By Mukta Malhotra

For advertising men, life has never been easy. And now it has become tougher. Thanks to the setting up of separate media buying agencies, commissions earned by advertising agencies have now been split into two: 13.5 per cent for creative work and 1.5 per cent for media-buying. That means, where agencies offer only creative services and clients source media buying themselves, agency commissions have come down to 13.5 per cent.

There is more bad news now. With the setting up of separate media planning agencies, these commissions are expected to come down further to 12.5 per cent. For, at least one per cent of the commission will be going to the media planning agency. And alongside, advertising clients are re-evaluating agency remuneration structures. Says Vijay Varma, chief operating officer of Mudra Communications: "Since there is a pressure on revenues, advertising clients are becoming more conscious of the fees they are paying to their advertising agencies."

Fee-based system
A fallout of this trend is that more advertising clients have latched on to fee-based systems of remunerating their advertising agencies. Obviously, there are advantages in such a fee-based system. These are: a fixed revenue for the advertising agency brings in a certain amount of certainty, puts an end to the ordeal of chasing billings and helps agencies to manage their cashflows better.

There is a catch here, however. Such a fee-based system could also mean a loss to advertising agencies. Says T V Shivkumar, executive vice president of the Mumbai-based Saatchi & Saatchi: "When the billing doubles, say during boom times, advertising agencies would not be able to take advantage of the situation. For, they are bound to earn the same fixed fees."

But, there is a solution here. Make the agency remuneration performance-related. For instance, Procter & Gamble has switched over to remunerating its advertising agencies with a fee-income which is based on actual sales volume worldwide. This signals a worldwide trend wherein clients are aiming at rewarding or punishing their advertising agencies for their work upfront.

Though more advertisers could follow suit, there are advertising professionals who feel that the earlier system of commissions are tried and tested and thus advertisers would not like to move away from it. They cite other advantages that the system of commissions have: it is easy to administer and is transparent. And in a sales-based system of remuneration, it is difficult to link sales to advertising. For, there are other aspects such as price and product that make the system difficult to administer. That is why most advertisers are not enthusiastic about sales-linked remuneration.

Okay, what would be the effect of such a sales-linked remuneration on advertising agencies? Answers Varma of Mudra Communications: "Agency compensations could move both ways. They could either increase or decrease depending on the performance of the advertising agency. However, the bottomline is clear: advertising agencies would now have to work harder to earn their commissions."

Tie-ups and alliances
Not only clients are demanding that agencies become more accountable for brand success, they are emphasising more on speed and delivery of agencies. Says Amba Kumar, vice president of the Mumbai-based Ambience D'Arcy Advertising: "Earlier, advertising agencies were required to create an advertising campaign only. But now, the clients are demanding much more within the same time-frame."

This changing profile of advertising clients is redefining the functions of advertising agencies. Clients want their agencies to go beyond media buying and offer them varied services such as direct marketing and customised selling solutions.

This has given birth to a new buzzword called integrated marketing. That is why advertising agencies are moving towards creating necessary infrastructure to be able to offer integrated marketing solutions. Says Kumar of Ambience D'Arcy: "Advertising agencies need to generate holistically alive ideas in areas such as retailing, distribution, tie-ups, promotions, merchandising and sampling."

That means advertising agencies need to become brand custodians. It is quite natural for a client to move over to an advertising agency which offers all assorted advertising services. For, he feels that his brand personality might get diluted if he were to go to three different agencies for three different services. But, if the same creative agency were to offer all the services, the agency can act effectively as a custodian of brands and retain the essence of brands also.

That is why a few advertising agencies are gearing up to cater to all the needs of their clients under one roof. For instance, O&M is even looking at below-the-line activities in a bid to reach out to the rural markets. There are a few advertising agencies which had downed shutters on services such as public relations and event management. But now even these agencies are keen to get into these activities all over again.

Tie-ups and strategic alliances are other strategies advertising agencies are looking at becoming one-stop advertising shops. For, strategic alliances are better options compared to opening separate divisions for varied services. And there are advertising agencies that are looking at acquiring direct marketing and event management companies. Trikaya Grey is one such agency which is on an acquisition hunt.

Hungering for size
True, advertising agencies are hungering for consolidation. They are keen on acquiring critical mass to cater to the changing needs of their clients. A large advertising agency is better equipped to invest in emerging technologies, negotiate better and gain media-buying strength.

Today, the top 15 advertising agencies account for as much as 80 per cent of the billings. The trend is certainly towards getting bigger. Says Ranjan Kapoor, managing director of O&M: "In three to five years, smaller agencies will find the going unsustainable."

So, what is the way out for smaller advertising agencies? They need to focus on niche areas in order to survive. Says Ramesh Narayan, president of the Mumbai-based Advertising Agencies Association of India: "Small advertising agencies will survive. Thanks to the nature of their businesses, there will be advertisers who will need the agility and quick responses of small agencies."

And mid-sized advertising agencies need to look at mergers. Says Apurva Purohit, media director with the Mumbai-based FCB-Ulka Advertising: "Mid-size advertising agencies will merge or get acquired."

Globally, such mergers and acquisitions have been happening in the advertising industry for quite sometime now. For, mergers and acquisitions help advertising agencies get a new client base, new businesses, better media-buying power and operational synergies. For instance, Publicis' acquisition of Saatchi and Saatchi was motivated by the need to gain an entry into the American market. In the Lowe and Ammirati Puri Lintas merger, Lowe's creative edge and the size of Ammirati Puris Lintas have been the deal-drivers.

All these then point out to an imminent shakeout among India's advertising agencies. As Amba Kumar of Ambience D'Arcy Advertising puts it, eventually, there may not be more than six or seven agencies straddling across the global advertising arena. And Indian advertising cannot remain isolated from this trend.