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Special
Media Issue
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Strategic
Marketing Forum
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| Payment
By Result Evaluated |
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Panel discussion organised by Strategic Marketing, held
in Mumbai on March 28, 2001. |
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Four
media stalwarts - Sam Balsara, CMD, Madison Communications;
Meenakshi Madhvani, CEO, Carat Media Services; Nabankur
Gupta, Group President, Raymonds, and Rajeev Karwal, Vice-President,
Philips India Ltd - came together to powwow on the troublesome
issue of ‘Payment by Result (PBR). The session was moderated
by Dr Ranjan Das, Consulting Editor, Strategic Marketing.
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| What
emerged were interesting viewpoints which sharpfocussed
on the rather close yet quirky relationship between clients
and ad agencies. |
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Ranjan
Das (RD): Distinguished panelists. Today we will
discuss three key issues relating to PBR viz..
*Changing
role of the advertising agency,
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The mechanics of PBR- what is it, how does it work,
how are we going to measure it and what are the administrative
problems in executing the new system. Also, the role
and impact of media specialists in effecting a change
in the system of remunerating the agencies and whether
they can influence the performance evaluation of the
service provided by an advertising agency,
* What
is a fair remuneration for an advertising agency in
the new scenario. Let us start with the first issue.
Nabankur Gupta (NG): I think the advertising
agency has already begun to be a part of the business
process; therefore the whole question of adding value
to business becomes a part of the agency’s role. Quality,
content, and retention of communication is important.
Rajeev Karwal (RK): The agency and the client
should act as partners. Half the battle’s won if the
agency becomes an extension of the marketing power of
the client.
RD: You can have a partnership with somebody
who speaks the same language. How does an agency contribute
value to a client’s thinking?
Meenakshi Madhvani (MM): I think client-agency
relationship is becoming value-driven with relationships
relegated to second place. You cannot add value to the
process unless you understand the process itself. Also
more and more clients are demanding accountability.
RD: What about the process by which the results
are achieved?
Sam Balsara (SB): Clients are not always keen
to know the truth. Many only pay lip service to partnership.
MM: I believe the client gets the agency it deserves.
An agency’s role is largely determined by the client
himself. The same advertising agency is different things
to different clients. And the client sets the direction
for it. I think clients need to make up their minds.
Different clients want different things, and what they
actually want is not what they express and state. I
think clients today are willing to be challenged, and
confronted with unpleasant truth if they believe you
know what you’re talking about. I think Sam, the problem
lies with agencies. Many of them want to offer a certain
kind of service, but don’t have the gumption to reject
a client’s demand.
SB: Yes, but how many clients would go along
and agree with the agency? Why don’t clients accept
many of the suggestions given by the agencies?
RD: There are two parts to your service - the
commodity part and the value-added part. Do you think
advertising agencies by and large focus only on the
former and lose the client’s trust when talking about
the value-added part?
SB: A client’s weakest link in the management
process is the understanding of strategy.
NG: In fact, the first thing an advertising agency
needs to understand is strategy - strategy regarding
creativity in communication; in terms of consumer, and
therefore media planning; and the link between strategy
and tactics, where I think agencies fail.
RD: The second question relates to the emerging
concept of PBR. Why are we talking about changing the
remuneration structure?
NG: Twelve years ago, I was the first to be ready
to pay more if the agencies working in my organization
then, could justify the 15 per cent that they were getting.
They couldn’t, forcing me to sack the whole lot. We
didn’t do business with any agency that professed 15
per cent from that morning onwards. Instead we decided
to go to the best creatives available, to the best planner,
to the best method of buying media, give maximum weightage
to someone who would work out a strategy, a common thread
around which the whole communication process would run.
MM: There aren’t any rules saying that advertising
agencies need to be paid 15 per cent.
