‘Tough love’ tack puts squeeze on networks

As clients tighten ad budgets and cut agency commissions, networks will have to adapt their structure and costs to survive.

In the US they call it “tough love” – treating your children to strict discipline alongside a system of rewards. The international advertising business is now having to react to its own version of this philosophy.

The tough part of the strategy comes with clients cutting budgets. Either directly, or as some multinational companies are now rumoured to be doing, by abolishing the standard 15 per cent commission in every European office and forcing roster agencies to offer a range of commissions, depending on how much work the individual offices perform on the account. This ranges from three to 15 per cent.

“It is the biggest issue multinational agencies are now facing,” says one industry source. “It is bigger than their vulnerability to McKinsey or any other management consultant. Many will be forced to close offices that cannot support themselves, having gone all out to build networks.”

The logic of cutting commission rates seems an obvious way to gain greater value for money from agency networks. And while many companies recognise the hidden costs of using global agencies, some clients have traditionally allowed their agencies much greater latitude.

For instance British Airways, when it executed a single global ad campaign through Saatchi & Saatchi in London, used to allow every agency in the Saatchi network which ran the ad a 15 per cent commission.

The love part of the tough love policy means that agency networks are being rewarded with pan-European and global centralisations. Last week, Kellogg centralised its entire 156m European media budget into J Walter Thompson (MW May 15).

Last year, Shell centralised its entire pan-European creative account through the same agency, with a brief to reduce its costs substantially (MW November 11 1996). The previous year a string of global advertisers did the same: Reckitt & Colman with McCann-Erickson in January 1996; Colgate Palmolive and Young & Rubicam in December 1995; IBM and O&M in 1994.

JWT has responded by developing a “clustering” strategy across Europe (MW May 8), which means it will have to sacrifice local offices to prevent duplication of effort. Shell, Kodak and now Kellogg have all influenced JWT’s European restructure.

Shell international marketing director Raoul Pinnell says that renegotiation of the global agency/client relationship has partly come from the need to reorient the oil giant’s businesses. “We are looking at ways in which large parts of our business can be run more cost effectively in a centralised way.”

He points to Shell’s last ad campaign, promoting its sponsorship of the Ferrari team during Formula One, which ran in 42 countries. “We saved $9m (5.6m) through our approach to Ferrari, from developing just one execution.”

He says this principle is also applicable to its ad agencies. Shell has already negotiated “enormous” efficiencies with its European media buying agency, CIA. He adds that a similar approach is being taken with JWT. But the fact that so many clients are considering this approach indicates wider structural changes are taking place.

The history of global agency networks closely mirrors the history of corporate expansion. Though some US companies exported to European markets in the late 19th century, the first real wave of internationalisation began after World War I.

Kellogg, Heinz, Hoover, Mars, Ford, Procter & Gamble and Sun Maid Raisins all came over in the Twenties and early Thirties – and brought their US agencies with them. Lord & Thomas, which was later folded into D’Arcy Masius Benton & Bowles, launched Wrigley’s and Palmolive in the UK in the Twenties. JWT began campaigning for Libbys in 1923, and four years later set up a formal office to launch General Motors on the European market.

The next wave of US agencies came after World War II, with the huge global expansion in US consumer goods. By 1972, US agencies held 86 per cent of the declared billings of the top 20 British agencies. The big agency networks were heavily influenced by certain key clients. Kellogg, for instance, still accounts for a third of JWT’s global media billings and over a quarter of its profits.

But global markets have changed and a prolonged period of adjustment is taking place. The unforeseen impact of the collapse of Communism in 1989 opened up virgin territories for multinational advertisers but required increased capital investment; the Reagan-Thatcher programme of deregulating markets increased pressure in mature markets, while the deregulation of global media fuelled cost inflation.

These factors have contributed to the fundamental need to re-engineer businesses, cut costs and contain global marketing spend while providing a broader service.

In January 1994, Lowe & Partners had 40 offices in 15 countries; today it has 73 offices in 32 countries despite the fact it has no truly global client fuelling this development. Its lead international clients include GM and Coca-Cola. A Lowe spokeswoman says the agency hopes to use its network as a way of attracting global clients.

The problem for the “old” agency networks is one of duplication. Elida Fabergé, which set up a European advertising operation with Ammirati Puris Lintas, is understood to have found problems with local and pan-European teams duplicating effort. Ford is also known to have run up against problems of duplication with O&M, where it set up European operations competing with strong local markets.

But if the old networks fail to adjust to the new tough love climate, they could find themselves at the receiving end of the old-fashioned British version of parental control – being beaten and told it is for their own good.

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