PROFIT Agency Compensation Task Force Operations Management Education Dana Perry – BBDO David Weiss – Interpublic February 1, 2012 It is a socialist idea that making profits is a vice. I consider the real vice is making losses. – Winston Churchill “ “
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Agency Compensation Task Force Operations Management ... Agency Margins “Agency margins may well be below where the agency community would like them, but the average agency margin
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PROFITAgency Compensation Task Force Operations Management Education
Dana Perry – BBDODavid Weiss – InterpublicFebruary 1, 2012
It is a socialist idea that making profits is a vice. I consider the real vice is making losses.
– Winston Churchill “
“
What is an Ad worth?
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What is an Ad worth?
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One of The 10 best Super Bowl ads of the (young) century
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The Profit Motive
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Facebook
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WHY IS MAKING A PROFIT SO IMPORTANT?
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An agency’s job is to increase sales and awareness of its clients generated by the ideas and programs the agency creates
Studies have shown that the most creative and innovative campaigns are the most effective in generating business results (Peter Field, “The Link Between Creativity and Effectiveness, Peter Gunn, McKinsey)
This takes talent that must be attracted to and retained by successful agencies. Top talent demands top payment and the opportunity to accumulate wealth
The best talent can only be attracted to and retained by a profitable growing enterprise
Agencies also need to be profitable to have access to capital so they can invest in people and technology
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MORGAN STANLEY ON AGENCY PROFIT…
Companies that fail to deliver to its investors financial performance that merits their talent (employees) and capital (investors) risks losing the loyalty and attention of its clients and employees…
One common denominator you have in enticing and rewarding the talent and wisdom of these two investors is the proper maintenance of your financial performance…
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AGENCIES ARE FRAGILE ENTERPRISES
The agency business is high risk– Often first to feel the impact of pending economic declines
– Often one of the last sectors to turnaround in an economic recovery
– If the Agency isn’t able to sell its time, it loses the opportunity cost
– In a relationship based business, major client contracts are mandatory for clients and discretionary for agencies:
Typically cancelable on 90 days notice in spite of investments made on behalf of the client in people, technology and real estate
No matter on what basis agency profits are examined, their profitability is substantially lower than its major advertiser clients
+
0%
5%
10%
15%
20%
25%
30%
Procter & Gamble
Verizon AT&T General Motors
Pfizer Johnson & Johnson
Walt Disney Time Warner L'Oreal Kraft Foods
Top 10 US Ad Spending Advertisers Profit Margin2010 Profit Margin
8.4%
11.6%
15.0%
11.0%
12.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Interpublic Omnicom Publicis WPP Havas
Agency Holding Companies2010 Profit Margin
On average the
operating profit
margin level of the
top 10 US advertisers
isone third higher than for the holding
companies of the
agencies they engage
Average12.0%
Average16.5%
Agency vs Client Profitability
Agency Margins
“Agency margins may well be below where the agency community would like them, but the average agency margin reported by advertisers in this survey remained flat at 14% compared to three years ago. Although margins may have remained flat, the actual dollar profits at many agencies likely did decline over the past couple years as clients reduced spending and total agency fees.”– David Beals, Trends in Agency Compensation, 15th edition. P.16.
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REPORTED AGENCY PROFITABILITY | NOTE DERIVED FROM ANA SOURCES, NOT AAAA’S
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AGENCIES ARE IN A VERY DIFFERENT PROFIT PLACE THAN THEIR CLIENTSAgency Pre-Tax Profits: Reported Versus Client And Agency Expectation – Trend Data
Profit Margin Reported By Agency (Among Those Whose
Agencies Report Profit)
Profit Margin Considered Acceptable By Client (Among
All Respondents)
Agency Request For Acceptable Profit Margin (Among All Respondents)
Some compensation consultants tell clients that an agency should realize a profit should realized by only with outstanding performance incentives
Incentive compensation is not a substitute for profit – it is a reward (or a penalty) for work that achieves or exceeds agreed to objectives.
Companies may choose to put some profit at risk when there is the opportunity to earn a sizable reward to offset the risk
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OPERATING PROFIT VS. HOLDING COMPANY PROFIT
A holding company may provide its agencies varying degrees of centralized services– Some provide a high level of centralized service as they believe
it is less expensive
– Some believe it allows agency management to focus on clients and growth and not on day-to-day administrative matters/support
– Others leave most to operating company management
– There is no right or wrong method
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OPERATING PROFIT VS. HOLDING COMPANY PROFIT
HOLDING COMPANY
PROFIT MARGIN
HOLDING COMPANY
COSTS
AGENCY PROFIT
MARGINS
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For a variety of tax and other reasons, not all of the service cost can be charged back to the agencies
So the operating company/agency is getting service at no cost that inflates or misrepresents its true operating profit level
The agency profit target must be higher to reconcile the overstated operating profit level and so the holding company can achieve a competitive profit level
HOLDING COMPANY SERVICES
HOLDING COMPANY CENTRALIZED SERVICES CAN INCLUDE
PAYROLL PROCUREMENT
Employee Benefits Audit
Real Estate Tax
Legal/General Business Treasury
Legal/Ad Copy Clearance Insurance
Travel Marketing Intelligence
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NOW IS THE TIME
We are faced with a paradox. On one hand, clients have never more leaned upon their agencies more. On the other, never in our industry has it been more difficult to justify a decent level of remuneration. Jean Marie Dru TBWA
Clients need the talent an agency provides to help them stand out from their competitors, especially now.
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VIGOROUSLY DEFEND A FAIR AND REASONABLE PROFIT
Use the facts and points-of-view expressed here to help support your right to and requirement for a fair and reasonable profit