Is Your Ad Agency Cheating on You?

03 Jan,2020

 

By Prabhakar Mundkur

 

When the ad agency was on 15% commission there was no need to cheat. Although margins were thin at 3-4%, the ad agency was able to handle its rent, training, staff costs and other overheads and make a decent profit although always much less than their clients. The quality of staff was infinitely better.  When I first started doing the rounds of the IIMs in the late eighties, agencies were not a preferred employer, but it didn’t take long to get there. In the period between 1985-1990, HTA (the erstwhile Wunderman Thompson) hired anywhere between 50-60 young business school graduates every year. And we ran a two-week workshop for them called Entrez Vous typically held at one of the hotels in Marve (in suburban Mumbai). After the training programme, the trainees dispersed to the various offices across the country and formed an incredible buddy network that stood the agency in good stead.

 

HTA was incredibly honest. I was once hauled up by the CFO of the company because he suspected that I had overcharged a client on a particular job – that I had charged more than the customary 15%. As it turned out, all I had done was charged a service fee for an exhibition in Rajasthan which was legal according to the HTA manual and the service fee I still remember had the billing head B7.  B8 was the production head where the remaining costs for the exhibition were billed like the artwork and the bromides to go over the panels. Exhibitions were charged a service fee because it was highly labour-intensive and if the agency were to just charge for artworks for exhibition panels, the job was highly unprofitable. I had had the client approve the estimate with the service fee and my CFO had to acknowledge that I was both clever and honest!

 

My first memory of clients being suspicious of agency earnings was when clients started interrogating film production estimates. I would say this was roughly around 1990.  I found myself being grilled on a particular film production estimate. And I couldn’t believe it. A little later, all film production estimates were going through an external film auditor which was a shame for an honest agency like HTA. Later, I discovered that the problem was with one of our competitive agencies, which used to pad up film production estimates to 25% or over while its client contracts specified 15% on both media and production. The client had discovered an anomaly in the other agency’s film production estimate and was naturally suspicious of us as well. I was a little shocked that any agency could charge 25% when all agreements with clients mentioned the standard 15%. This ultimately gave rise to the emergence of the film production services auditor of which there were a few in the country. They matched up agency production estimates with actual market costs and advised clients accordingly. The objective was to discover the hidden padding of the film production estimate.

 

Come the 1990s and agency earnings were rapidly going south. First the 15% agency commission broke down, and then came the major shock to the ad agency – the separation of the media from the creative business. This actually meant that neither the media nor the creative business was earning like before.

 

So now it was the media arm’s turn to make a little extra money which was above and beyond the agency contract. In fact, I was once meeting the Chairman of one my largest clients in Asia, to make a very important presentation to him on one of his main competitors. When my Asia Pacific chief heard about my meeting, he at once wanted to accompany me knowing the stature of the client. When I put in a request to the Chairman that my APAC chief wanted to attend the meeting, the man winced. Clearly, he didn’t want to meet my boss. Later, I heard that the Chairman had a grouse against my Asia Pacific Chief because in another Asian country, my agency had not given back the media rebates the agency had earned, which were to be returned to the client as per the client contract. Yes, you guessed it – ultimately the lack of transparency in media rebates gave rise to the media services auditor. It is still difficult to separate ‘co-mingled buys’ that leverage the collective buying power of their clients but aren’t tied to any specific client’s account.

 

And so, it has carried on for the last 20 years or so. Nothing has changed. A few weeks ago, a prominent up-and-coming and eminently successful CEO was summarily dismissed because he had been caught cheating his clients on film production costs amongst some other accusations. Tinkering with company P&Ls seemed like the lesser sin. A sad end to a promising career. Of course, he was trying to make his agency rich by maintaining margins much larger than his agency had promised the client globally. What could be the motivation? A really honest guy who probably was just trying to bump up his bonuses.

 

I felt a twinge of sorrow when I heard that story. That is the sad downfall of the advertising agency as I knew it, since I first joined the profession in 1977. But who is to blame? I think the clients are to blame for negotiating terms that are so hard, that agencies are left with no option but to find means of increasing their profit. I blame the agencies for negotiating unrealistic terms with their clients just for the greed of handling their business. And lastly, I blame the agency bosses for laying unrealistic targets on their CEOs. In the process the ad agency seems to have lost its moral compass along with its ability to stay alive as it loses business rapidly to the digital agency of the future. Although, one must add, that digital agencies are not invulnerable. There are already stories of padding up hours for fee-based clients. But I am hoping they survive the future better than their predecessor.

 

And I also wish agencies – networked and otherwise – relook at the way they conduct their business. Given a significant premium on the marketing spend, transparency is critical in the marketing services business. Clearly there is no room for any monkey business.

 

Prabhakar Mundkur is a veteran adperson having worked across geographies leading agencies. He is also a prolific writer and recognised by LinkedIn as its #1 Top Voice in 2016. He writes frequently on MxMIndia. His views here are personal

 

 

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