Inviting Prospective Suitors Further Thoughts On Agency Selection
An Addendum
The Interview
An Addendum How to Calculate Capitalized Billings
Decision Day
Selecting an Ad Agency
Sizing Up The Field
Partners In Profit
Sorting Through The Candidates What Do You Want From An Advertising Agency

One day, in the early fall of 1984, a major Canadian brewing company, John Labatt, dropped a bomb on the Canadian Advertising Industry. The company was concerned about the image of its number one bestseller Labatt's Blue. To put it mildly, the "Big Blue" campaign had burst its bubble and gone totally flat -- the product of an older generation of advertisers who were targeting their message to their peers, oblivious to a market that was getting younger by the day. The commercial consisted of a very mild Peggy Lee jingle that seemed to be closing eyes rather than opening them. The time was nigh for a change. Consequently, the beer company advised its incumbent agency J. Walter Thompson that the account was under review. The move signalled the beginning of the biggest, most expensive, most exhaustive search for an advertising agency ever in the history of Canadian advertising. When word spread that John Labatt was looking, the industry caught fire. Agencies lined up by the dozens for a crack at the $20 million account. The search took three months to complete and eventually involved five of the most dynamic agencies in Canada (all of whom financed their own presentations). As well, the search took its toll on the private lives of hundreds of agency personnel. When all was said and done, the John Labatt brewing company drank a toast to its new advertising agency, the maverick Scali, McCabe and Sloves, while hundreds of "losers" bellied up to the bar, shook their heads and mulled over the reasons why they lost one of the biggest plums in advertising history. Was it ever a time. T'was the best of times. T'was the worst of times.

When the management of John Labatt went shopping for a new advertising agency, the company's high profile and financial clout made it a very exciting potential client. Since your advertising budget (we suspect) will be considerably smaller, chances are it will probably not have the same dizzying effect, but if you go about your search judiciously and professionally, you will raise a few of the right eyebrows in the right boardrooms. To accomplish this, it's best to be a realist from the outset. The first thing to do is look at your ad budget and find agencies that handle accounts in the same price range. For example, if you spend somewhere in the neighbourhood of $600,000 per year on your advertising, you will be on the wrong side of the tracks with an agency that handles budgets in excess of two or three million dollars. Why? you ask. When you examine the pecking order in an agency's account list, it's not unusual for the client who spends the least to get the least service. When a big agency gets around to working on a small account, the job might be squeezed in during a lull in another client's major campaign or the job may be shuffled off to the agency's juniors which is not good. Accordingly, you should find an agency where your account will be as big or slightly bigger than the others. That way, you will get first class treatment. If it happens to be a small agency, so be it! On any given day, a small agency is as capable as a bigger agency in delivering first-rate account people or dreaming up a brilliant piece of creative. The maxim here is: you don't have to be big to come up with a big idea. (To be fair, big agencies do have advantages over smaller ones but that's a subject for another report). On the other hand, if your budget eclipses the budget of every other client, you might find yourself on shaky ground. The agency may lose their impartiality and become slavish handmaidens, virtually just another "in house"agency and you don't want that either.

Performing an agency search will take as much stoney-eyed conviction as a gold digger would put into finding a rich husband. In fact, the agency you choose will be very much like a marriage partner, hopefully one you will stay with for a good many years. To find out who is the most suitable, it's important to first analyze your own company. List its strengths and weaknesses. Don't turn a blind eye to your own weaknesses for this is where an agency should be most able to help. Now, check the books for a good match. Some advertising agencies are specialists in a certain kind of advertising such as retail, corporate, trade, promotions or otherwise. They've gathered together a good many years of experience and have a solid understanding of what they do. Other agencies have earned their spurs in specific products or services such as pharmaceuticals, business equipment (computers), transit services, automobiles, after-market, etcetera. For those of you who prefer the more conservative approach, a wise move would be to include an agency familiar with your field on your list. By doing this, you will get more than just blank stares and toothy grins when the talk turns technical. For those with courage, you might search around for an agency unfamiliar with your business. Remember, advertising people are professionals in the business of advertising and marketing. If they knew as much as you did, then they should be in your business, right? By selecting an agency short on experience yet long on service and excellent creative, you could get some bright, fresh, innovative, imaginative advertising. And that's exactly what every company needs. Speaking of good advertising, one way to seek an agency is to find out who created advertising you admire. Just call up the advertiser and ask.

