The Hindu Business Line : Remunerating agencies

And as the printed word became organised into what was to become the print media, the first formal advertising agencies began to make their presence felt.

Ten years ago, I would have stiffly agreed that "you never ask a man his salary and a woman her age." Today, these aspects of one's life are bandied about in the media with gay (no other connotation implied) abandon.

Therefore, it would not be amiss to discuss something that very few really know about, but almost everyone discusses openly.

The primary source of revenue for a traditional full service agency, till a few years ago, was its 15 per cent agency commission.

This was a figure that was decided many, many years ago by people wiser than me. I will not, therefore, speculate why it could not have been 18 per cent or 12 per cent.

Do understand these were days that were very different from what we are witnessing now. I believe the younger generation needs to know about these things, and so I will go down the corridors of time.

Even ten years ago, the printed word was sacrosanct. You would go into a shop and never dare negotiate with the shopkeeper, even though his was one in a row of shops stocking similar products, simply because you saw a little strip of paper pasted on the wall with the words `fixed price'. Media representatives would produce a printed rate card that was the last word to the media planner. And most people considered it rude to discuss remuneration. In any case, everyone knew that an ad agency was accredited by the Indian and Eastern Newspaper Society (now called the Indian Newspaper Society, INS) on the basis of an inspection and evaluation of their facilities and their capability to provide a set of services and skills to their clients, and were paid a 15 per cent agency remuneration. Nobody questioned it and everything was hunky dory.

But then, everything changes, and so did the nature of the advertising business. Firstly, it was media that heralded sweeping changes in the form of a dynamic new medium that would re-define the way we worked, played and lived. Television was introduced and it took a long lawless period for the television channel owners to band themselves into an association called the Indian Broadcasting Foundation and try and accredit agencies in the same way the INS does. By this time the agencies had begun to look at themselves not as commission agents of the media but as business partners. This was accepted by the TV channel owners, and they too decided that the time-honoured 15 per cent remuneration to agencies would continue.

Through all this process of change, there were always murmurs and whispers about an alternative remuneration system. In the US, some agencies were being paid partly by way of a commission and partly by way of a fee calculated on the basis of time sheets and an agreed-upon rate.

Acquisition binge

Simultaneously, foreign advertising agencies were feverishly acquiring large chunks of Indian agencies. By the late Nineties, the legendary heads of the large agencies were nearing their retirement age and were in no mood to dig their heels in and analyse or argue that what was good for the goose wasn't always good for the gander.

The agency commission system with respect to multinational agencies and their clients was under siege and the Indian generals of multinational agencies somehow could not tell their foreign masters that inasmuch as tax rates are different in different countries, so were remuneration rates. The unshakeable edifice was beginning to crack.

Along with this structural change that was taking place at a macro level, there was a simpler yet no less damaging practice that was beginning to occur. In the name of being competitive, agency heads were discounting their revenue. This was the only differentiator some people could offer. Meanwhile, changes were occurring at all levels. At the client level, younger brand managers were taking over because suddenly the economy opened up and real competition began to be experienced. These young people were weaned on stories they had heard and read. Business journalism was suddenly very hot and youngsters who were still wet behind the ears had their own bylines, columns and fancy designations. The age-old journalistic rules of double-checking sources and always getting both sides of an issue were cast aside as the gusts of new-age journalism with `scoops' and pretty headlines swept aside sobriety and hard content. One leading pink newspaper published an article with a table that laid out names of about ten advertisers and their agencies and the rate of discount that was being offered by the agency to the advertiser. I knew it was probably a completely fictitious article probably fed to some cub reporter by some young brand manager or account supervisor because my agency's name and the name of my client were published with a completely cooked up rate. As an agency that prided itself at always playing by the rules, I sent an angry letter to the editor and publisher, and was met with stony silence and then an embarrassed offer to "meet and sort things out."

The entire scenario was a prescription for disaster.

Some agencies rebated. The industry suffered. I still say that the 15 per cent agency remuneration is right. Before I am laughed off the stage, let me explain why I feel strongly about this.

On the one hand, no one really knows how many agencies and clients are operating below 15 per cent. I will ignore all the off-the cuff estimates with the contempt they deserve. Is there any real estimate of this figure? The answer is an emphatic "No!"

Public sector clients still prefer to go by the rule book simply because working out any other remuneration package is almost impossible for them. This is a large chunk of business nationally.

Many large advertisers still fork out 15 per cent between the brand agencies and the media agencies. They are mature and know that an agency needs good minds which have to be paid well. Let's forget about the brash brand manager who `saves' 5 per cent from the agency and pays 10 per cent to a management consultant for the same work. They need to be educated on the value of their agency.

The primary point which very few people understand is, how can an advertiser `cut' something that he does not pay?

Put in another way, the all-important point to understand is that it's the media that pays the agency, not the advertiser. And both the agency and the advertiser seem to have forgotten this completely. The advertiser likes to think he is `cutting' the agency's remuneration. The agency likes to think it is `passing on' a part of its remuneration, and can squeeze the media for some more. The media feels very angry. And with good reason.

Quarterly results

There is a need to go back to the drawing board and tell the advertiser that he needs a communications partner, not a `fetch-and-carry' agency. There is a need to impress upon the advertiser that he actually stands to gain, every which way, by having a healthy agency that can provide him with strategic inputs, consumer insights and creative ideas. And there is a cost attached to these invaluable things.

The alternative is horrific. Advertisers will continue to think they can do what they shouldn't be doing, looking only at quarterly results. Media will begin to feel that a standard commission system is redundant so it could even be dropped officially. The law of the jungle will prevail. Medium and small agencies will be crushed. Large agencies will be emasculated. It's a lose-lose situation.

I believe it can be retrieved. I believe that advertisers would be willing to see value when it is presented to them in the proper way. And agencies need the money to provide the vital inputs the brands require. And media needs agnostic planning. But what is needed first is sage counsel, integrity and a willingness to look beyond one's little nose.

(Ramesh Narayan is a communications consultant. Feedback on this column can be sent to brandline@thehindu.co.in)

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