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Big marketers are trying to slash their advertising budgets, and consulting firms are the latest casualty

  • The ad industry is under threat from clients who are squeezing them, devaluing their services.
  • The latest casualties of this trend could be the management consulting firms that oversee agency reviews for big advertisers.
  • These firms sometimes sell data to clients to let them compare the different agencies' rates, and the practice could further devalue advertising services.
  • According to one source, a major pharmaceutical company went to the extreme of insisting that consultants provide that information. A second source called that practice "corporate larceny."
  • Ultimately, the practice can push prices down — and it may be illegal.
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Advertising agencies and holding companies face an existential threat from clients devaluing their services.

The latest casualties of this trend could be the management consulting firms that oversee agency reviews for big advertisers. Sources say there's been a rise in fee benchmarking, whereby the consultancies provide clients with detailed information on agencies' hourly rates, commission structures, full-time-employee costs, and more.

This information is taken from the agencies' contracts with their own clients and resold to other advertisers, who can then use it to gauge market rates for such services. But it can also help the clients shop by price, and agencies fear this will lead to further commoditization of their work.

Read more: General Mills CMO Ivan Pollard defends his stance on how ad agencies should be compensated — and lays out what the CPG giant seeks from its agency partners

In most cases, agencies do not provide rates until the latter stages of a review, after they've had the chance to distinguish their offerings from those of competitors. But big advertisers have begun asking for this information from consultants earlier in the process.

A management consulting source who spoke on condition of anonymity said one of the three largest international pharmaceutical giants recently took the trend to a dramatic extreme, contacting six to eight consulting firms — the source's included — in preparation for a global agency review.

According to the source, the pharma company said it would only work with consulting firms that provided agency benchmarking data for free, even before deciding which shops to invite to the pitch.

Other industry sources called the alleged example, as described by Business Insider, an unprecedented attempt by the pharma company to undersell its own would-be partners, saying it threatens agencies and consultancies alike.

Drug companies and their procurement departments are notorious for slashing expenses like marketing

External View Consulting Group principal Russel Wohlwerth, who has conducted audits and reviews for several major pharmaceutical companies, described the alleged behavior as "corporate larceny."

In a related example, Adweek reported last year that drug giant GlaxoSmithKline concluded a global media agency review by gathering finalists Publicis, WPP, Dentsu, and Omnicom in a hotel and going from room to room to compare their rates.

Wohlwerth said drugmakers face unique pricing pressures because their research and development expenses are so high, leading them to take extreme cost-cutting measures in other areas like marketing. The practice is not unique to the pharma industry, though.

"I have had prospective clients ask me what I think they should be paying their agencies for the project we are discussing, but I do not provide that level of insight until after I have been hired," said Ken Robinson, founding principal of New York-based consultancy Ark Advisors. "If I gave that information away for free, what's to stop them from using my benchmarks and managing the review and compensation negotiations themselves?"

Wohlwerth said that's exactly the plan. He said a pharma chief procurement officer recently told him, "We will use your knowledge so we can do it all ourselves."

As big advertisers push prices down, agencies and consulting firms feel the burn

For now, the biggest ad spenders still need consulting firms to audit their marketing — and agencies to execute it.

Matt Weiss, president of strategic growth at Huge, part of ad holding company IPG, said it's an "unfair practice" for a company to demand rates before the pitch starts. He added that agencies rarely know the potential value of a contract until after the review.

Another consultant said agencies may have grounds to sue a firm that provides their benchmark data, as described in the alleged pharma company example, because it could violate the NDAs in their contracts.

This consultant suggested that benchmarking practices, even if legal, hurt agencies because they train clients to keep trying to beat the benchmarks, thereby eroding fees and quality talent.

Squeezing suppliers will backfire at some point, said Matt Kasindorf, SVP of agency management services at advertising trade group 4A's. "They're basically devaluing everything."