The choice for clients: Price vs value, vendors vs partners, delivery versus excellence
It's easy to find client companies talking about the need for ‘partnership’ and ‘relationships’ with their agencies.
It sounds lovely.
Except that when it actually comes to the grubby business of money, the hollowness of much of that talk is quickly exposed.
Certainly it's a little hard to take seriously claims that client companies 'value' creativity when the downward pressure on agency fees is relentless.
According to research conducted by the UK's Marketing Agencies Association, clients have succeeded in forcing down agency fees by almost 20% over the past decade.
Now thirty years of the IPA Effectiveness Awards have demonstrated how creativity can create significant financial value for corporations.
Thus, for example, from most recent collection of effectiveness cases, published by the IPA as Advertising Works, Volume 21:
Over two years, advertising in the UK for John Lewis generated £261 million of incremental profit.
In China advertising for Dove generated incremental sales of £25.5 million over 16 months.
While one can only guess what the agencies’ compensation was, we can be fairly confident that when set against the wealth created, it will have been minuscule.
Marketingland it would seem, wants exactly the same returns (if not greater) for ever less.
That's the opposite of 'valuing'.
Thinking for free
And then quite aside from being assigned to produce specific and finite creative assets, there are all those brainstorms, hothouses, conferences calls, ideation sessions, and so on that agencies are invited to and expected to contribute their creativity to.
For project fees that often amount to little more than token gestures.
Of course the agency contribution (if it's a good agency) goes beyond simply responding to requests and producing ads.
Good agencies bring to bear creative thinking all the time to a client's business. And they do not charge for it.
Clients should recall that all this free stuff was once actually paid for via what used to be called agency 'margin'.
The very thing that is being tirelessly eroded.
Clients reading this may be indignant because their experience of agencies is increasingly mediocre and transactional.
Up to a point the indignation is justified.
But they are getting to experience the blunter tools rather than the sharpest minds in the industry box because of their own industry's cost-cutting.
It’s rather like the horse-meat scandal in the UK. We insist on meat being so cheap it's free, and then feign shock that it's old racehorses.
The fact of the matter is that you should no more cut great agency fees than you should stop advertising in a recession.
To all this pressure, we can now add the newer demand from client companies that agencies submit to new, extended payment terms.
In some instances it will take agencies a full 120 days to get paid.
As the UK’s IPA recently put it it:
It is surely nonsensical that agencies... should act as banker to these major corporations merely so that these corporate giants can demonstrate strong balance sheets to their analysts each quarter. With interest rates at an all time low there is no real commercial value in unilaterally extending payment terms. Those at the receiving end of this pressure are precisely those hired to add value to these major companies through their commercial creativity."
Demanding that agencies act as bankers, funding the short term cash flow needs of client companies is hardly conducive to respectful, trusting partnerships.
While client companies (and agencies) are justly nervous about the economic future, corporate poverty is hardly a robust defense.
According to Forbes, in 2012, U.S. non-financial companies filled their coffers with an additional $130 billion, taking their total cash to a record $1.45 trillion.
According to S&P Capital IQ, 202 members of the Standard and Poor's 500-stock index have $1 billion or more in cash.
Why do companies have so much cash?
In 2012, S&P 500 companies accumulated earnings never before seen in history.
Hard truths, hard choices
Client companies can choose to focus on reducing the cost of the creativity they purchase, or they can focus on its value.
They can choose between having vendors or real partners.
They can focus on the efficient manufacture and delivery of creative assets or they can choose to focus on effective value creation.
For ultimately the corporation must recognize that creativity cannot thrive in an environment that treats those who supply it as mere vendors.
And that should concern clients everywhere.
For when their own organization no longer has interaction with a creative, challenging, free-thinking culture, their own quality of thinking will suffer.
So the choice for clients is starkly clear:
Treat (and bully) your agency as a low-cost vendor and accept a low-quality product.
Or treat (and reward) your agency as a premium offering and strive for a high-quality product.
The challenge for agencies, needless to say, is what kind of agency they wish to be.
And what kind of client company they wish to keep.