Send out a questionnaire to not more than ten agencies who you think are capable of doing the job. If you already have an agency, don't include them on the list. As a matter of fact, why include your incumbent agency at all? If you're looking for somebody else, there must have been problems and it's likely those problems won't disappear overnight. When an Agency President finds your questionnaire in the mail, s/he usually has mixed feelings. On the bright side, your business is an opportunity to increase agency revenue and/or be a "showcase" account to lure other clients. On the down side, the President usually feels short-changed by a questionnaire. His or her preference, of course, would be to meet with the agency eye to eye and rant and rave about what makes the agency so great. But, for as impersonal as a questionnaire may be, it has value for this very reason. All the candidates are put on an equal footing. Each candidate has a fair shot at your business by telling you what's so great about them with a few well-chosen words. When your questionnaire arrives at the agency, the intercoms will start buzzing. All the senior people will gather to surmise their chances. you will make them happy by being specific. Otherwise, there will be a lot of hand-wringing. What do they mean by this? Why are they asking this? The questionnaire is only a means of gathering preliminary information so it's best to steer away from complicated philosophical questions. Stick to the basics, such as "what are the agency's billings (note that the capitalized billings (See formula) are not true billings. They are the fees charged for the work multiplied by 6.67 to arrive at an estimation of a client's budget. Also, ask for their growth record (watch out for agencies that are growing too fast. They may have over-extended themselves). Ask for names of accounts recently won and lost, their personnel, creative recognition and business philosophy. When the questionnaire comes back to you, sharpen your pencil and start stroking out the duds. Any questionnaires received after your deadline should be dismissed. First, make sure your potential agency doesn't work for a competitor. If they do, they'll let you know. Sometimes, an agency may consider resigning your competitor's account if yours promises to be more lucrative. There's nothing wrong with this. Tread carefully, though, if the agency promises to set up another division or associated company to handle the competitor's business and they still solicit yours. Based on the information returned, you should be able to whittle your options down to at least three agencies.

Now it's time to inform the lucky agencies of their potential fortunes (and, of course, tell the unlucky ones the reasons why they weren't selected. Be specific). When you contact the "possible" agencies, set up a convenient interview time. Give them at least two weeks to prepare themselves. Tell them that you're not expecting a "dog and pony" show. The interview is only a preliminary meeting whereby you will have the opportunity to meet their people. Insist that the people who will service your account attend the meeting. Too often, clients are impressed by the presentation team (every agency has a good one.) They are those triple "A" personalities with insight, vision, understanding, compassion, good looks and everything else. It's easy to be impressed by them, but when it comes to handling your account, chances are they'll be long gone. Now, hang up the phone, sit back and relax. The ball is out of your court. When the interview day finally arrives and everyone feels as nervous as cats in a room full of rocking chairs your role is to do very little. Briefly inform the agency of your objectives, then let them do the talking. If you listen well, you will know who did their homework and who didn't. After not more than two hours, the interview should be finished. If it isn't, say it is. You have other agencies to meet (schedule no more than two interviews per day).

Your decision team, which was already well briefed by you on what kind of agency is needed, should be ready to settle down. Start the ball rolling, because you promised the agencies a date for your decision: hold to it. Call the Advertising Managers who work with the agencies in question. Ask them for their opinion. Then, call the clients who decided to drop the agency. Find out why. Think about the interview. Were you impressed by these people? Did you like their thinking? Most important of all, did you feel a chemistry? Would you feel okay if you were shipwrecked with these folks? If you didn't feel any chemistry, forget it. Nobody needs a dance partner constantly stepping on their foot at every turn. Of course, you have checked into their creative credentials. Is their creative approach good? Are their "creative" people "creative" or are they mere sycophants to the agency principles? Look for creative people who are strong and cherish their own opinion. You might feel slightly intimidated, but at least they'll have the guts to tell you when something is wrong. They'll help you tell a good campaign from a bad one. If your decision has come down to the toss of a coin, you might consider asking for a presentation. If you opt for a presentation, give the agencies a call. Tell them of your dilemma and ask for a presentation. Don't ask for speculative work It'll only make you look like a major cheapskate and the agency might think twice about servicing you. Would you ask your dentist to work on your teeth for free? If your lawyer gave you advice, would you refuse to pay if it wasn't what you wanted to hear? Offer to pay all expenses, including labour and materials, up to a maximum. At this point, you can brief the two agencies on your company's most intimate problems. Don't worry about confidentiality. You're dealing with highly professional people. When the presentations are finished and you've made your decision, let the losing agency know first. Tell them you were impressed by the presentation and the calibre of all the competitors. Say it was a difficult decision to make. If the trade papers call, repeat your statement to them. Informing the successful agency should be a happy occasion for one and all. The honeymoon is about to begin. But, before it does, talk to your agency about compensation. Your first few months together shouldn't be marred with any arguments over finance. Make sure your agency will make a profit from your account. If you think it's out of line, say so. But be interested in their profitability, not just at the beginning but throughout your relationship. After all, your agency is interested in the health of your profits.