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Sam
Balsara Dr
Ranjan Das
Nabankur Gupta
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RK: Basically, most markets are maturing, and
competition too is intensifying. Every advertisement
or interface has to bring in a certain urgency in communication
and achieve greater effectiveness.Clients by and large,
understand this new reality and are hence demanding
performance in each aspect.An agency, apart from giving
the correct picture, should spend time, money and energy
researching how the consumer is reacting to a particular
communication, and then advise the client on the direction
to take. Often, the client will employ a different research
agency and the ad agency should have the courage to
accept the research done by a third party if it says
that the advertising is not effective.
RD: Do you think the corporate sector is talking
about the new system of remuneration because there is
an underlying pressure to cut cost? Are you keen to
introduce the PBR just because you could not do much
in difficult areas such as downsizing the head count?
NG: This was true 10 years ago. Today, advertising
reach in a very crowded situation has got its limitations.
Beyond a certain point, the value got out of advertising
drops exponentially. Therefore, intelligent advertising
has become far more important. Clients are no more keen
to pay based on a formula or the assumption that if
one doesn’t spend a certain sum of money, one doesn’t
get value.
MM: There is now twin emphasis on specialisation
and cost effective value addition. For example, independents
are now entering the market. As a result of these new
emphases, inefficiencies are being highlighted and the
advertising agencies have actually begun sensitising
their clients to the fact that there is scope for specialists.
RD: One of the drivers behind the emergence of
the PBR system is the conference of independents. Another
is the questions being asked by multinationals viz.
why should we pay 15 per cent again for the local adaptation
of an ad for which we have paid 15 per cent at the time
of creating the original. Do you think this is a reasonable
question?
SB: The 15 per cent system was created for a
good reason. There may be valid exceptions, such as
the example you pointed out where 15 per cent may be
an over-remuneration. And I think those matters could
be looked at. But the current reason for the re-examination
of this 15 per cent system is nothing but a sheer cost
cutting, bulldozing exercise to cut costs. I mean for
example, there are some multinational clients who are
willing to look at our books and pay us more than 15
per cent. Are you telling me that if an agency says
that it’s costing me 20 per cent to service you, you
will pay the 20 per cent? No!
RD: There are instances in the UK where agencies
got more than 15 per cent after PBR was introduced.
SB: I suspect in the Indian context this is not
true. All those clients who’re wanting to re-look at
the agency remuneration system are wanting to do this
because they believe it’s a money-making opportunity,
and that their agency is being over-remunerated for
the kind of work it’s producing. What’s driving this
simple business economics is the need to save money.
RD: Don’t you think the time has come for agencies
to become worthy of their 15 or 20 per cent?
SB: An agency should be not be remunerated regardless.
But to deride something that worked in the past and
served industry well is not right. If it’s not working
well today for some clients, those clients should take
a fresh look.
RD: The PBR system takes into account three major
inputs. The first is the client’s business performance
say in terms of sales, market share, etc. Second, advertising
performance i.e. whether the advertising has been able
to increase brand equity, customer loyalty and awareness.
Third, the agency’s own performance in delivering their
services. An interesting question is whether the clients
have understood the system, and to what extent have
they implemented it?
NG: If you look at the client’s business performance,
there has to be transparency in understanding. Ultimately
it’s all about money. Can we relate the roles of the
advertiser and the agency to the value addition each
really generates to the bottomline? That’s the big question.
RD: What about the second parameter viz. performance
of the advertising say in terms of such parameters as
increasing brand equity and customer loyalty? Do you
find that a big problem to implement?
RK: I don’t think there’s any difficulty in implementing
the measurements on whatever objectives you’ve defined.
For example, the objective could be raising brand equity.
There are agencies which have proprietary tools, and
you can measure share of voice versus share of preference,
whether it is in terms of media awareness, or brand
equity itself, or brand personality you want to paint.
It can be by independent agencies, or by proprietary
tools, because you’re not going to do just one-off research.
It can be periodic research and you can benchmark yourself
against some of the best practices in your industry,
or the ad industry, depending on what parameter you’re
measuring. And then you try and see where the dots are
moving, over an extended period of time.
