Game of mates ends badly for advertising executives

John Slattery as Roger Sterling, Jon Hamm as Don Draper and Vincent Kartheiser as Pete Campbell in the AMC hit TV show, Mad Men. Picture: Supplied.

New financial regulations mean that the “game of mates”, which has historically been an integral part of many areas of business, is in sharp decline in financial services. But the decline goes further.

Today I want to explain how segments of the advertising agency business have been hit by an over-reliance on mates and a why lot of people are now losing their jobs.

Part of the Hayne royal commission’s recommendations were about stopping, or severely curbing, the “game of mates” in banking, insurance and superannuation.

For example, we have all seen the big signs at sporting arenas promoting industry superannuation funds. That promotion also involved invitations to employers to join fund executives at corporate boxes. The aim is of course convincing employers to continue to direct their employees’ superannuation to the fund which organised the box.

That is now going to be banned.

Industry funds weren’t the only groups that played that game, but because they are mutual organisations, the money funding the corporate boxes came out of the savings of existing members.

Of course the funds themselves would respond that the promotion helped give the fund stability, which then enabled them to invest more heavily in infrastructure which has been very profitable for members.

In wealth management and insurance the big companies turned a blind eye to the fact that their army of financial planners and sales people was charging customers for advice that they were not receiving, as well as other bad practices.

Again it was part of the “mates game” and the customer was paying the bill. Similarly there may have been arrangements between bankers and mortgage brokers that wouldn’t survive close scrutiny.

The “mates’ game” practices in advertising have been around for a long time.

Back in my BRW print publishing days we offered agencies attractive advertising rates if they committed large sums to our publications, but that is where the story ended. That was a few decades ago.

In more modern times, in some agencies that specialised in television advertising, the bulk-buying practice used to gain lower advertising rates was taken one step further.

Agencies would commit large amounts of advertising spend to a particular television network in the coming year in exchange for attractive advertising rates. But sometimes the agencies got their timing wrong and they were spending a lot of money on creating campaigns that were expected to run in the future. That created a cash flow problem.

A television network would sometimes pay the agency commission in advance, but it was a commission that had not yet been earned because the big advertising orders that justified the lower rates had not been placed.

But each year the advertising orders would arrive as they had always done — until 2019. Such advance commission payments to mates were dangerous because they were akin to a loan.

My guess is that the networks that undertook that practice were usually well rewarded with plenty of mates business in following years. Given the practice had always worked, few recognised the risks.

But this year it all went pear shaped. The Reserve Bank’s lower interest rate policy curbed the spending of older people with money, consumer confidence was down and internet promotions, particularly via Google, took market share. So advertisers cut back their planned television advertising spend.

To make matters worse, except for some very high rating programs, advertising rates started to fall sharply. So some agencies found that they couldn’t muster the business to honour their undertakings to some of the networks. That is where the game of mates really started to fall over.

The networks wanted their advance commission, or “mates money”, returned, and not surprisingly they put pressure on the agencies to deliver. Each agency involved had to pay the money back, so costs were cut via heavy retrenchments.

So walking around the streets of Sydney and Melbourne you will see many glum looking advertising people who have suddenly been retrenched.

They never saw it coming and many have mortgages and school fees to pay.

And it gets worse, because some of those retrenched people are very talented. Agencies that weren’t caught up in this game look at that retrenched talent and realise that not only are they better than their current staff but they are available at a lower price. The carnage spreads to a new level.

Of course the whole game has become more intense, because Nine scooped the ratings pool with its Married At First Sight, Lego Masters and other top-rating programs. This creamed market share from the other networks.

Nine’s dominance in these areas has also attracted some big advertisers and left a myriad opportunities for other advertisers to choose from, thus pushing down rates in the lesser-rating programs.

Those agencies caught in the talent reduction spiral will take a long time to recover. But the misery among many professionals goes further

As I pointed out last weekend, the government’s curbing of prices in the retail energy sector has forced some retailers to respond by reducing staff. Banks have also been on the retrenchment warpath.

So not only are advertising people walking the streets but bankers and energy executives are also on the pavements. These are not good times for many Australian professions.