Three years ago, an alleged production house scandal at a top advertising agency network shook the ad world, which put some heads on the chopping block, the names which were believed to be involved however were given a clean exit. Even before that, the ad production business has had a reputation of not being a black and white territory. There have been hush hush stories of how creative agencies have used this space to make some extra money on the side in an era of fast decreasing margins.
When brand marketers told IMPACT how kickbacks are given to creative agencies from the pool of money assigned to production houses for creating a brand film, we decided to dig deeper. While most creative agencies we approached rubbished the allegations and refused to come on record, sources from within the creative industry as well as production houses confirmed this theory and told us that it is an everyday practice in the ad world, which partially has both the production house and the creative agencies’ nod, which makes it a matter of great concern for brands.
It works both ways, says a production house owner, “The production house gets the big budget and meatier films to make if they find favour with the creative agency. The creative agency makes sure that the client agrees to work with their choicest of production houses by presenting a plethora of reasons to the client justifying that. The creative agencies can most certainly sway the decision in the favour of a said production house. On the other hand, the creative agencies which are anyway struggling with reducing margins, between retainers and project-based fee, get an additional income via cuts in these films.”
Types of kickbacks
Sources say the kickbacks are given in two ways, one is what is called the official ‘service fee’ which goes straight to the creative agency’s coffers and second is the unofficial one which goes to an individual’s pocket. In their defence agencies say, “There are far too many audits that happen today at the big networks which can easily catch a transaction which comes from a production house to the agency, because that is not the general direction in which the money should flow. Many clients have also started putting in place cost controllers who take care of the negotiation with the production house, so where is the agency involved in this?”
But others say it is easy to carry out because most times an agency acts as a conduit between the client and production house and payments are handed out to the producers via the creative agency. So, numbers can be easily misrepresented. A relatively new producer on the block says, “Most of the agencies that I have worked with have asked me for agency fees. The clients paid the agency and the agency paid us and there was obviously a 10-15% margin in it that goes to the creative agencies for fixing the deal, which I’m fine with because at least it’s happening on record and there is no shady business in it for me. Basically, I send a quote to the agency for making the film and then they bounce off that quote plus their fee to the client. So, that is obviously a fee that’s held back by the agency when they pay us. They tell me upfront that it’s an agency fee, even though the client is not aware they are charging it.”
He adds, “However when I started off in the business, there was a South based production house, that operates only out of one city, a representative from which directly asked me to pay him in cash 10% of what the client would pay me for the edit. That made me jittery, with national agencies it has always been incorporated into the contract as an ‘agency fee’. But when you are new, you fall for such stunts too as you need the work and such recommendations to get you started.”
When IMPACT spoke to another producer who only makes big budget ad films, the response was almost similar, “The margins are so low right now, that agencies are literally telling me ‘Add my buffer to your invoice and give me the cheque’. I don’t know how it is justified. My question is, fundamentally if you agreed to a price with a client to provide a service – even if you feel you are being underpaid-- how are you going behind their back and adding a rate.”
Talking about how they operate, he says, “Because these are big budget films costing anywhere between 1.7 to 2cr, agencies don’t charge on the overall cost of production but take a 10-30% cut on the additional billing which may include, super changes, music changes etc. When you agree to a certain scope of work and it goes beyond that, you have to pay for what’s extra. To get that payment approved agencies ask for a kickback. So, if it costs 10 lakh, agencies will take home 3 lakh.”
He adds, “Small production houses run their firms depending solely on the next advance they receive, they have to get these changes approved, else they risk losing their jobs. And on the agency side they will tell you, ‘Tell me what you want, I shall add my number to it and get it approved for you’. Agencies would raise a consultancy invoice, so it becomes an official payment. There are location permission costs, police permission costs, the excuses are endless. The problem is that the younger and smaller production houses are agreeing to anything that the agencies ask for.”
Another head of a production house says, “It is so rampant that I have stopped looking at the 10-20% service fee as a kickback and think of it as an official fee given to the agency, even if the brand doesn’t know about it. I’ve never had issues with giving that cut to an agency as a company but, when people ask for that as a personal enrichment scheme, it becomes a little messy. I have always been anti-kickbacks to individuals.”
He goes on to explain how such kickbacks are given without drawing suspicion, “We have had requests where an agency representative who holds sway over the client says we should pay his credit card bill, buy an international flight ticket or send his family on an all-expenses paid for holiday, then there are requests to buy jewellery, 1.5 lakh -2 lakh worth designer bags; all sorts of things which can’t really have a money trail leading up to them. There is no bill to it. It’s a gift which is difficult to catch.”
Are brands in the dark?
But for a practice so rampant in the industry, how is it that brands don’t know about these underhand dealings and this ‘service’ or ‘supervision’ fee. A creative person who didn’t wish to be named said, “Many a times the brands usually have someone who has gone from the agency side to become a brand manager. In most cases they turn a blind eye or they pretend like they don’t know. I’ve heard, sometimes the money goes all the way into their pockets too.” In fact, another creative head says the brand has told them that they will be able to give them only this much retainer or project fee and to ‘adjust’ the remaining through the production cost.
