Ad agencies hold their ground in slowdown

The industry learnt some key lessons from the downturn of 2008. And that has helped it stand in good stead in the current downturn

It is an oft-quoted truism that the first reaction of  managers to a business slowdown is to cut expenses and advertising is the first to feel the axe. Pressure to keep costs under control and maintain liquidity during a credit crunch make marketing and communication budgets look like a dispensable luxury that should be jettisoned without a debate. Advertising experts have routinely argued that leaders who succumb to that temptation put the long-term growth of their companies at risk.

From the looks of it, India Inc has been listening to that advice. The mood is reflected in the results of a new study. The latest Consensus Ad Forecast from London-based marketing intelligence service Warc (see box) puts India among the top three ad markets in 2013. It says while the global advertising expenditure will increase by 3.4 per cent in 2013, the strongest performers will be Russia, China and India, which are expected to see growth of 12.1 per cent, 9.7 per cent and 8.4, respectively, and are expected to maintain robust growth through 2014. For the uninitiated, Warc’s Consensus Ad Forecast is based on a weighted average of ad-spend predictions at current prices offered by advertising agencies, media monitoring firms and independent analysts, Warc’s in-house expert team and other industry bodies.

Of course, this is not to say all is hunky-dory. While there are no large scale lay-offs or pay-freezes, there are no mass-scale hiring or fat increments this year either. “Ït’s all adjusted to the market,” says Hemant Misra, chief executive at Publicis Capital, part of Publicis Groupe SA, France. “But I must say there is no widespread panic. Yes, there is a lot of pressure from clients to perform and make the ad spends work harder. This, in turn, means we are stressing on workflow efficiency. But what has helped the industry stand in good stead in the current downturn is that we never forgot the lessons from the last slowdown,” he says.

Agrees MG Parameswaran, executive director & chief executive, Draftfcb Ulka Advertising, one of the largest global advertising agency networks owned by Interpublic Group: “Ï would say the water has found its own level. In the last round (slowdown), we made a lot of adjustments, both internally and externally. Internally, we had cut back on things like travel—no business class, if two people are travelling share cabs, etc. We—and here I don’t just mean my agency, but the industry in general—never went back to the ostentatious days of the nineties or the early 2000s. Externally, agencies made a lot of adjustments in fees and commissions in general and in our relations with clients, and it holds even to this day. To top it all, we have made sure there is more cooperation among the Advertising Agencies Association of India, Indian Broadcasting Foundation, and Indian Newspaper Society so that clients who default are brought to book.”

Emerging trends
Net-net, three important trends seem to be emerging in the industry from the current slowdown. One, more and more agencies are looking to move away from a commission-based remuneration structure and are looking to get into a fee-based model to ensure revenue doesn’t fluctuate with the ups and downs of the market. Two, as clients demand more bang from their advertising buck, most agencies are beefing up their digital muscle—it being cheaper and easier to measure at this point. The third point—and it flows from the second—is that we are seeing a lot of merger-and-acquisition activity, mostly related to agencies buying out digital prowess.

Consider the first issue: remuneration. The old system of commission—where agencies got a certain per cent, say 8 or 10 or even 15 of the total spend by the client—has been under threat for quite some time now. It started being challenged more vociferously as the economy went into a tizzy around 2008-09. At this point, about 50 per cent of the agencies have moved to a fee model. All the negotiation are done upfront for a certain period and, in some cases, revised at the beginning of every year. When agencies know how much they have in their kitty, it is easy for them to plan for the year and deploy resources accordingly. So even if a brand decides to cut its marketing and communications budget, there is no pressure on the agency to cut back on talent or other resources deployed.

There are some pressure points though. Agency heads agree that while FMCG as a category has been able to weather the storm well, categories that have been really hurt are automobiles and telecom, traditionally among the top advertising spenders. These categories have cut overall ad budgets; their agencies, though, are insulated because most of them work on a fee basis but they are pushed to “show results”. This has contributed a move towards the new media; but more of that later.

Default-weary agencies are also working on the so-called Taproot model—that is, on a project basis where most of the work is concentrated during a certain time or for a specific goal and the entire payment is upfront. Still, there’s  a caveat. A senior agency hand says there are some instances of defaults even then, but mostly these are small clients and the delay is not abnormally high. “If a client doesn’t pay its creative agency, we have a system in place where the media is warned in advance and they wouldn’t release your ad. So there is pressure to cough up the moolah.” He adds, “Öf course, there are clients which are habitual defaulters, but we know them; and when an agency takes up work from them, it’s usually with a pre-payment clause.”

“You will also see some fraudulent pitch activity as the year draws to a close,” points out an industry veteran. “These would be initiated by clients that want to put pressure on their agencies to review the fee structure they have agreed to before,” he says. The agencies have also learned to deal with such underhand tactics. There stand usually is: take it or leave it. While it is easier for bigger agencies to say that, small agencies that have creative might are no push-overs either, given the checks and balances.

Two, clients want more result-oriented campaigns and are looking at digital with growing seriousness. As people move to the social media, brands are bound to follow suit. The best part is there are several metrics to measure a brand’s impact across social and digital media platforms—such as growth, engagement, impressions, traffic and other qualitative metrics.

The shift is showing: Digital ad spending in India, which started from a low base of Rs 1,000 crore in 2010, experienced a jump of 50 per cent in 2011 to Rs 1,500 crore . As the online market matures, growth will slow down a bit, says emarketer,a  digital media research agency.

Digital drive
That brings us to our third contention that much of the merger and acquisition activity in the country in the last year or so was aimed at building digital muscle on the part of agencies. For instance, in May this year, the Dentsu India Group, a wholly-owned subsidiary of Tokyo-headquartered media giant Dentsu Inc, acquired 80 per cent stake in digital agency Webchutney. The move is part of Dentsu India’s plans to build expertise in campaigns tailored for digital and mobile technology platforms. Maurice Levy-led Publicis Groupe acquired Neev, which is based in Bangalore and is a provider of software solutions, and Mumbai-based digital agency Convonix.

This time last year too saw some hectic—by advertising agency standards—M&A activities. Publicis Groupe acquired three digital agencies: Indigo Consulting, iStrat and Resultrix. That was followed by WPP-owned JWT Singapore acquiring a majority stake in Hungama Digital Services, the digital and promotion marketing division of Hungama Digital Media Entertainment, in June 2012. Next Communicate 2, one of India’s leading performance marketing and search agencies, was acquired by the Aegis Group.

Interestingly, in the last downturn, digital marketers were operating out of separate agencies, but today, marketers are able to construct fully integrated campaigns. As a communication manager in an automobile company that has extensively used the social media to generate pre-launch buzz puts it, “We have been talking about integration for years, but it was slow coming. This slowdown may, for all you know, accelerate that integration, and make the whole advertising industry more efficient.”