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In-depth: A tug of war between creative agencies and brands on remuneration

Creative agencies are dealing with reducing profitability issue more than ever before. While brands' marketing spend has increased over the years, why hasn’t their spent on their creative partners increased in the same proportion? BestMediaInfo.com digs into the matter

Shrinking profits, high rate of talent churn, looming threat from media and digital agencies and price competitiveness of smaller agencies. It's been a double whammy for India's creative agencies that have seen the remuneration from clients being stagnant for years and the business pie from the same client being distributed among various agencies.

There is a lot of hue and cry in the creative industry about not being paid well by clients despite the work load increasing. The agencies feel that these things will eventually affect the quality of work along with their balance sheets.

What has changed for creative agencies that were known to be the brain behind the brands?

Shiv Sethuraman

“The game has changed. Earlier, the creative agency always used to be at the top of the table, where they were considered the most important strategic partner," said Shiv Sethuraman, Founder, The New Business.

"Today, the media and digital agencies are becoming more strategic. Also, not a lot of clients are spending as much on mass media as they used to. So, all of this has resulted in changing dynamics," he added.

Sethuram said that agencies are equally to be blamed for their weakening position since they have been very slow to change which has led to casual erosion of their status and revenues.

Also, clients are not depending on only one agency and have empanelled a bunch of big and small agencies where the client fee gets divided.

Virat Tandon

"Clients are having to pay too many agencies. That is the new reality. Reducing the remuneration of the agency shows that probably the client doesn't fully appreciate or understand their contribution. Or, that some clients are not getting their value from their agencies," said Virat Tandon, CEO, Mullen Lintas.

In the hey days of creative agencies (the period between 1980's and early 2000), brands had a single agency as partner to do media planning as well as creative work. Media and creative functions of the agencies disassociated with each other long time ago and became separate entities. Today, both marketers and agencies are trying to reach out to consumers through different mediums.

Prasoon Joshi

Prasoon Joshi, CEO and CCO, McCann Worldgroup India, Chairman McCann Asia Pacific, explained the changing scenario clearly. He said, “People are consuming content in a very complex manner. In today’s time, an agency is finding it challenging to build a brand and deliver its message and experimenting with various things like developing content and trying out different innovative ways to deliver the message. That world will definitely give birth to new revenue streams and it will also make certain ways of making money obsolete."

Industry stalwarts feel agencies stuck with the business formula of 1980s are not going to stay in the game anymore.

Ashish Bhasin

Ashish Bhasin, Chairman and CEO, South Asia, Dentsu Aegis Network, added, “The inefficient dinosaurs are getting squeezed out. The people who have built the businesses on the 1980s’ formula and are not willing to change are going to feel the pressure.”

Besides competitive scenario, Dhunji Wadia, President, Rediffusion Y&R, cited value-engineering by clients as one of the main reasons behind the growing revenue pressure.

Dhunji Wadia

Wadia also held agencies responsible for not keeping the pace with the change and said, "If you always do what you’ve always done, you always get what you’ve always gotten. So, unless the agencies change their behaviour they’ll continue getting the same results. Today, most agencies have gone beyond the traditional advertising offerings. Those who don’t can keep complaining."

Where does the problem lie?

GroupM, a global media management investment conglomerate, has forecast the country’s advertising expenditure to grow by 10 per cent and to reach an estimated Rs 61,204 crore in 2017 as compared to Rs 55,671 crore in 2016. Advertising expenditure of the brands is only increasing over the years. Then why is there so much cribbing about reducing profitability and not getting paid well by the clients?

The creative industry is one place where anyone with a laptop and ideas can open an agency. The urge to grow and the feeling of running independent cause dropouts from the bigger creative agencies and give birth to independent smaller agencies and freelancers. All this, in turn, opens up more options for the brands to choose their creative partners and leads to competition among the peers.

A senior industry person who didn’t want to be quoted and has worked on both the creative and the brand sides said, “We keep aside a fixed sum to be spent on the creative campaign and if the agency is not able to deliver a piece of work fast and in the desired manner, we give it to the freelancer. So, it is not that we don’t spend money on creatives but the amount gets distributed.”

Experts feel that the increasing number of small and independent players have hit the margins hard as the brands tend to go for anything that doesn't cost them much.

