What’s the truth in all this, and do advertising agencies have reason to worry? I believe they do. Advertising agencies have moved to a strange business model. In the course of abandoning the old gold standard of 15 per cent commission, most agencies have adopted the “resource package” fee system by which they charge out their people’s time at somewhere between 2.3 and 2.5 times salary. Nothing radical about that. It is a way of doing business made familiar by solicitors, auditors, management consultants and the like.

Relying on resource package fees makes agencies vulnerable

But these service providers are normally working on projects, with a beginning, an end and tangible deliverables. Agencies, on the other hand, are retained suppliers. The desired analogue is a marriage, not an affair. Yet conjugal bliss is interrupted at least once a year by a haggle over how many account execs, planners, creatives and so on the client is prepared to retain.

These resource packages do not come cheap, and there is always the temptation at the client end to slash and burn, and if negotiations do not work out well, to pitch the business. The problem is that it becomes a matter of opinion who is vital and who you can dispense with. My thesis: relying on resource package fees makes agencies vulnerable.

So how can agencies defend their profitability in the face of clients constantly seeking to cut back? Three options really: winning new clients, selling more services or cutting costs (which in adland nearly always means staff).

New business has become the number one driver for agencies – even ahead of providing service to the existing client base. Three problems arise from this I believe. First, such a philosophy inevitably weakens advertisers’ respect for their agencies (canny clients can tell when their agency friends are out hunting). Second, it leads to agencies hiring sales-focused sprinters rather than the service-oriented middle-distance runners you need for developing client business. Third, it can have an adverse effect on revenue unless the new business kicks in quicker than the attrition on ongoing business, which might have been neglected.

Selling more services sounds like an excellent option. Except that the trend has gone exactly the other way. The classic creative agency is far from a full service operation. Agencies have been focusing more and more on developing advertising (or marketing communications at more integrated agencies). This has led to the abandonment of many of the ancillary earners of old (design, promotions, literature, trade support, internal communications). With staffing reflecting specialisation, it is hard for them to suddenly look at diversification.

Cutting payroll is a familiar last resort, but it is, of course, a double-edged sword. Football clubs offer a remarkably close parallel. Both are businesses with a passion for cornering their share of a limited talent pool. Quality creatives are the last asset you want to let go (even when a business downturn leaves them less than fully employed), so the axe frequently falls on lesser mortals, with predictably negative impact on service levels.

Despite the rather gloomy scenario I have described, many agencies continue to show good results. But for how much longer? Endless acquisitions help, with the economies of scale and pooling of client lists that they often bring. But relentless pressure on numbers is wearing on agency managements, and must often contribute to further difficulties in client/agency relationships.

Should marketing directors worry too if agencies are suffering? Probably, yes. It’s a buyer’s market, but as mother used to say; you only get what you pay for.

David Wethey is chairman of Agency Assessments International, advisers to advertisers on agency selection and management.

davidw@agencyassessments.com

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