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Fees, outsourcing and procurement improve prospects

The days of 15% gross commissions – 17.65% on cost – are long gone. Commission levels have receded to around 12% gross for full service, including media planning and buying, or, as we put it, Media Investment Management. Production commissions have largely been reduced or eliminated, although there are interesting procurement opportunities for agencies themselves in television production.

While commissions persist, fees are becoming more popular with clients, although that momentum seems to have slowed recently. They now represent at least 75% of our business. Usually time-based, with incentives, they are used almost exclusively in our marketing services business, which accounts for 54% of our revenues. In advertising, they account for well over half of our business.

Fees have a number of advantages and, on balance, we prefer them. They are not seasonal, in a business where spending tends to be concentrated in the second and fourth quarters (January, however, has become a profitable month). If clients cut or do not spend or continually re-brief us, we still get paid.

Finally, when fee-driven, we tend to plan our annual business better. Fees have also tended to dampen volatility in our operating margins. In the most recent cycle, our margins peaked at 14.5% and bottomed at 12.3%. In this cycle they have already reached almost 16% (under 2004 UK GAAP). In the previous cycle in the early nineties, they peaked at 10.5% and bottomed at 5.6%.

I cannot remember a time, in the 30 or so years I have been in the industry, when clients have been so focused on cost, although between 2004 and 2007 there were signs of a growing focus on top-line growth, and innovation and branding. Given overcapacity, low inflation and lack of pricing power, and high management turnover, that is perhaps understandable.

However, the question remains whether the procurement process can successfully purchase creative services in the way door handles or widgets are bought. The emphasis on procurement seemed to start in the pharmaceutical industry and then moved elsewhere. It may work in media buying, where there are clearly economies of scale, but not necessarily in media planning or other creative or intuitive areas.

It is true we must improve our processes and eliminate waste, but can you buy ideas or our people's creativity in such a mechanical way? Increasingly, pressure on price will drive our best creative resources to clients and categories where their services are appreciated and rewarded appropriately. Many marketing clients still appreciate that great advertising ideas and copy deliver outstanding results. Reducing marketing costs indiscriminately, particularly in industries with heavy fixed production costs, will only result in having to spread those costs over fewer unit sales.

The procurement process seems to be based on the idea that what we provide is low value-added, and that, because we are dependent on significant revenues from large clients, we can be squeezed. This thinking may be flawed. First, what we do is critical. There is a limit to how far costs can be reduced; but there is almost no limit (apart from 100% market share) to how far you can grow revenues. Second, in an increasingly undifferentiated world, what we do – differentiate products and services, tangibly and intangibly – is becoming more and more important, particularly in the slower-growth markets of the US and Western Europe, where overcapacity, commoditisation and retail concentration are more pressing issues.

Finally, growing consolidation in our industry is reducing the available resources for clients. It is ever more difficult to find co-ordinated resources that can deliver what clients require, particularly if they are an international, multinational or global company. Smaller, country- or city-based operations cannot offer the depth of coverage or breadth of resources.

One interesting recent development is the growing interest in outsourcing parts or all of the marketing function. Clearly this is an opportunity for us and is being driven by CEOs' focus on costs and their analysis of their investment in marketing services. Instead of concentrating solely on amounts spent outside the organisation, closer examination is being made of amounts spent inside the company. WPP has become involved recently in outsourcing projects in the car and internet services industries. In a number of other areas, including advertising, direct marketing and research, there is interest in what can be done in outsourcing costs. Clearly this tends to make internal marketing departments more defensive about their functions. We have seen much of this, for example, in the media buying area.

BrandZ™ Top 20 risers 2007
Year-on-year brand value growth*

Brand %
Brand
value
growth
%
Brand
contribution
growth
%
Business
value
growth
BlackBerry 390 -1 124
Apple 123 -1 124
Amazon 93 3 93
China Construction Bank 82 -8 90
Vodafone 75 4 24
Standard Chartered Bank 73 8 36
Movistar 73 -1 57
ICBC 70 -7 289
Nivea 68 4 29
IBM 65 0.3 30
Porsche 62 0 100
Siemens 61 2 71
Mastercard 52 10 25
AXA 50 2 30
McDonald's 49 0.4 35
Esprit 46 -6 72
Goldman Sachs 45 0 19
Gucci 43 0 34
Orange 42 4 14
Bank of China 42 -7 61

Source: Millward Brown Optimor
* Excluding restatements; excluding brands whose 2007 value was lower than $5 billion.


BrandZ™ Top 100 Most Powerful Brands 2007
Year-on-year brand value growth by category*

Category Brand value growth
Mobile operators 35%
Technology 33%
Personal care 27%
Fast food 27%
Luxury 24%
Beer 24%
Apparel 23%
Insurance 23%
Coffee 18%
Soft drinks 17%
Financial institutions 16%
Retail 10%
Water 9%
Cars 7%
Motor fuel 5%

Source: Millward Brown Optimor
* Excluding restatements; like for like (value of all brands in scope in each category compared with their 2006 value).