The head of a production house narrates an instance when a brand found out about these extra charges their agency had levied, “Several years ago a fairly popular brand that is still around sensed that there was some mischief going on. The payment for the ad film was done via the creative agency, so they asked the agency for the production house invoice. The agency knew they were in big trouble and had to really plead with the production house, telling them that they may get sacked if they don’t help out. The production house gave them a fake invoice to bail them out. This was an independent agency which later shut shop.”
Who are involved?
But the question is, who are really involved in such dealings, a creative agency head on the condition of anonymity says, “The who’s who of advertising have sullied their hands in this. Having said that it is not necessarily the heads who partake in such messy dealings, it works at all levels. Even at an NCD or ECD level you can push the client saying you want to work with a certain production house only.”
Multiple sources in the industry claim there are two independent agencies, both famous and creative, which have made most of their revenue doing these underhand dealings with production houses.
Sources have also told IMPACT that 5-6 years ago, a top network agency created a unit called Box Office, which basically tried to formalise the idea of a creative agency charging ‘service fee’ from the production house for picking them over others. But within a few months of its inception, it was disbanded following a discussion with the network heads at a global level labelling the practice as ‘unethical’.
Another creative leader says, “Unlike smaller creative houses, top networks are slightly more wary about the production houses they do these dealings with and they take it forward only after they safely fall into a circle of trust.” A highly placed source told IMPACT that two and a half years ago an auto client found out how it was being massively overcharged by an in-house production house of a big network agency which was also in collusion with the brand’s marketing department, causing a massive furore both at the production house and at the brand’s end. A few months later as a face saver the retainer was renegotiated and the brand’s marketing budgets were also slashed by half.”
Sanjeev Shukla, a marketer with close to 30 years of experience of having worked with auto majors said, “Most marketers are aware of these dealings, and whenever I was in-charge I have personally selected the director and production house and paid the charges directly to them. But from my understanding the agency still got a commission.”
But why would the agency get a cut if the marketer directly roped it in, without an agency influence. He goes on to explain, “Even then if the production house realises that the agency has a voice, it will make sure the agency is happy because they know except in the case of a handful of brand marketers, the agency recommends the director basis the brief given to them. The production house doesn’t necessarily represent only one director so there is more at stake for them. Having said that even if it is the same director and the same production house, and the agency likes the work, it may bring in more clients as they work with multiple companies.
Elaborating he says, “Let’s say I’m one client, I’ll do one or two films a year. Agency will have 10 clients, so, they would be in a position to do 20 films a year with them. I would call it a ‘relationship’ fee not kickback. If a client has negotiated really hard, maybe there’s not enough margin in that amount for the agency to get paid reasonably well. But in some other projects, there is more money, so they may get paid belatedly. The commission doesn’t have to be given on one transaction immediately, it could well happen collectively at the end of the year. It is impossible to find out details because it is an informal sector, there are no fixed costs to many things and also, a pitch from one production house might not be comparable with the other. One company may do the film in 15 lakh and the same film with a high-profile director may cost you 1 crore. Director’s fees and/or talent’s fees aren’t really fixed in any way. There is a similar logic for the agency commission rate, it is hardly fixed and unknown whether in a said case the deal was struck in cash or kind or like more work in the same costs. It is essentially about a long-term relationship between agencies and the ecosystem around”
While for some stakeholders it has become a deal of convenience and quid-pro-quo, for the others it amounts to breaking the brand’s trust. But what can’t be ignored is the fact that margins for agencies have been shrinking gradually over the past many years. Sources say, five years ago, the monthly ad agency retainer for a top telecom client, including brand campaigns and work for various circles, for a dedicated 120+ member team was upwards of 4 crores, which has, come down by close to half today. Mainline agencies’ profitability kept coming down over the years, and another reason for it is that the pie has got further divided into many specialist agencies.
Long ago, a product from a homegrown FMCG brand used to dedicate 7.5% of its media spends on creative agency fee. Today between retainer and projects that amount has got slashed by half says an industry expert when in fact inflation should have propelled it to increase further.
Talking about marketers who complain about agencies indulging in unfair practises and tampering with the budget meant for the ad, Amer Jaleel, Chairman and Group CCO, Mullen LoweLintas Group says, “Who are these marketers?!!! Do they believe they are doling out some financial extravaganza to agencies?? Honestly, I don’t believe this is some kind of wave happening in the industry unless you’re looking at some tiny shops with no principles or values. But, of course, I’ve heard of this from outside. Look, agencies are operating in a cutthroat environment. Every year the retainer gets squeezed and projects and pitches have become the order of the day. This is not to justify anything but marketers really ought to also come out from under the rock and acknowledge that these particular agencies are dying from cuts. Some business guy is likely to come up with a wily solution, ‘they won’t even know’ he’ll say. I have heard of project fees consolidated with film cost that smaller agencies are picking up, where the project cost looks quite tiny but the agency makes it up in the film budget. Somewhere the sunrise in this industry has to be led by marketing. I always used to think of marketers as Akbar Badshah and agencies as the Navratnas. You need to be the patron of the arts. Generous, appreciative, indulgent even! Give those outfits legitimate and proportionate payouts. And watch the reversal moment in the industry.”