Sadly, the fact is that most agency/client relationships are terminated on average about three years after they begin no matter how perfectly suited one is to the other. The reason is simple: a lack of communication and, therefore, a lack of understanding. Your agency is, of course, working for you but you are also working for your agency. It's a team effort. Let them know when things go awry. Give them laurels when things are going well. Keep your agency informed of all the latest developments in the industry or of any sacred cows they should avoid. Review their progress from time to time. Above all, be objective about their work. Your agency believes in good advertising. The creative staff are constantly striving for originality. They know that nobody was interested in the first moon landing, so they are always trying to be first with an original idea. Trouble is, original ideas are always the first to be shot down. It's surprising to see people in focus groups viciously attack a new idea simply because it's unfamiliar to them but for as oddball as these ideas are, some actually work. There's plenty of proof of that. Just check out our Cannes Award Winning Video Section. It might also be noticed here that the creators of award-winning campaigns are often fired by their clients the day after they pick up their awards presumably because of the iron will of the people who pushed the ideas through. This is an important pitfall to avoid. Allow your agency to challenge you. Then, you challenge them. Remember that some of the most innovative ideas were born during wars. All in all, it should be a mutually beneficial relationship between you and your agency. It should be a rewarding experience for you both, a chance to do some on-target advertising and make your company grow. Presume that this will happen, for if you make the right decision on an advertising agency, it will. Happy hunting.

Have you been looking for the formula for capitalized billings?

Most companies measure their success in sales. Advertising agencies, however, measure their success in billings -- or, in other words, the amount the client gives to them to spend on advertising. In some cases, however, an agency and its client will agree on a fee for a special project that may be extraneous to a client's budget. In order to reflect this fee as billings, the agency will multiply the fee by 6.67 to arrive at the capitalized billings. 6.67 is the number of times 100% is divided by 15%. As an example, let's say a $10,000 fee is negotiated for a special project. When multiplied by 6.67, the capitalized billings will be $66,700. So $66,700 is added to the billings, however, the number is usually asterisked as capitalized. In reverse, you can take 15% of 66,700 and you will get $10,000. When you have taken this information and worked your way up to agency president because of it, remember who told it to you: the Canadian Copywriter .

When it's time to select an advertising agency, it's important for a company to look at its needs first. There are about five different types of companies who require some kind of advertising support.

  • Companies where advertising is of limited importance. These companies are reasonably self sufficient in other key marketing areas, such as marketing research, new product planning and sales promotion. Examples might be industrial companies or insurance companies. Because of the specialized technical nature of these companies, agencies can make only a limited contribution. In this first category, therefore, companies usually require little more than expertise in copy and media.

  • Companies where advertising is of limited importance, but which are not self-sufficient in some other key marketing areas. Examples might be an industrial company that needs agency help in developing trade exhibits and promotional material or some consumer packaged goods companies that have decided to do part of their marketing work internally. Companies in this second category, therefore, want advertising help plus certain selected services (such as market research and sales promotion).

  • Companies where advertising is important and have fully developed capabilities in all key marketing areas. Examples might be a large manufacturer of consumer durable goods or a large industrial company that wants to advertise past its customers to the ultimate consumer. Companies in this third category want not only advertising help, but objective and sound marketing counsel of the broadest sort.

  • Companies where advertising is of critical importance and which have fully developed capabilities in key marketing areas. Large, multi-agency consumer packaged goods companies frequently fall into this category. These companies want agencies that can offer in-depth, specialized talents and can share responsibility with the company for total marketing results -- a full marketing partnership, in other words.

