My interest in the larger economy within the socio-political environment relegates to the background commentary on the marketing communications industry, which is my primary constituency, in general and the experiential marketing segment in particular. One of the major issues facing the experiential segment of the industry is fair remuneration where we have a great deal of confusion in the compensation package for agencies. I say confusion because we have in practice today a hybrid system where a commission system masquerades as a fixed fee system with the agencies at the receiving end of the stick.
Typically in a fixed fee system, third party costs is separated from agency remuneration. The agency fee is based on a simple matrix including total number of people allocated to the account and the percentage of time they will spend on it. Then a percentage of other overhead costs is allocated, plus administrative cost on the account as well as a provision for profit and taxes to arrive at total earning for the agency. Once this is fixed it is either paid monthly or quarterly as agreed with the client. In this system, the client pays the agency net cost for all expenses incurred on their behalf. This means the agency is not allowed any markup.
In a commission system on the other hand, the agency earns a service fee from between 7.5 to 15% based on value of the account and negotiation. The agency is also entitled to earn a commission from third party cost. Typically 15% for media and 10% on production. Sometimes the agency is allowed a further 7.65% markup on the production estimate from third parties. So in principle, the agency is expected to earn nothing less than 20% income in a typical commission system. In effect, the third party costs unlike the fixed fee system is gross to client and not net.
What we have in effect today is that most clients operate a commission system with the experiential agencies where there is no tenure security and pay them between 7.5% and 15% agency service fee (most pay 10%) but expect that all third party cost to be net. In discussions with people on the client side and particularly those in Procurement, their issue with the experiential segment of the industry is the level of transparency compared to the other segments, advertising and media, which is better structured with better transparency. So to mitigate against this, most procurement people negotiate the agency to the bone and keep pushing by cutting costs until the agencies reach the wall.
Now because we have all kinds of experiential agencies (entry barrier is low), it is an all comers affair so there is always one agency desperate enough to take a job that another agency has rejected. Although I refer to these desperadoes as agencies, I am actually generous with the term as they are fly by night operators, doing business from their briefcase and ready to take any job because they have very little overheads. They usually have their collaborators in the less structured client companies or in structured companies where liberties are provided for agency engagement.
The resultant effect of course to the bigger more professionally structured agencies is that it is increasingly difficult to compete as client use them to beat costs down. The experiential marketing sector is in dire straits as margins become thinner even as clients increase payment periods ranging from 30, 45 and 60 days. Some clients are proposing 90 days to finally hit in the final nail in the agency coffin. The Experiential Marketers Association is of course engaging with clients formally and informally to provide education to clients on this issue as well as work with them to improve transparency. My argument to those I have engaged on the subject is simple. How can agencies to survive on a gross margin of 10% when you you maintain a zero advance payment policy with a typical 90 to 120 days payment cycle. Cost of funds is already about 4% to 5%. The 10% is agency gross margin not profit. So they will pay their staff (full time not contract), pay rent and utilities, cost of funds, other overheads, provide for taxes and hopefully make a profit.
Many of these clients run very efficient finance departments with accountants with a wide variety of competences who understand the financial side of business so it beats me how they expect agencies to run a sustainable business on a gross income of 10% (on average). I find it contradictory that clients expect transparency when the environment has not been provided for it. A fair compensation package is the beginning of transparency which the client desires and which the agency is obliged to give. What we have in this confused system is an aberration to the norm and it is peculiar to Nigeria. It is not the practice in other saner climes. What surprises me the most is that many of these clients operate in other climes and know better.
I have had many engagements with clients on this subject formally and informally and it is the major reason why a relationship with a tobacco client that dates back to 1995 ended a few years ago. I simply refused to bulge on a demand that is not the practice in other climes. Whilst the clients have their issues, agencies also have theirs. Proliferation of agencies ensure it is a sellers market so for survival it is a dog eat dog situation and clients hard pressed by the economic environment milk the situation well. But we must look beyond individual agencies now and look to the survival of a section of an industry which is why the various efforts being undertaken by EXMAN to ring-fence the industry and instill some sanity is in the right direction. It is slow but we will surely get there. Compared to the rest of the industry, EXMAN is a toddler among adult professional associations in the marketing communications industry in Nigeria. We however need to move from crawling to running to catchup with the rest of the industry.
This topic is one we discuss animatedly when we gather as a section of the industry with a bit of spirit when we engage with ADVAN or informally with clients but timidly when sitting across the table with Procurement but we must take this discussion out of the closest into the open as a matter of enlightened economic self interest.
My name is Kayode Olagesin and this is a personal view and should not in any way be construed to represent the official view of Towncriers or EXMAN. I sincerely welcome contributions on both side of the divide with the belief that we will all be better enlightened. Views from other markets will be appreciated.
Happy May Day