The Hindu Business Line : The fee good factor?

THE fee-based system of remuneration has become a widely accepted norm in the advertising industry worldwide, but the Indian ad world seems to have mixed feelings about it. Despite a number of agencies switching from the traditional 15 per cent commission to a flat fee system, many feel the commission system is much simpler to implement and definitely more rewarding.

The biggest grouse against the system is the lack of the "mechanism" of compensation. Pranesh Misra, President & Chief Operating Officer, Lowe India, says the fee-based system no doubt ensures a fair compensation to cover an agency's direct salary, overheads and profit margins, "but we also want to earn an incentive if our campaign works well and delivers the desired impact in the market. When our clients profit, we want them to share it with us in a small way. The commission-based system also pays back to the agency in terms of royalty for the intellectual value that it sells its client in the form of a successful campaign, but the fee-based system has no mechanisms for this element of compensation."

The agencies feel advertisers want to switch to the fee-based system mostly to cut costs, but in the long run are compromising with the passion and equity an agency shares with a brand. U. Jairaj Rau, Vice-President & Client Services Director, JWT, says brand managers are being "penny wise pound foolish" in an attempt to reduce costs. "If an advertiser cuts down my revenue, I have to look at other businesses to make my money. In the long run it would definitely affect my commitment towards the brand."

On the other hand, there is a segment which feels that the fee-based system is a much more professional and efficient way of doing business. "We get paid for the services we provide, not based purely on the amount spent in media. It's a more open and clear way of paying the agencies. It's still in its infancy, but should settle down to being the most common method of remuneration," says John Goodman, CEO, Ogilvy Group.

R. Krishna Mohan, Executive Director, Ogilvy & Mather, says the agency operates on a fee-based system of remuneration with 60 per cent of its clients. "We are fast moving towards the fee-based structure and this helps us to plan our expenditure and investments much better. Earlier, everything would depend on how much the client would spend."

Mohan says that time-sheets, which are the backbone of the fee system, help a great deal to monitor how much time and money the agency invests in each client and therefore charges them accordingly. "We get remunerated as per the number of hours spent."

Nirvik Singh, Chairman (South Asia), Grey Global Group, says there is hardly any ambiguity in the fee system as the fee that is being paid is for the resources that have been committed, irrespective of spend levels. "I think a fee-based system works well both for the marketer and the agency. Agencies commit resources on the basis of the client's spends upfront. Often these spends change and shrink; however, the agency's resources stands committed."

Though Misra of Lowe agrees that the agency through the fee system is protected against last-moment budget cuts and year-end blues, and the structuring of the fees is done on the basis of actual manpower requirement from the agency, he says that, in practice, it is difficult to exactly predict the work requirement from a brand during the year ahead.

"Competitor activity could change all these plans. So, there is a lot of rule-of-thumb kind of estimation used in calculating manpower requirement and the resultant fees. The time the agency and the client have to spend on just negotiating these aspects comes at the expense of what could have been productively used on the brand strategy," says Misra.

"Also, fee negotiations tend to be delegated down the organisation hierarchy — younger people miss the big picture and try to earn brownie points by questioning everything, and trying to negotiate the fees down to rockbottom. Moving to fees needs a lot of maturity on either side; failing that it would lead to de-motivation and a vitiated agency-client relationship — both of which are not conducive to production of great work on the brands," he adds.

How did the fee system come into being?

The expansion of the media with the emergence of multiple TV channels and magazines, as well as opening up of below-the-line media of communication such as PR, brochures and point-of-purchase materials, induced a number of marketers to switch to the fee system, says Rau of JWT.

"The client began to feel that the agency should come with more ideas and try to position their brand through different media. On the other hand, there were agencies that ran the same campaign for years together and enjoyed the commission, and these clients began to bargain. At the same time, a number of smaller agencies cropped up which offered quality services and were ready to work even on a 5 per cent commission. All these factors prompted the clients to negotiate the fees," says Rau.

"The fee-based system came into being when clients felt a need to reduce the cost of advertising. With the budgets growing at rates higher than inflation, the assumption was that the agency's costs were not growing as fast. As a result, agencies were perceived to be making windfall profits. So, it was felt that fees would ensure a reasonable profit to the agency - but not outrageous profits," remarks Misra of Lowe.

Prepared to switch?

"No," says Sam Balsara, Chairman and Managing Director, Madison Advertising. "By and large most Indian companies prefer a commission system, whereas the big spenders among multinationals prefer a fee system which is either mandated by their global headquarters or want to follow what is practised at their headquarters. Indian companies prefer a commission system as they believe paying their agency in proportion to their spends (which in some way is equated to the work the agency does) is fair."

This debate is relevant only to a few top advertisers of the total of about 3,500-4,000 advertisers in the country. Therefore, the Advertising Agencies Association of India also believes that the relevant system for the country is the 15 per cent agency commission system. So do the Indian Newspaper Society and the Indian Broadcasting Foundation. It is simple, direct, easy to compute and does not lead to discussion, negotiation, dispute or misunderstanding."

However, Rau of JWT says that though many large spenders prefer the traditional commission system, there is a continuous rise in advertisers opting for the fee structure. "The commission system is definitely under pressure," he says.

He admits that the advertising agencies are at the receiving end and are succumbing to the clients' demand to work on a fee structure. "There are some big accounts which one would hate to lose, despite knowing that they are squeezing the most out of you.

A combo deal

Srinivasan Swamy, Chief Executive Officer, RK Swamy BBDO, says the future would see a combination of both systems. "Both of them have to co-exist as all kinds of systems are required for all kinds of work. Some large advertisers who don't want to pass on too much of their profits to the agency would prefer to work on a fee system. They could at the same time also be open to a combination of both the systems, with an incentive for performance."

Mohan of O&M says that the agency works on an incentive-based system with one of its Chennai-based clients, where the agency is assured of a certain commission apart from the yearly fee if it performs well on certain parameters."

Giving an advertiser's viewpoint, Vijay Singh, Managing Director, LG Care, says he is in favour of a combination of both the systems as the agency is assured of its expenses being covered and at the same time doesn't become complacent.

Similarly, a senior official of a Chennai-based FMCG company also feels that the future would see a combination. However, he seems to favour the commission system. "The agency's remuneration is strongly linked to the fortunes of the brand it is handling. A brand needs continuous investment in quantity and quality, for which it is extremely important to ensure that the agency is motivated. A fixed fee structure without any added incentives could dampen the agency's motivation."

However, Misra of Lowe finds the entire logic behind the fee system fallacious: "Look at other creative professions such as cinema, music, art, writing. Remuneration for work produced is linked to the effectiveness of the output. When the film is a super hit, the producers get super profit. When a book is a blockbuster, the author gets a windfall. Commission system in a strange way works this way. When the campaign is successful, clients tend to spend more money on it — both the client and agencies benefit from the intellectual value produced. A fee-based system does not ensure increased remuneration for agencies when they produce a great campaign. Even when a performance incentive is structured into the remuneration model, there is a definite cap. The sooner clients understand this, the sooner they will swing back into the commission-based system."

At the same time, Misra also seems to accept the idea that the fee system is here to stay. "We are followers of the world, with a five-year lag. We will go the way the world is going — towards fees."

Illustration: Falguni Gokhale, Design Directions, Pune

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