As the industry evolves, media agencies are no longer set up to work with their clients in a financially viable way.
In reviews, client procurement departments still evaluate their agencies against historical cost benchmarks, such as commissions or number of full-time employees (FTE) charged by its previous agency. But that often precludes the agency from working in an interdisciplinary way, said Mat Baxter, CEO at Initiative, a media agency owned by IPG.
“[Clients] want to put the agency on a commission or FTE for buying, but [don’t] want to pay an FTE for planning on their owned assets, for example,” he said. “They’re already getting to a solution before they understand the problem.”
This focus on meeting historical benchmarks is sparking more client reviews and putting agencies into constant pitch mode.
“We are a little bit too ready as an industry to pitch,” Baxter said. “If you’re in a perpetual state of pitching, it’s very difficult to give your existing clients the attention and focus they need.”
But getting an entire industry to rethink decades-old ways of working is no easy task.
“These are some of the big challenges facing the industry,” Baxter said. “There are some fundamental structural challenges that need to be addressed.”
He spoke with AdExchanger.
AdExchanger: What would a more sustainable business model look like for agencies?
MAT BAXTER: I talk about profit neutrality – setting the objective for an agency to earn the same amount regardless of the recommendations it’s making. You reorient the agency’s focus around the most important thing for the client: their commercial performance.
Right now, the only way the agency can make money is by spending in paid media. The solution might be to better leverage a client’s retail ecosystem or owned assets and integrate with partners and affiliates.
Is an agency genuinely free to give that type of advice if paid media might not feature on that plan? Most agencies don’t have that financial freedom.
How open are clients to rethinking their financial terms with agencies?
There’s a dual-audience: the marketer, driven by their KPIs and objectives, and procurement, which has been conditioned to compare apples with apples.
Let’s say [a client’s] old agency was on an FTE that they historically understand. The natural tendency of the procurement department is to say, “I know what I used to pay my old agency and I want to compare that directly with my new agency so I know I’m getting a competitive price.” But that’s the wrong mindset.
The better mindset is, “How do I structure an agreement that’s going to give me the best outcomes for the future?” Procurement has to realize they’re actually holding their agencies back because they want to continue working on commissions and FTEs.
What’s the dialogue like between agencies and procurement? Are they open to making changes or do they just view marketing as a cost?
Some are more open than others, but it would be great to see more willing to change that engagement. Both industries have a collective responsibility to press the reset button, and there needs to be give on both sides. On our side, we need to change the way we operate, but there needs to be flexibility on the client side so we can get a financial design that’s sustainable.
How does constantly pitching impact your ability to function as an agency?
Pitching is a challenging area. It’s service that’s given for free in the majority of cases. It’s getting increasingly expensive and it’s extremely resource-intensive.
The expectation for a global pitch is to fly around the world and support local teams. The hard costs alone can run into the hundreds of thousands and sometimes millions [of dollars]. On top of that you have resources distracted from your clients who are actually paying. The number of pitches has increased so dramatically over the last five years that an agency is now pitching full time. It’s a destructive model for agencies and clients.
How often are you saying no to pitches?
We’re saying no to one out of every two pitches, so maybe 50%. If you say yes to everything, you’re pitching five big things at a time and that’s unsustainable. Agencies don't have pitch teams sitting around. These people have day jobs.
When clients ask for unrealistic things, it forces us to say no. For example, if they want us to turn around a strategic response to every brand in a portfolio in three weeks. One brand brief is enough to see how an agency thinks. There’s behavior that can be opportunistic, where clients try to get their entire problem solved through the pitch. Those are the ones that we’ll say no to.
Clients expect agencies to take on 120-day payment terms. These are unrealistic and unreasonable. We don’t have 120 days to pay the media, so why should we carry all of that cash flow burden? We’re not banks.
Do you ever get pressured to pitch lower on fees?
No. We’re trying to run a sustainable business, and IPG acknowledges those challenges. We would rather pitch less and win more. When we do say yes, we’re able to focus and give better quality resources. When we’re not spread so thinly, we can do a better job.
Do you feel like clients are disrespecting their agencies?
Well, clearly. But I don’t blame the clients for that. You have to earn respect. No agency is entitled to respect from their client. You’ve got to prove you’re worth keeping around.
If I look at the clients where we have the best work going on, there’s no coincidence that they’re also the most respectful and trustworthy relationships. It produces better work. There’s tangible benefits for all parties. When there’s just frustration and anger, the work gets worse.
This interview has been edited and condensed.