The US Association of National Advertisers has been looking into production costs and practices – just as it has been with media – and, to no-one’s great surprise, has found that big holding company-owned agencies rig the system to their own advantage.
This is the conclusion of 12 “experts” commissioned by the ANA anyway. More serious for agencies is a parallel investigation by the US Department of Justice led by a prosecutor who has previously sent errant agency execs to jail.
The production issue seems to be more a post-production issue, with agencies directing work to their in-house studios through bid-rigging; chiefly soliciting inflated bids from “friendly” production houses who are then rewarded with work down the line (they hope). The report also mentions the various mark-ups agencies try to slide past client’s noses but that’s always gone on.
Back in the day agencies were happy to pay the best production production and post-production houses (and their directors and editors) what they asked because they would then mark up the costs by 15-30 per cent or even more. There was no need to have their own in-house studios. Two things happened: the increasing influence of procurement personnel who found some of the numbers gob-smacking and the exponential growth of internet content which made conventional charges untenable. There’s a comprehensive report in Adweek.
Above all this there are two interesting issues.
One is the quality of creative work, which is why these costs are incurred in the first place. Many people would maintain that the old system – which created a number of multi-millionaire commercial directors – actually worked better despite its absurdities (like technical casts of thousands on commercial shoots). Quality was mostly high and therefore the better ad campaigns worked better. There’s no point saving money if the ad doesn’t work.
The second is the impact these findings, if indeed that’s what they are, have on already stressed agency and agency owner margins. As they’re doing in media, clients will start scrutinising contracts more closely and there’ll be serried ranks of poachers-turned-gamekeepers queueing up to assist them. It can be argued that the slowdown in growth experienced by most of the holding companies in the first half of 2017 (we haven’t heard from WPP yet) is partly due to the crackdown on media agency margins following the ANA report. Production is a much smaller part of holding company income but important all the same.
One might go so far as to argue, as Madison Avenue consultant Michael Farmer has, that the holding company model – take 30 per cent off the top of the operating companies – is increasing untenable. But the likes of WPP and Omnicom aren’t going to go away. So they’ll have to rationalise their multifarious agencies – in being chiefly for account conflict reasons – and encourage clients to do business directly with them.
In which case the outlook for some of adland’s famous names just became even more vexed.