Ogilvy's Production Consolidation in NZ Solves Cashflow Problem, But Will Clients Like It?

Last Updated Sep 17, 2009 11:27 AM EDT

Ogilvy & Mather in New Zealand is to consolidate its TV production and art studio facilities into a single unit, RedWorks. The move is small but telling as WPP's agencies look to control cashflow and reduce expenses. WPP's agencies recently formed an in-house commercial production agency in India, also.

Consolidated in-house production solves a thorny problem for agencies: uncontrolled cashflow. Until recently, agencies relied upon independent TV producers to submit competitive bids for client work. The winning bidders were paid upfront by the agency, which then turned to the client to recoup the expense.

But clients want production vendors to qualify for their preferred vendor lists by agreeing to fixed prices over set periods of time, a move that threatens to lower what vendors get paid. They have also cut their ad budgets or asked agencies to take lower fees. In response, agencies have demanded "sequential liability" for vendors' bills by insisting that production vendors only get paid after the client pays the agency.

Bringing commercial production in-house solves the agency cashflow problem by eliminating the independent vendor. It doesn't matter when the in-house team gets paid as long as the client pays the agency. Even better, the agency gets to keep the revenues that previously went to an independent commercial producer.

WPP chief Martin Sorrell recently hinted that "back office" operations at JWT, Grey Group, Ogilvy et al could be consolidated because they all do the same work. It's not yet clear what Sorrell means by "back office" -- it could be human resources and finance, but equally it could be commercial production and graphic prepress work.

However, solving the cashflow problem exacerbates the client billing problem. Clients traditionally have wanted to see competitive bids for production work. With in-house production teams competing for those bids, the bidding can easily be rigged. If overall bills go down, clients may not mind. But they will ultimately have traded quality and choice for cost cuts and increased agency revenues.