The Ad Industry Has Reached a Breaking Point. Can It Bounce Back?

Would you work a full-time job for four months without being paid? Could you? “Once upon a time, the agency was the most important outside relationship most clients had,” said Bill Duggan, group evp for the Association of National Advertisers. That is no longer the case. Agency leaders, trade groups and CMOs have united in decrying the conditions of General Mills’ ongoing creative review, which include 120-day payment terms, “blind” briefs and complete ownership of creative concepts from winners and losers alike. General Mills, which declined to comment on the RFP, didn't start this trend. Its approach mirrors that of other major advertisers—and the agencies that agreed to sign their contracts. “Trust between marketers and agencies is at an all-time low,” Duggan said, citing ANA member surveys. The leader of one prominent creative network, speaking on condition of anonymity, went so far as to say some clients that see creative services as another disposable commodity have "crossed the line into usury over payment terms and IP ownership." Meanwhile, CMOs face their own uphill struggles. Audi, whose parent company, VW, countered a sales slump by slashing its global media budget, recently launched a review after nearly 50 years with BBH, only to see big-name shops from Leo Burnett to VCCP decline or drop out after the brief. "The industry really is at a breaking point," said Crossmedia CEO Martin Albrecht, "because clients don’t see the value, period." How can advertising overcome this apocalyptic prognosis? Creative as currency The most contentious trend concerns ownership of creative ideas. “Architecture firms aren't going to give you their designs for free,” said Matt Kasindorf, svp of agency management services at the 4A’s. Celebrity Cruises CMO Peter Giorgi called the idea that any client would ask agencies to pitch their best concepts before assigning them to a cheaper shop "offensive." A consulting firm like KPMG or Accenture, he said, would never even consider agreeing to such terms. [kickout id="1"] Yet 4A’s members report an increasing expectation for unpaid pitches, and many fear the bar will continue to drop once such demands have been normalized. The creative leader also said client contracts "almost always" assign legal responsibility for matters like unauthorized usage lawsuits to the agencies, rather than the marketers that approved the work in the first place. Duggan connects this slow-motion breakdown to the original decoupling of media and creative as brands added more shops to their rosters and began addressing their marketing needs on an à la carte basis. Still, the General Mills RFP served as a wake-up call, with more than one agency declining due to multiple red flags. Managing director Eric Dunn of San Francisco’s Odysseus Arms, which pitched General Mills in 2016 under similar conditions, called such reviews a "high risk, minimal profit scenario." The president at another shop who requested anonymity to avoid upsetting client-side purchasing agents added, “We wouldn’t agree to those conditions even if we’d already won the pitch.” Some draw their own lines. David Mullen, partner at The Variable in Winston-Salem, N.C., said his agency usually insists on 30-day payment periods, responds to RFPs with extensive Q&As and asks would-be clients to sign basic “ownership of rights” agreements ensuring that all original concepts belong to The Variable even if they don’t get hired. He estimated only 10% have declined to sign. Search consultants also work to walk marketers back from the edge. “We make it very clear from day one that they will not have ownership of the work unless they pay appropriately for it,” said Ann Billock, partner at Ark Advisors. Billock added that all vendors feel the squeeze, including broadcasters, publishers, distributors and her own two-person firm, whose clients have demanded 180-day payment terms. To many industry leaders, the problem comes back to one word: procurement. Pricing themselves out of business As big advertisers heighten efficiencies, teams usually tasked with negotiating the most favorable deals on raw materials, furniture and IT supplies have assumed a larger role in writing marketing contracts. One agency CEO called 90% of procurement "draconian" and said its influence has further distanced CMOs from creative and strategy, or the very things that should set their partners apart. The 4A’s Kasindorf compared agency services to the distribution of a product like aluminum, which will vary little whether it comes from company A or B. “Switch to legal or advertising and there can be a tremendous difference in quality, price and ultimate outcome,” he added. [kickout id="2"] Yet procurement is not necessarily the enemy. One member of Celebrity Cruises' procurement team now deals exclusively with marketing service providers after working in accounts at TBWA. Tina