RD: What you’re saying is that the second item
viz. the advertising performance is not very difficult
to measure. What about the third variable i.e.the agency’s
performance?
MM: No. Most agencies today operate under an
appraisal system that is imposed. Clients appraise the
agency on a set of parameters. The agency knows that
anybody can find how they’re ranked by a client in terms
of strategic inputs, quality of personnel, turnaround
time, response rates, all of that. It is a part of a
structure; it should be the part of the structure of
any agency.
RD: Are you saying that the service standards
in all areas such as competence of people, time, cost,
quality, etc. are already available?
MM: The industry has standards; now whether those
are industry standards is a different issue altogether.
But there are standards that are benchmarks and in most
cases these are agency specific. If there are no assumptions,
then the benchmarks are clear, in black and white.
RK: I personally would be in for some performance
linked incentive. Because I find from my personal experience
that the agency team works best when there is an incentive,
and every member of the team working on a certain project
knows clearly what the expectations are. Also, this
performance linked bonus or whatever, that Meenakshi
spoke about, forces the client to think about what he’s
expecting and putting it down in the beginning of the
year. It’s a very important discipline that the client
imposes on himself, ‘Yes this is what I expect, and
if I get this I will be happy’.
RD: Do you articulate and quantify the expectations?
Are these publicly available? .
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Meenakshi
Madhvani Rajeev
Karwal
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SB:
Not publicly available. Of course, they’re available to
the client at the beginning of the relationship.
RD: It’s been said that what you can’t quantify
you can’t measure and what you can’t measure you can’t
control. What you can’t control, you should not do it.
Any comment on this in the context of client-agency relationship?
NG: The performance appraisal of an advertising
agency is feasible, if you set the benchmarks, and don’t
question the same after that.
RD: Is it possible to quantify specific service
parameters that both client and agency can track regularly
on an objective basis without bias.
NG: Like the balanced scorecard concept, at the
start of any financial year, have a discussion with the
agency, do a brand health check, and then set objectives.
The objectives can be in various areas - learning, competence,
financial, or customer area.
RD: Let me conclude this part of the question by
saying that there are three elements to PBR and both client
and agency must agree with regard to defining those terms
and clearly identifying the parameters including how these
can be tracked by the existing MIS. Until this happens,
implementation of PBR will continue to have some problems.
SB: I wish to make a comment on the second element
of PBR i.e. advertising performance. Advertising performance
is always campaign related, where the creative used would
probably determine 70 to 80 per cent of that ad performance.
The question that always bothers me, is that it is ultimately
the client who has to sign off the campaign, and all those
crores are not spent till the client says so. An agency
goes with a recommendation, a strong belief, which it
feels will work. If the client says no, whose opinion
prevails? At the end of the year, in terms of advertising
performance, the agency has to carry the blame.
NG: Sam, there’s one issue there. First is, was
the brief right? Second, was the brief understood. Third,
was the brief translated into a communication which was
in line with the brief? If these three elements are right,
chances are that the client will say yes, if he understands
the business. Most of the time, these three elements are
not in harmony.
RD: What is a fair agency commission? For a moment,
let’s forget that concept of 15 per cent ever existed.
MM: I would like to ask the client a question:
when you’re looking at your business what do you think
is a good gross margin to have on your business? To my
mind, there is no fair margin as such. It’s just a question
of each service provider knowing what kind of cost structures
they have. And then, actually being able to run a business
with those cost structures.
RD: But there are different segments.
MM: Of course there are.
RD: What do you think the principle should be in
deciding the margin?
MM: The principle is very straightforward. You need to
be able to generate a gross margin out of every piece
of business you handle. What we’re looking at is a gross
margin of between 10 to 12 per cent on every piece of
business we manage.
SB: I personally think it should be much higher.
I think it would be fair for an agency
to make a 25 per cent gross margin.
RD: How do you define this 25 per cent?
RK: I would first look at the critical mass an
agency needs in terms of money to service my business.