Akashneel Dasgupta

Akashneel Dasgupta, Senior Vice-President and Executive Creative Director, ADK Fortune, said, “The advertising industry itself needs to be blamed because we tend to sell ourselves too cheaply. In advertisement, there is hardly an entry barrier. There is no infrastructure that you have to set up. There is no price for an idea. The whole advertising pie size has increased, but compared to that, the number of people who are staking claim of the pie has multiplied by 10 times.”

Adding to it, Tandon of Mullen Lintas said, "Agencies are also at fault for undercutting each other to the extent that sometimes it's unbelievable how they will pick up businesses for a totally unsustainable fee."

Another senior creative professional said the problem of not being paid well by the clients has multiplied manifold due to demonetisation and implementation of GST. He said, “Earlier, it was due to demonetisation that we faced this problem of outstanding payments. Now, the brunt has increased with GST coming in. We need to pay our employees irrespective of when the clients are able to pay money. Even if they are giving us the money, they are trying to negotiate on the payment front.”

The agencies earn money from what brands pay them for their services. Till the time brands don’t increase the spend on the creative partners, these issues will continue.

Brands want creative agencies to re-invent

BestMediaInfo.com reached out to brands to know their point of view. We put forward the queries of creative agencies’ about remuneration to brands.

A senior marketer of a top FMCG company said, “Nobody is ready to pay the money agencies demand as there are so many options. Agencies are not in a position to negotiate. Negotiation happens when there are equal partners. There is so much of supply.”

BK Rao

While marketing spend increased at Parle Products, the brand agrees that the money spent on creative agencies has not increased to that extent. BK Rao, Deputy Marketing Manager, Parle Products, said, “Brands started negotiating on the commission bit and slowly the agency commission went on decreasing. The agencies also agreed to work on lower commissions.”

Earlier, the media spend by brands was very minuscule as compared to now. Therefore, a marketer was able to pay more to the creative agency. Till mid 90s it was only Doordarshan on which brands had to advertise. But now with more than 800 channels, TV as the medium has fragmented so much that on an average, to get decent visibility, one needs to spend more than Rs 8-10 crore per campaign.

The clutter level has also increased, which in turn has caused brands to be more accountable and here, the negotiation comes into play. A few marketers said that the mediums on which the marketing and communication money goes have also increased.

Subhrangshu Neogi

Subhrangshu Neogi, Director, Group Marketing and Brand, Religare Enterprises, said, “Marketing spends today have become much more fragmented and essentially are largely ROI-focused, especially in a category like BFSI. While you may still be spending on conventional media from the context of brand awareness and recall, you are also focused on performance marketing, social, affiliate marketing, email marketing and so on and so forth.”

Parle's Rao also said that the market condition is extremely tight right now, especially in the last one year post demonetisation and GST. “All the clients have really gone low on communication and there are so many creative shops rising. There is increasing competition as far as creative shops are concerned. So, clients really don’t have a dearth of creatives now. It has become challenging for the creative agencies to keep winning accounts and retain clients at the same time.”

A few brands argued that there is no direct relationship between agency remuneration and media buying spend. Agencies are paid on a remuneration basis and the amount that a brand spends on buying different mediums is not related to each other and can’t be compared. On the contrary, agencies argue that the kind of return on investment the creative idea brings to the table by putting the particular campaign/creative idea on different mediums is huge and should be paid over and above the usual remuneration.

Brands say that they're willing to shell out more money to creative agencies if they can show path-breaking work that they've done for other clients.

Sushil Matey

Sushil Matey, Director, Marketing, at Livpure, said, “A typical creative agency can be good in (a) strategy and (b) creative. The best agency is the one that excels in both. In today’s cluttered media sphere, a creative agency should deliver three things – create awareness, build memorability and break the clutter. Allocating money is directly dependent on the budget allotted for creative/ advertising agency. Also, a fact to be noted here is that category A agencies will charge fees as per their expertise and norms and the same goes for category B and C agencies. All these factors combined help an organisation to decide on getting the creative agency on board. However, if an agency can show path-breaking work done prior in a competitive category, the brand/ company can decide on allocating more money to that agency.”

