How are the best advertising in the agencies?

How have advertising agencies changed since the abandonment of the old commission-based fee model in favor of the FTE model?

• Don Schultz, professor emeritus of service at Northwestern University's Medill School, pined that J. Walter Thompson ruined advertising from the very beginning by giving away his ideas for free and only charging clients a percentage of the the media they bought. For years, this commission-based arrangement was the standard way for agencies to charge clients. Now, however, most agencies use the FTE model whichcharges clients for the billable hours of employees (which, after accounting for paid time off and holidays works out to about 1600 hours). What were the effects of this? Negative or Positive?

• Answer:

  Prof. Schultz's answer is correct from an historical standpoint:  The earliest ad agencies, about a hundred years or so ago, were really media agencies that helped advertisers get their messages into newspapers and magazines.  Eventually these agencies realized that their clients needed help writing the advertisements themselves.  It's a bit of an oversimplification, but yes, one could say they charged a 15% commission on the cost of the media and gave away the ideas for free. Or not.  At some point the marketplace established itself and buyers and sellers understood the game.  The agency would get paid according to the size of the media investment.  The creative work would be included in the service exchanged for the payment.  I don't think we can say they "gave away the ideas for free".  I will say that the agencies spent more time on creative ideas for clients that were spending big media bucks. In the 1980s those media bucks became quite considerable.  The largest advertisers were spending over $100 million -- and realizing that their agencies were making over $15 million.  So the commissions were negotiated down, perhaps 15% on the first $100 million, less after that, and eventually no one was paying 15% on anything anymore. Agencies got lazy when it came to justifying the value of their ideas.  Hey, the price was already set.  If your client spent $100 million, you got paid the same for a great idea as for a not-so-great idea.  To be sure, the client could always fire you, but there was little thought as to what the idea was worth. Sadly, clients and agencies put equally little thought into the labor-based system that replaced the media-based commission.  Neither system recognizes the value of ideas in building the client's business.  In fact, relative to creative ideas, both systems are based on artificial contributions by the agency, either client media spend or agency labor spend.  (Some clients and agencies have performance-based incentives, which I think is excellent for both parties.) Here are some of my published thoughts on the subject: http://admajoremblog.blogspot.com/2010/04/your-results-are-worth-more-than-your.html http://admajoremblog.blogspot.com/2012/11/account-management-at-crossroads-ii.html (see point #2)