Once we can specify what our need is in terms of services
of the agency, they need to say what their cost, without
profits, is going to be. That is something that must be
paid to the agency because you cannot run them into the
ground. Having arrived at that figure, which is X amount
of figures to service you as a client, that is a fee to
be paid month to month. Thereafter come the other elements.
To quantify these, you can come up with a model.
SB: What I’m saying is, after the client has ascertained
all those costs which an agency incurs, he should be willing
to put on a 25 per cent profit onto that and make that
into a figure. The client must accept that it is not unfair
or unrealistic. Just because a client may sometimes operate
on five per cent or whatever, he cannot expect an agency
to operate at five per cent. This is because the volumes
here are much lower.
RD: One question is, how do you monitor those costs?
Once you set target cost figures, is there a transparent
system by which all info is captured at the source, tracked,
analysed and presented to the client? If the agency is
to survive, it must invest in information technology to
capture the time and cost elements. The client would like
to see, is there a system in place to track the cost.
MM: I agree fully.
RD: Let me now turn to a concluding issue viz.
what is the agenda for the Indian advertising agencies
during the next few years so far as agency remuneration
is concerned.
SB: I think the agenda is quite clear. Ad agencies
as a group have to consciously work towards delivering
value to client. I think advertising agencies have to
spend a lot of time and intellectual effort in delving,
going deeper to unravel the Indian consumers’ mind to
find out what can make them tick. I’m strongly of the
view that in the last 10 years, advertising worked less
efficiently for advertisers as a whole.
RD: Do you think during the next 12 months or so,
some agencies will take proactive steps on their own and
approach the clients with recommendations to use PBR system?
MM: I think before agencies take any proactive step they
need to define their own business. I think that’s a fundamental
problem. There are times when they talk about being consultants
like Mckinsey, or of setting up design studios, or PR
companies and direct marketing companies. So I think agencies
have to basically revisit fundamentals and define the
business space in which they wish to operate. And then
guard that business space since you can’t be all things
to all clients.
RD: I agree fully that time has come for agencies
to revisit their positioning vis-à-vis competition and
client.
RK: Agencies have to realise that the market is
very tough. And every client has a lot of pressure to
cut costs. And your marketing communication budget always
becomes the soft target because it’s big, you can just
cut and improve one percent. Agencies have to take ownership
of the brands for which they’re working. They should start
monitoring leading indicators, not only for the brand,
but indicators emanating from the client’s office. If
the brand is not performing well in the market and the
client is not happy with the services of the agency, I
would appreciate an agency coming to me and saying, ok,
your MD is taking a 10 per cent salary cut for this year,
and as an agency we’re offering a 50 per cent deduction
in our margin this year. These are the best practices
which agencies must bring into the Indian marketplace.
NG: I agree with what Rajeev has said. Except that
I think we need to extend our arms across to the other
side - which we always do. I think there is a need now
to try and work out a model. Just to share with you -
we have in our own way started something. We’ve had a
couple of dialogues. We’ve arrived at a basic figure.
What is the critical mass for agency A, B or C. We’ve
arrived at that, with complete acceptance down the hierarchy.
We now need to see how we can win your bread thereafter.
The bottomline is: there is no such thing as a free lunch.
You have to earn it. The same parameters of business that
drive bottomlines also have to drive bottomlines in ad
agencies. They’re not different from industry. Doing business
on the golf course is over. And there has to be hard negotiation
and understanding over the table for agencies and clients.
RD: I think that brings us to the end of this discussion.
The time has come for Indian agencies to go upstream,
upgrade value, and give the clients a lot of inputs on
strategic issues. They also must help their clients evaluate
their services. By keeping mum on those parameters, it’s
harming the agencies. You must spell out the parameters
by which you want your services to be evaluated. When
the agencies do that, clients will appreciate them more.
And once all these are in place so far as agencies are
concerned, the remuneration structure will get performance
linked and opportunities will open up for high performing
agencies to earn more than the present 15 per cent. |
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