So has he never seen something like this happen at his agency, Jaleel responds, “We have very strong values and systems as an agency but yes, I have come across the odd case who got caught out and was dealt with summarily! We’ve also instituted a blockchain based system to ensure that all financials are absolutely transparent and can be identified at all levels. Despite the quality of our people we’re still ensuring it’s fully watertight.”
A creative professional says that creative agencies are also massively hit because media spends are diverted to digital in a big way today, the cost of creation of a digital ad and the media spends, both are much less compared to ads on the mainline mediums, also because of its short shelf life. Some brands do one mainline campaign in a year for which a top creative agency is employed and do digital advertising throughout the year. The retainer fee for a mid-sized account handled by 10-15 people in a creative agency can range anywhere between 15-20 lakhs. While on the other hand there are competitive pitches among digital agencies amounting to as low as 1.5 lakh per month which is difficult for a creative agency to dabble in.
Covid added to their woes, agency heads say that during lockdowns they tried to support brands by operating on reduced costs, but the brands even today expect them to work on the same budget. In some cases, brands have reduced their own expenditure too. Sources say a water purifier brand which paid 40 lakh as a monthly retainer decided to pay 40 lakh per project whose scope of work would last 3 months. Even if a client did two projects per year, the agency suffered a loss of 4 crore easily in a year.
Most creative networks have started their own production arms be it FCB’s Fuel Content, Publicis’ Prodigious, Lintas CEX, etc. because production is the only part of the creative business where the money has not dwindled in the past few years, even post Covid.
An industry insider also reveals, “Leaders of many agencies which have an in-house production house also have a KRA to bring a certain number of films to their production houses. The agency produces the work and is known to keep 25 - 30 % of the production margin. So, if it is a 4cr film, the agency will keep 1 crore. There is a lot of money in this.”
Defending the ‘service fee’ another creative professional says, “Digital agencies can sustain themselves because of resources being divided between multiple accounts, juniors running the show in case of social media accounts, larger workforce and a huge grey area in media billing, while on the creative side, a minimum of 5 lakh retainer is important to sustain even a mid-level agency because when it comes to spending on a TVC, a client expects a well-known senior resource from the agency side to be on board. The revenue model in advertising is very complicated. With decreasing ad margins, if you are the owner of the creative shop, how else will you make things work if not by taking a cut from production houses?,”
But that is no excuse says Santosh Padhi, CCO, Wieden+Kennedy, “Taproot was known as a traditional agency, hence we were approached and used to work on many ad films. There were enough signs and signals from some production houses who reached out to us for a messy understating, both of us, creative founders were very clear about our strengths and weaknesses and never really entertained anyone who gave us the setting/ kickback signals (they were kept miles away) nor did we have people in any department to deal with the new worm that’s eating up our good side of industry.”
“We had our names linked to the creative product and I definitely didn’t want to compromise on the end product at any cost. We were happy with making money through our creative ideas/strength and services, (sometimes premium compared to industry standard) clearly didn’t want to go down this path as there was no need. But it’s sad to see some agencies making this as part of their culture due to the massive pressure of outgoing / network ask / or due to their bonuses linked to the commitment. As a creative community and industry we should believe in the power of ideas and encash them and not waste the energies finding unwanted shortcuts to make one time monies, we should push our clients to be more brave and courageous and only that relationship will articulate in better monies,” he adds.
When asked if he has been approached by production houses for a similar arrangement, Amer Jaleel, Chairman and Group CCO, Mullen LoweLintas Group says, “For someone who has done social and ethical work like Jaago Re and Hawa Badlegi it’s ironical but as a novice in advertising I was offered my first kickback some 25 years ago! 1 lakh for a 12 lakh film then. I politely refused but did not allow the servicing guy to reduce the budget by that margin. Instead, we got the production value upped by that 1 lakh. Felt really good to snub a producer back then! Most people in advertising are not in for megabucks, there are no megabucks! But for the lifestyle and conversation. At least most people I know. But ad guys don’t mind the small perks, a bouquet of flowers, a scotch or an extra night in a hotel in Goa. But I guess there are exceptions. Those who want to get themselves a snazzy car faster than the next guy. And that probably tempts. In Lintas I’ve known creative juniors who’ve refused to charge dinner or taxi allowance from the company far less falling for producer handouts.”