  • Companies where advertising is critically important, but which do not have fully developed capabilities in other key marketing areas. Many smaller consumer goods fall into this category, Companies in this category look to their agencies for marketing leadership.

    Here's a list of the type
    of services that you might require.

    Development of marketing plans, marketing strategies,
    new products, advertising strategies
    Marketing Counsel on product mix, pricing, sales targets.
    Creative work on media advertising, brochures,
    catalogues, point of sale, packaging
    Distribution Analysis
    Marketing Research
    Media Planning and Buying
    Public Relations

    Further thoughts on agency selection
    The following are excerpts from an article our editor -- Norm Barnett -- wrote for a Canadian Business Magazine. While the article covered a variety of topics, we have extracted and printed the section that deals specifically with agency selection

    Choosing the right advertising agency is just as important to a small company as it is to a larger one. The reason is that advertising plays such an important role in the marketing of a product or service. In a study performed in the U.S. for Cahner's Publications of Boston, buyers were asked if they were aware of a product prior to seeing its advertisement. Six out of ten said no; in a similar study, nine out of 10 said they would buy an advertised product rather than one that had not been promoted. With so much riding on public perception, it's important that the people who create your advertising understand your business and your goals. Here's how to choose an agency and how to work with it effectively.

    Before you set out on your search, you should know how much you can afford to spend. Since there is no foolproof way to predict the effectiveness of an advertising campaign, deciding on the sum to set aside is one of the toughest problems you will ever face. Of the many budgeting methods used, three -- the "what's left" formula, the advertising/sales ratio and the share of market/share of voice ratio -- are the most popular.

    As unscientific as it sounds, the "what's left" approach is usually the one small businesses with no advertising experience take. In this instance, you determine an ad budget by combining the cost of doing business (goods, overhead, sales force and marketing expenses such as research and promotion, for example) with a percentage for profits then subtracting the total from either the first year's sales or forecasted sales. While not sophisticated, the formula ensures that you won't spend more than you can afford.

    Equally conservative but more quantifiable is the advertising-to-sales ratio, which you arrive at by multiplying last year's sales figures by a fixed percentage. The norm is 2%, however it can vary from 1% to 5% depending on business. More aggressive budgets for, say, a new product launch use the same formula but are based on predicted, rather than previous year's sales.

    The third option, the share of market/share of voice (SOM/SOV) ratio, depends to a large extent on educated guesswork. First, you will have to determine your competitor's SOM.Then you must estimate the amount each competitor spends on advertising as a percentage of the total ad expenditures. This is known as SOV. The SOM/SOV ratio should be roughly 1:1. If the SOV is greater, market conditions are highly competitive and you should adjust your budget accordingly.

    How will you know your budget is enough to attract a good agency? Most small to mid-sized agencies say $100,000 is a good starting point. Is that enough to achieve your sales objectives? "There 's no clear-cut answer, says Phil Chadwick, president of the Society of Ontario Advertising Agencies in Toronto. "It depends on your business as well as your goals. If a company works on a small profit margin and advertising is expensive, then advertising could be ineffective." Once you know your financial limits, the next step is to find agencies handling accounts in your price range. Find out who created the advertising you admire. Look for agencies where your account will be as big or slightly bigger than the others. Don't be concerned about size: most small firms are as capable as big ones in dispensing expert advice or dreaming up a brilliant ad campaign.

    Your agency should also be familiar with your industry. Some firms have earned reputations in specific products or services, such as cosmetics, pharmaceuticals, business equipment or transit services. The more an agency knows about your business, the faster you will get results. If you don't know who's who in advertising, two publications are invaluable. The National List of Advertisers includes a section on companies that advertise nationally, their products, the agencies handling their accounts and approximate advertising budgets. It costs $47 and can be purchased from Maclean Hunter Ltd., 777 Bay Street, Toronto M5W 1A7 or by calling 416-596-5970. The monthly Canadian Advertising Rates and Data (CARD) lists the rates charged by newspapers, magazines and television and radio stations. it also contains the names and addresses of advertising associations across the country. While they won't recommend agencies, the associations will tell you which firms have accounts similar to your own. CARD costs $74 and is available from MacLean Hunter at the above address or by calling 416-596-5912,

    After you have the names of at least ten likely candidates, send a questionnaire to each firm. Ask for the range of ad budgets that they handle and a list of clients, including accounts recently won and lost.