According to Neogi, "The order is that the brands now don’t just want creative ideas but marketing solutions. Clients today are not just looking at a one-dimensional creative solution but are looking at holistic solutions for their business problems. So, the expectation from partners is obviously revisiting their skill and capability sets. And it’s not that people aren’t doing that. A lot of the traditional agencies have been working remarkably well in that direction."

“It cannot just be a plain straight-jacketed solution that says, ‘I am a creative agency, I will only do creative’ or ‘I am a media agency, I will only do media’. Ideas/ thoughts can come from anywhere. Ultimately, what clients value and are looking for are people who can help them as I mentioned: ‘solve their business problems'," he added.

Another space where brands are spending the money on creatives is that even after having agencies on record, they are letting out important brand campaigns on a project basis as and when required.

Parle Products has Everest Brands Solutions and Thoughtshop Advertising on its roster but got its last two campaigns done by Taproot Dentsu on a project basis because they thought Taproot made more sense to do the brand campaign for Parle Products.

The reason that Rao gives for hiring agencies on a project basis is that the AoRs will no longer be given work on a platter. They need to fight for it and each time we want a creative campaign, a pitch will be called, when we want a creative campaign. It will be the game of the survival of the fittest.

Suggestive solutions

 

Neelima Burra

Neelima Burra, Chief Marketing Officer and Business Head Health & Wellness, Cargill Foods India, has a pretty good solution for agencies if they could deploy that in practice. She said, “The creative agencies have to relook the model of service. Probably, the old-fashioned retainership model where their risk is protected while business nowadays is far more volatile. The industry is far more dynamic with higher inflation and the cost to serve is also increasing. In such a scenario it is good if a creative agency comes up with a model where they can take some part of incentive or bonus to deliver better results or ROIs of the campaign which they are promising. Who doesn’t like incentives and bonuses? If the team that is working on the account is put on the performances, higher bonuses and incentives, they would not leave the agency.”

Wadia said, "An idea without execution would be just a hallucination. According to Steve Jobs, ‘It’s the disease of thinking that a really great idea is 90 per cent of the work.' And if you just tell all these other people “here’s this great idea,” then, of course, they can go off and make it happen. And the problem with that is that there’s just a tremendous amount of craftsmanship in between a great idea and a great product. For me, ideas are worth nothing without execution. Great execution would be worth millions. And agencies that imbibe this caveat will stand to gain.”

Sethuraman said, “The only real solution that I can see for creative agencies is to strive for a much stronger integration with the data and digital side of the business. There are few agencies who have a good creative reputation and who will continue to make decent revenue but over a period of time I don't think it is going to sustain.”

DAN is a 26-agency network and eight of them are in the area of data, technology and media. 1,400-1,500 out of 3,500 people are in digital. Search and performances are going to be the key.

Bhasin realised where the brands are willing to invest their monies quite early in the game. He said, “When I started the journey a few years ago, people were saying that digital is only five per cent of the market. We found the field opened for us. Some of the large legacy kind of agencies didn’t see the wave coming and couldn’t act as fast as we could. The competitors were also not looking at the out-of-home areas where the world is moving, as the infrastructure is improving. You have to follow where the consumer is and where the client spends are going.”

Tandon of Mullen Lintas said that an agency should be clear that the value it can create for a client, no other agency can and no businesses should be picked for an unsustainable remuneration.

"I know at Mullen Lintas, we have lost a few pitches because we refused to be beaten down on pricing. We are quite confident of what value we deliver to our clients," he said.

Wadia suggested that one must evolve and adapt. The best way to address this is to find a correlation between profit margin and revenue tracking. Agencies that track revenue per client will have higher profit margins than those that don’t. So, unless the agencies change their behaviour they’ll continue getting the same results. Today, most agencies have gone beyond the traditional advertising offerings. Those who don’t can keep complaining.

Piyush Pandey

In a recent interview, Piyush Pandey summed up the discussion well. He said, “I think each agency network is trying their best to keep up the pace as they are all competent agencies. There has to be good discussions with the clients about being open with the budgets if they want great creative output. The client will have to partner me in getting better people. It’s all about understanding, negotiation and managing your businesses properly while making efforts to increase profitability.”

Info@BestMediaInfo.com

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