Why the American PR agency model doesn’t work in China

Why the American PR agency model doesn’t work in China I have noticed over the past 12 months a couple of trends which appear to be gathering pace, and an article by WPP CEO Shelly Lazarus in Ad Age prompted my thinking about why the American PR agency model doesn’t work in China. It is an issue for EASTWEST PR as it is still American firms who leverage PR most strongly in Asia. The first seems to be an growing disparity between the business of PR in the USA and Asia. Global Requests for Proposals and contracts originating in the USA appear to be giving clients fixed fee with unlimited service levels. Lazarus cites the involvement of the Procurement department in the decision – certainly now legal counsel seems to be dictating terms as much as the VP of marketing. It is also apparently a function of the price competition in the US market where differentiation is difficult. One agency shared that they have an hourly fee of US$150 regardless of the seniority of the consultant. Other agencies appear to be giving a no coverage, no fee proposition. Agencies appear to be on contracts with immediate termination, ie. no notice period, and payment terms of 60-90 days. These terms together may work in a free and flexible labour market but aren’t a fit for Asia where staff demand security not entrepreneurial opportunity. China isn’t a flexible and low cost market for PR. Ask any agency owner and they will tell you about the difficulties of employing high quality staff with a return on capital employed. Assuming that one manages to hire good staff, the ambition of young staff in this inflation inflamed market makes keeping them on the starting salaries it. In an attempt to safeguard employees, the Government has instituted increasingly protectionist legislation including prohibition on open contracts, long maternity leaves and recently a requirement for unionisation in organizations. In China cash is king, and is demanded upfront. The lengthening payment terms for agencies in the USA, and the growing shadow of late payment beyond agreed terms, are creating a new stress for smaller agencies. In China when one commissions a supplier to do work, or pays rent, the requirement is cash upfront. As there is very little trust, and the banking system has some arcane rules, everyone wants a sheaf of red notes – as the RMB100 (US$15 bill) is still the largest denomination simple logistics can be a bottleneck. The largest bottleneck then for an agency operating on a low margin, extended cash cycle, is delayed payment by a client. The average agency makes 30% gross margin, which means that there is not the surplus margin to fund staff to continue work on late paying accounts. The disappointment is that the relationships start to become strained and the flow of information to the media is interrupted. Agencies are in effect outsourced staff who require salaries on a monthly cycle, with the company acting as their consolidator. It appears that in the USA staff are more like free agents and agencies their marketing ‘agents.’ Ms. Lazarus, chairman of WPP’s Ogilvy wrote in Ad Age recently bemoaning the demise of the Agency-Client relationship in Ameria. In China relationships are still pivotal. The competition and short termism of the US market is opposed by the lack of quality consultants and need for education in China. As we are all in the communication business, it is time that we work together to ensure our clients understand the differences; it is one of the biggest issues international PR agencies face.