    (This will tell you whether the agency is dealing with your competitors -- not a good idea -- and provide you with a list of references to check. Ask the agencies to list their most recent and effective campaigns. And most imortant, have the president tell you why he or she wants your business. Stress that you want written replies and set a deadline. Never deal with an agency over the phone; the purpose of the questionnaire is to put all candiates on an equal footing. Disregard any replies received after your cutoff date.

    Once you've narrowed down the choices to three or four agencies, arrange get-acquainted interviews. Insist that the people who will handle your account attend the meeting. Too often agencies send in their presentation team: senior executives with good looks, tremendous inight, vision, compassion, intelligence and ability. They make a good first impression but are long gone when it is time to service your account.

    On the interview day, briefly spell out why your company is interested in the agency, then let the candidates do the talking. Look for a spark of chemistry, an understanding of your company. At the conclusion of the interviews, tell all parties that you will make a decision by a specified date -- and then hold to it!

    Sometimes one agency looks as promising as another. Since the one you choose will have a resounding impact on your future profits, you might want to invest part of your budget in a creative presentation -- a demonstration of how the agency intends to present your product or service to your target market. Offer to pay a token fee as a gesture of good faith. "If a company's sales are between $5 million and $10 million, a fee of $500 to $2,000 per agency would seem reasonable," says Lynne Reid, advertising and sales promotion manager at car manufacutrer Saab-Scania Canada Inc. in Markham, Ontario.

    Before you hire an agency, it's important that you understand its fee structure. The form of compensation that has been used the longest is a 15% commission or rebate from the media. Publishers and broadcasters are But if the bulk of your budget will be spent on advertising space, the commission system could mean your agency will earn windfall profits without doing a lot of work; an hourly fee might be less costly.

    According to the Association of Canadian Advertisers (ACA) an organization representing more than 200 corporations, the commission system is now being used by only 38% of agencies. "In many cases, straight 15% commissions are no longer adequate," says Keith McErracher, President of the Institute of Canadian Advertising in Toronto. "The 15% system was invented in 1918. Since then, the range of services has expanded and become more sophisticated." In a bid to stay profitable, many agencies are marking up bills from suppliers by 17.65% to assure the agency of 15% on gross billings to clients. ACA President John Foss takes issue with this practice. He prefers standardized fees for service. "It's up to the agencies, the clients and the media avoiding the issue altogether by charging the client a monthly fee or an hourly rate for each person working on the account. Others combine all three to establish a fee and then credit the media commissions earned against the total.

    When the agency begins to work for you, give the staff full access to your sales figures and marketing plans. Tell them your most intimate industry problems. Agencies need at least three months before they can be truly helpful. And -- because staff time is divided among many clients -- it may be up to three years before an agency knows your operation well.

    As the agency/client relationship grows, it's important to assess your progress regularly. "We review our agencies on an annual basis," says Bob MacNally, director of brand management at Labatt's

    media to get together and establish a fair and equitable system," Some agencies are Ontario Breweries. "It's a formal affair rather than a lunch-time discussion. We discuss compatibility, personality conflicts, changes in the agency's strengths, our needs. It's a two-way street. Everybody airs their opinions."

    If you've chosen wisely and treated staff fairly, you will find that your agency has become an all-important third arm in achieving your goals.

    When you hire a new agency, it's important to strike a formal agreement. Once you strike a formal agreement, you can avoid many future misunderstandings if each party sets down the business details that either have been or should have been decided. Matters such as method of compensation, how commissions and trade discounts are to be handled, details of billing and payment should be covered. In a commission arrangement, a detailed list of services to be expected as part of the arrangement should be outlined.

    Details such as new product assignments or other projects which may come up from time to time can simply be covered under a "fee to be negotiated" category.

    Remember that the best time to work out all the details of the business arrangement is at the beginning of the relationship.

    Also, the trade press will get very curious when they hear an advertiser is looking for a new agency. Often, the advertiser will try to covertly investigate other opportunities, but inevitably the secret will be found out. When the "cat's out of the bag", so to speak, the agency will panic to find out what's going on. The best thing to do is level with your agency. Tell them why you are unsatisfied -- and give them the opportunity to resign gracefully. If they refuse to resign, let them re-present their case as one of the selected agencies in the upcoming agency review. If the old agency isn't the winner, start winding up the projects and the monies owed. Although there is no "standard" practice for a termination notice, 90 days is considered a fair period for the new agency to take over.