'Commodifying the advertising practice could kill creativity'

As the economic crisis further unfolded towards the second quarter of the year, more multinationals are reconsidering their ad agency payment structure.

Unilever is shifting more towards performance-based compensation, following Coca-Cola that implemented this method in the second quarter of the year and P&G adopted the "new formula" as early as 2003.

According to AdAge, Unilever communicated to its agencies a new upfront profit margin of five per cent that was not negotiable. It was earlier 10 per cent with the opportunity to earn more via a bonus if certain performance metrics were met.

Unilever's creative shops cut across four holding companies – WPP Group, Interpublic Group, Omnicom Group and Publicis Groupe. Spread across the groups that hold 85 per cent of agencies around the world, the impact of the margin change alone appears significant.

Sources cited by AdAge described the cut as "structural" and therefore unlikely to revert to the previous percentage even when the economy and Unilever's business results rebound.

In the UAE, Emirates Business contacted Memac Ogilvy, the ad agency handling Unilever accounts, for a comment. Ronald Howes, Managing Director of Memac Ogilvy, said: "We welcome innovative and fair remuneration models that aim to improve clients' ROI [return on investment] while recognising and rewarding the partnership with their respective agencies.

"No agency/client relationship could ever survive without trust, as the most effective engagements are ones where a true partnership emerges between the two parties. As such, this is not an issue of trust, but rather one of the sector evolving. Because this is a work in progress, and the model has not yet been adequately tested, it would be pre-mature to try to gauge the impact it could have in the region." However, other major industry players were not reserved in conveying their concerns regarding commoditising the advertising practice and compromising fair profit.

Acknowledging the impact of the crisis on advertisers and consequently on the industry, members of the UAE Chapter of the International Advertising Association and industry leaders still seemed sceptical regarding the course that this would take once implemented in the region with no sound foundations.

Yet, they did agree that difficult times will lead to achieving more accountability and transparency both on agency and client levels.

Speaking to Emirates Business, industry leaders provided their opinions.



Lance De Masi

President of IAA

Questioning whether ad agencies are currently over-priced, and hence the changes in payment structures, the [issue] is provocative, and rightly so. I have to ask: overpriced vis-à-vis what? Is it other types of suppliers of marketing communications services or the value that they add?

Clear criteria for evaluation must be established; and those that are doing the evaluation have to be fair-minded and have the knowledge and capability to evaluate effectively. So, my message to agencies is they should be compensated according to the difference they make in brand and business-building; and I remind clients of the need to put in place objective measures for agency evaluation.

Accountability applies to both agencies and clients, and it is incumbent on both to define reasonable success criteria, including return on customer investment (ROCI). Doing so would eliminate a lot of the scepticism and arbitrariness that customarily creeps into discussions of agency worth.



Douglas Palau

IAA Board Member and Vice-President, Network Marketing/Client Service, Managing Director of Proximity Impact

The way creative agencies are remunerated globally and in the region has in many cases moved from traditional media commission-based models to a cost-plus or fee-based model. This is partly a result of the separation of media planning and buying into specialist media companies and partly to more accurately remunerate time spent on the business via fees related to specific agency resourcing.

Commission-level discussions are often misleading because whether a specific percentage generates a low, fair or high profit depends on the size of the media budget being spent and the agency costs associated with an individual service to a client. Clients who would try to pay margins below economically attractive levels are hurting both the advertising industry and themselves. If agencies are not allowed to make fair profit margins they will not be able to attract the best talent and thus ultimately will not be able to deliver the essential added value ideas the client needs to give their brands a competitive advantage.



Hermann Behrens

The Brand Union, CEO Middle East

The communications business should not be allowed to become a commoditised industry where services and agencies are traded as equals and decisions are driven purely by price. This type of transactional approach will not nurture creativity and strategic thinking, it will dilute talent and ultimately we will end up with lots of cheap, worthless communication that consumers don't want.



Kamal Dimachkie

Leo Burnett, Managing Director

What concerns me is that if the five per cent margin is the sole compensation that the agency is receiving, it would be very low compared to what organisations need to remain profitable, while providing quality output.

This has several potential repercussions: it may alter the way existing cost structures are developed so that agencies add other buffers; it may make agencies become more determined to raise their overhead rates to protect all the investments that go into the development and operation of an agency; or agencies will become very creative in the way they compensate for such a drop in remuneration. These repercussions will not necessarily appear in isolation from each other, but rather in various combinations.

Having said that, implementing this new system assumes that sales performance relies solely on advertising. While it is a fact that advertising is a powerful tool in generating sales leads, however, what about sales conversions? If a client has a weak sales team for example that cannot handle the leads generated by the agency's advertising campaigns, the agency will likely be culpable and therefore its profitability affected.

It is, therefore, key to have the right tracking mechanisms and measurement tools in place to identify weaknesses in the entire process and rectify these as quickly as possible.

In North America and the developed communication markets, the spread of such trend is facilitated by the transparency in brand management.

If such a system is applied in our region without similar transparency, the effect can be disastrous. However, if the foundation is laid, and this requires massive investment and years of knowledge building, best practice application, qualification and maturity.

Whatever the system of payment is, it needs to spread the risk on both sides, and it should be able to meet cost and profit requirements while satisfying a client's right, which is to expect ideas that perform in the market. Ultimately, whatever trends do occur, there must be a gradual progression towards a system where fair value is recognised and paid, and where costs are met and profits are made – on both sides.

If properly applied and practised, then the outcome is more transparency and more pressure on performance. Moreover, if we assume this new system is a direct result of the current economic situation, we need to make sure the sacrifices that will be made now will be recognised when times are better.

For the industry as a whole, I believe that agencies will come out fitter, leaner and more accountable and results oriented – and this is never a bad thing.



Saad Abdul Aziz El Zein

Bayounah Media Co, Chief Communications Officer

International trends always find their way to the Middle East. Global businesses and accounts are likely to adapt international practices to local markets taking into considerations any market particularities. Low margins were applied recently and business wins are mainly based on alignments and best-value deals.

I believe this trend will add quality, competitiveness and efficiencies on deliveries. Agency profitability might decline but relationship, partnership and integration between media agencies and clients will reach new heights. The implication of such integration will result in more creative and unconventional media planning and buys.

With the advent of the current economic crisis, price adjustments are taking place to ensure business continuity and profit margins. We need to also consider the fact that agencies have taken some drastic measures in relation to their direct and indirect expenses, so as to ensure possible lower price deliveries. The industry growth will continue. What will change are the ratios, the ways and forms. New media solutions and alternatives such as the internet and mobile platforms might result in unprecedented growth versus traditional media.

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