Fegent, a veteran of GSK and Grey who runs her own procurement consultancy, advises clients to move beyond pure cost-cutting to focus on matters like ROI and supplier diversity while collaborating more directly with their agencies. “I am not saying that they accept everything a cost-focused procurement person may say to them, but you need to have those conversations on an equal footing and knowledge base,” she said. Still, penny-pinching takes precedence. Citing the Audi review, Fegent said agencies sometimes need to cut their losses and walk away. This is by no means an exclusively creative phenomenon. Media was the first to be hit as clients like Procter & Gamble and Anheuser-Busch InBev began expanding payment periods several years ago, and the practice has evolved into an industry standard. “At some point, every major media account stops to make a play for payment terms,” said Mat Baxter, CEO of IPG's Initiative. Unlike the GM RFP, such negotiations often come at the end of the review process when agencies have already spent “millions of dollars in labor and expense." A view from the other side Some clients have adapted to address their partners' concerns. Kate Hartman, group director of brand PR for Coca-Cola, said the company recently “revised its global payment terms policy to a new standard of net payment in 120 days” rather than the 180-day model. "Generally," she added, "we pay for pitches and have ownership of the ideas presented, regardless of whether they win or not." Mars head of global media and agency alumnus Robert Rakowitz declined to go into detail regarding payment terms but said his team has worked to develop "a more sustainable approach to ensure [partners] are fairly compensated" in the interest of mutual growth. During Mars' most recent global media review, the client and GroupM co-wrote a "comprehensive remuneration plan." "There’s a point where you can’t bend anymore," added Rakowitz, who said his company would never demand IP ownership from an agency that does not win a review. "Let them walk out the door with their ideas and their integrity intact." Lego takes a similar approach. [kickout id="3"] "We have a 'partner promise' that’s part of our Lego brand framework where we outline what people can expect from our company," said Lego Systems vp of marketing Michael Moynihan. Procurement is heavily involved in contract negotiations, but the company aims to optimize profit as opposed to maximizing profit. Moynihan said that the quality of work would surely decline "if agencies are not making some sort of acceptable return." Unlike most big advertisers, Mars and Lego are privately owned businesses—and this fact shields them from some of the shareholder pressures applied to traditionally low-margin companies like General Mills and P&G. One executive who spent 20 years managing marketing operations for a publicly traded CPG company said its strategy quickly went from growth-focused to cost-focused when the CFO became CEO. "We would turn to our agencies and say, our budget just got cut by 10%. Help us figure out which levers to pull," she said. The way forward The question remains: How can advertising transcend what Kasindorf calls "a general societal issue with trust?" “We’ve reached an inflection point, and both parties have a choice to make: Peer into the abyss and go for more competitive advantage at all costs, or decide that we have to build each other’s businesses in a responsible and sustainable way," said Rakowitz. To Kim Wijkstrom, a former agency executive who most recently served as CMO of OneMain Financial, the most important aspect of this debate concerns how difficult the act of truly differentiating a brand can be. "If you want Michelangelo, you pay for it," he said. "The Pope wanted the best creative director at the time, and he didn’t get it for free." Giorgi believes agencies are not properly compensated for the work they do, but he also recalled seeing only "a handful" of truly great creative ideas over the past 12 months. And Greg March, who launched Noble People after leading Wieden + Kennedy's media team, said clients may just be "accurately valuing something that has become, in fact, a commodity—especially on the larger end of the agency services spectrum." In other words, large brands and conglomerates can almost always grow profits by cutting costs, and marketing will inevitably be among the first on that chopping block. (See Johnson & Johnson, Kraft Heinz, et al.) The anonymous creative leader suggested "an alliance between holding companies who get together and say we can’t stand for this." Martin Sorrell, then head of WPP, publicly opposed Diageo's expanding payment terms in 2013, but any such agreement could slip into questionable legal territory. In cases like that of General Mills, more agencies might have to say no before the pendulum swings back. "Unfortunately," said Duggan, "there’s always going to be someone willing to say yes."