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Marketers need to take a long-term view of cutting production costs in the short-term

A recent report released by the Association of National Advertisers in the USA claims that advertising agencies and their holding companies are less-than transparent when it comes to the production of commercials, music, events and other collateral, and are inflating bids from independent production houses so that they can route jobs to their in-house production shops.

In the USA, this allegation is being investigated by the Department of Justice’s Antitrust Division. While, so far, only the USA has forayed into legal waters, the issue is contentious in many international markets, as well as here in South Africa.

Angelika Kempe, executive consultant at marketing efficiency specialist agency AdOps, says that the reason for this alleged practice is one of simple economics. “Over the past few years, remuneration structures for creative agencies have changed, characterised predominantly by a move away from commission-based payment structures to hourly rates and retainers. In many cases, agencies have had to hold the same rates for years while inflation and costs continue to rise, and it stands to reason that they have had to find ways to remain profitable: enter in-house production units for channels that were previously independent and specialised.”

And, says Kempe, while there’s nothing wrong with agencies optimising access to more business and spend from their clients, how they go about it can produce several shades of grey.

Kempe has identified several areas that marketers need to give thought to when considering changing agencies, when procuring the services of a new agency, and even when briefing new creative in to an agency that they regularly work with.

  1. Ethical competitiveness: When pitching, many agencies are asked to provide competitive quotes in addition to their own. But, the very nature of this request is unethical. How can you expect a supplier of services to present better options from its competitors?
  2. Preferred suppliers: Many agencies are part of larger business structures and are under pressure to appoint preferred suppliers, the theory being that working with pre-approved suppliers is a guarantee of work quality and cost-efficiency. Often though, this sidelines a client’s interest in the procurement process for fear of compromising the final product. In fact, the South African creative industry is home to many excellent independent suppliers, which are both reliable and able to provide excellent production output at competitive rates.
  3. Lack of time: Like everyone, agency creatives will always have relationships with trusted suppliers – service providers who need less interaction or supervision to produce the work and meet the expectations. This makes sense from a time-management point of view but clients must question whether this is the optimal way to meet their commercial and procurement standards.
  4. Contract compliance: Agencies often use subsidiaries that may not be covered in client contracts and are therefore not subject to commercial stipulations such as mark-ups, right for reconciliation, and hourly rate formulas.

In this context, says Kempe, it’s clear that it’s not ‘business as usual’ in the industry and, while the short-term result of taking all production work in-house may well be cost efficiencies for advertisers, the longer-term effects will supersede these limited savings.

Says Kempe: “In the short-term and on paper, an in-house production company may be cost effective. But, a commercial production company benefits from less downtime and greater efficiencies of scale as it works with many different clients and agencies at once, while an in-house facility only produces for one agency: itself. This means that once it’s operating at the same level as a commercial venture, its business expenses are likely to rise.”

As seen internationally, the in-house model also puts immense pressure on independent production companies, even forcing some to downscale or go out of business. With fewer production houses comes less competition and, in the long run, a lower commercial production standard across the board.

“However,” says Kempe, “This isn’t just a quality issue. Less competition also soon means higher costs for marketers. While it makes sense that agencies are broadening their scope for financial reasons, the upper hand will only last as long as competition exists. If traditional production companies disappear costs will level out, or even increase, and output standards will drop, crippling the entire industry.”

Kempe advocates that marketers and their procurement departments ask strategic questions before signing contracts. What are our requirements? Do we have senior strategic requirements? How creative do we need our agencies to be? Do we need this level of services for all our brands, or only some? What do we need and at what level?

Further, Kempe says that many AdOps clients are asking for more efficient ways to handle their advertising requirements throughout the value chain. “As an independent, third-party consultant with production cost expertise on board, we know the industry and are able to provide value to clients who are pushing us for alternate options that will produce the same results.”

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