“Unilever Set to Join Cost-Cutting Push” by Andrew McMains, Adweek

Agencies working for the CPG giant face lower margins, extended payment times

Published June 7, 2009

NEW YORK There’s no shortage of major marketers taking a hard look at agency compensation. InBev Anheuser-Busch has shifted away from retainer relationships and extended the time it takes to pay agencies. Coca-Cola has made agency profitability solely contingent on meeting performance metrics.

Now, Unilever is asking roster shops to accept less profitability up front, and questioning the hourly rates that agencies charge and whether it should extend the time it takes to pay its bills, according to sources. Some of the terms, such as payment timing — currently at 30 days — are negotiable. But Unilever, which last year spent $7.2 billion worldwide on advertising and promotions according to its annual report, has told its agencies that the new upfront profit margin of 5 percent is not, said sources.

Previously, the base margin was 10 percent, with the opportunity to earn more via a bonus if certain performance metrics were met. Now, roster shops will have to hit such performance measures just to maintain their previous margin. As such, Unilever, like Coke, though not as acutely, is shifting more toward performance-based compensation. Unilever’s major creative agencies were notified of the margin change in March, and it was retroactive to Jan. 1, according to sources.

Given that Unilever’s creative shops cut across four holding companies — WPP Group, Interpublic Group, Omnicom Group and Publicis Groupe — the impact of the margin change alone is significant. What’s more, sources describe the cut as “structural” and therefore unlikely to revert to the previous percentage even when the economy — and Unilever’s business results — rebounds. As one agency CEO put it, “Once things go this way, they tend not to come back again.”

While Unilever’s drive to slash agency costs comes during a downturn, that’s not necessarily the driving force. Rather, sources point to the influence of new Unilever CEO Paul Polman, a former CFO at Nestlé who replaced Patrick Cescau as the packaged-goods giant’s top gun this year. Before Nestlé, Polman spent 27 years at Procter & Gamble, originally in finance roles and lastly as group president for Europe.

“He’s there to shake up Unilever and to shake up the status quo,” said one source.

Said another: “He took a look at the overall marketing costs and believes that too much is being spent on fees and production” costs. “He has got benchmarks from Nestlé and P&G.”

When contacted about the rationale for changing aspects of its agency compensation, a Unilever rep said only, “We don’t usually comment on our remuneration policies.” Likewise, affected agencies including Ogilvy & Mather, Lowe, DDB, JWT and Bartle Bogle Hegarty, declined to comment.

Executives from roster shops and their holding companies are said to be involved in the compensation talks, which are ongoing and date back to the end of last year. Unilever global CMO Simon Clift is playing a leading role on the client side at the direction of Polman, said sources.

One source characterized the talks as collaborative, noting that agency pushback on payment timing may result, in some cases, in keeping it at 30 days, though Unilever this year has raised the notion of extending it to 60 or 90 days. That said, sources acknowledged that agencies these days have little leverage with major marketers, short of resigning the business — not really an option in an ever-shrinking marketplace.

To some, the situation is paradoxical.

“Clients have never had a higher demand for big ideas, greater creativity and innovation,” said a source. “At the same time, they have never been more prepared to treat everything we do as a commodity.” The source added that the trend “has been happening for a while, but the intensity of it now … is just pervasive.”

The trend leads some sources to suspect that certain clients are using the “wet blanket” of the recession as an opportunity to extract further concessions from agencies. “It has happened a lot,” said an agency CEO. Some clients do it “because the business needs it,” while others use the “moment to stand on the shoulders of an agency to push down.”

Lost in the focus on agency costs — and in particular the base profit margin — is the concept of value, according to Arthur Anderson of Morgan Anderson Consulting in New York. “Clients are under pressure, tremendous pressure. They are trying to contain costs without loss of quality in advertising work,” said Anderson, who described the syndrome as “cost containment with loss of value.”

That, of course, puts the onus on agencies to demonstrate value and differentiate themselves from others. Such efforts may be lost on client procurement executives, but shops will continue to make the case. As one agency CEO said: “The only leverage that you have in any service industry is that you have to be very good and you have to be such a valued resource” that clients can’t do without you.

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