Creative kickbacks: Decreasing agency margins not an excuse

Creative agencies have had to deal with diminishing agency margins & ad pie being split between several agencies, but is that a valid excuse for buffering production costs or taking kickbacks?

e4m by Neeta Nair
Published: Aug 19, 2022 8:36 AM  | 5 min read
advertising

Two days ago, exchange4media brought to you details about how kickbacks are given by the production houses to creative agencies. But for a practice so rampant in the industry, how is it that brands don’t know about these underhand dealings and this ‘service’ or ‘supervision’ fee. A creative person who didn’t wish to be named said, “Many a time the brands usually have someone who has gone from the agency side to become a brand manager. In most cases, they turn a blind eye and pretend like they don't know what’s happening. I've heard that sometimes the money goes all the way into their pockets too.” In fact, another creative head says the brand has told them that they will be able to give them only this much retainer or project fee and to ‘adjust’ the remaining through the production cost.

The head of a production house narrates an instance when a brand found out about these extra charges their agency had levied. “Several years ago a fairly popular brand that is still around sensed that there was some mischief going on. The payment for the ad film was done via the creative agency, so they asked the agency for the production house invoice. The agency knew they were in big trouble and had to really plead with the production house, telling them that they may get sacked if they don’t help out. The production house gave them a fake invoice to bail them out. This was an independent agency which later shut shop.”

While for some stakeholders it has become a deal of convenience and quid-pro-quo, for others it amounts to breaking the brand’s trust. But what can’t be ignored is the fact that margins for agencies have been shrinking gradually over the past many years. Sources say, five years ago, the monthly ad agency retainer for a top telecom client, including brand campaigns and work for various circles, for a dedicated 120+ member team was upwards of Rs 4 crore, which has come down by close to half today. Mainline agencies’ profitability kept coming down over the years, and another reason for it is that the pie has got further divided into many specialist agencies.

Long ago, a product from a homegrown FMCG brand used to dedicate 7.5 per cent of its media spends on creative agency fee. Today between retainer and projects that amount has got slashed by half, says an industry expert, when inflation should have propelled it to increase further.

A creative professional says that creative agencies are also massively hit because media spends are diverted to digital in a big way today. The cost of creation of a digital ad and the media spends both are much less compared to ads on the mainline mediums, and also so because of its short shelf life. Some brands do one mainline campaign in a year for which a top creative agency is employed and do digital advertising throughout the year. The retainer fee for a mid-sized account handled by 10-15 people in a creative agency can range anywhere between Rs 15-20 lakh. While on the other hand there are competitive pitches among digital agencies amounting to as low as Rs 1.5 lakh per month, which is difficult for a creative agency to dabble in.

Covid added to the woes. Agency heads say that during lockdowns they tried to support the brand by operating on reduced costs, but the brands expect them to work on the same budget even today. In some cases, brands have reduced their own expenditure too. Sources say a water purifier brand which paid Rs 40 lakh as a monthly retainer decided to pay Rs 40 lakh per project whose scope of work would last 3 months. Even if a client did two projects per year, the agency suffered a loss of Rs 4 crore easily in a year.   

Most creative networks have started their own production arms be it FCB’s Fuel Content, Publicis’ Prodigious or Lintas CEX because production is the only part of the creative business where the money has not dwindled in the past few years, even post Covid.

An industry insider also reveals, “Leaders of many agencies, which have an in-house production house, also have a KRA to bring a certain number of films to their production houses. The agency produces the work and is known to keep 25-30% of the production margin. So, if it is a Rs 4 crore film, the agency will keep Rs 1 crore. There is a lot of money in this.”

Defending the ‘service fee’, another creative professional says, “Digital agencies can sustain themselves because of resources being divided between multiple accounts, juniors running the show in case of social media accounts, a larger workforce and a huge grey area in media billing. While on the creative side, a minimum of Rs 5 lakh retainer is important to sustain even a mid-level agency because when it comes to spending on a TVC, a client expects a well-known senior resource from the agency side to be on board. The revenue model in advertising is very complicated. With decreasing ad margins, if you are the owner of the creative shop, how else will you make things work if not by taking a cut from production houses?”

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