of day.  

This has made work from agencies quite generic, in turn hurting the relationship. Because generic promotional work can be done by any agency. There is nothing special in it. Short term marketing objectives have unfortunately resulted in short-term client-agency relationships because tactical work does not need a sense of history or even a great understanding of the client’s product or service.

Clients think they can do their own creative

Increasingly clients are filling their marketing departments with basic resources for execution. One client I pitched for last year had their own staff to execute digital campaigns. In fact, an idea that we presented at a pitch was quickly plagiarised by their internal resources. Imagine the shock our creative director went through when his own idea which he had presented a week ago was looking back at him on his Facebook timeline. 

So while clients can do some basic work with basic resources, they are not able to produce full-fledged advertising or digital campaigns. But somehow are still under the mistaken notion that they can.

Agencies are becoming more servile

In spite of a good brief for a pitch recently for a major jewelry client, a digital agency boss actually called up one of the client team members requesting him for hints on what to include in his pitch presentation.  Later when I met this particular client, I found out that this phone call had gone against the agency.  The client saw that call as a sign of weakness.  And he decided the agency was unsure of itself.  It wasn’t a surprise that the agency didn’t win the pitch, in spite of a good presentation put together by the firm’s digital strategist and creative director.

PostScript

Agencies are taking a more servile role in the relationship which is resulting in agencies being bullied by clients.  

Once upon a time, clients treated agencies like equal partners.  And agencies produced some magical work that was considered outstanding. That drew respect from clients. But that phase of equal status seems to have changed permanently. Agencies seem happy to be mere vendors to clients.  And vendors who can’t add value to a client’s business, can’t demand respect.  

One can only hope that the days of Mad Men when clients showed utmost respect to their agencies can be revived.  And that the agency-client relationship is on an even keel and restored to a happy relationship between two equal partners. The onus is as much on the agencies as the clients to create this change towards creating a relationship of equals.

First published in Social Samosa on May 22, 2018

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