Dangers of over-fishing in agency fee negotiations
As we approach the ad-agency-contract-renegotiation-season there is a truth that should be known by clients for their own long-term good and for the good of the agencies upon which they rely: ad agencies sometimes do silly deals.
There, the cat is out of the bag.
To be fair it has been out of the bag in the agency world for quite a while. Most ad agencies are aware that some of them do silly deals with their clients. But this will be news to many in the client world - particularly those in marketing procurement. But the reason we need to make this particular cat’s escape from the bag better known is because there is a popular belief, particularly amongst the marketing procurement community, that agencies don’t do silly or unprofitable deals. Many in marketing procurement (and indeed some in marketing) believe that there’s still plenty of fat to be cut when they reduce their agencies’ fees by that extra few per cent each year.
In fairness to clients, most folk believe that it must be a lie if an agency claims they wont make a profit from a deal to which they agree. Why would anybody agree to such a deal? Well, there are a number of reasons, but here are three for now that I think are worth knowing:
Firstly, the business-to-business model of an agency is different to many. Most big creative agencies wont have more than about twenty clients, largely because the ones they have insist on being exclusive the category or categories they represent. Therefore, if an agency loses a client, there is a significant contribution to overhead to be replaced. Faced with the option of losing a client over a failed deal compared to keeping one that makes a contribution to overhead but no profit, of course you would take the contribution. Think of it this way – if your house is on fire and you need three extinguishers to put it out you wouldn’t turn down two if they were made available.
Secondly, and perhaps understandably, clients believe there are legitimate savings to be made because agencies continue to suffer from the hangover of their profligate behaviours of yesteryear. Agencies have got to shoulder some responsibility here but only for the perception. The days of regular extravagant lunches are over – reserved mostly for entertaining clients. Flash company cars at relatively junior levels are long gone. In the age of transparency, and with Kingston Smith’s latest report that the top 50 UK agencies are making less profit now that in 2008 (http://www.campaignlive.co.uk/article/top-50-ad-agencies-lowest-profit-margins-seven-years/1358676) – perhaps procurement needs to take its foot off the negotiation gas a little.
Lastly, unfortunately many agencies aren’t terribly good at the renegotiation process, and for a number of reasons:
Few, if any, have the resources to match their clients’ procurement teams time to properly prepare for the negotiations.
Agencies are in the service business. Many find it counter-intuitive to argue or stand their ground with their clients such that it might reach conflict – even more so if their business is already weak. Few will have walk away points and will hope for the best.
And it’s very difficult for an agency to tell its client that if they reduce their fees then their service or value will suffer (or both). But, the procurement fraternity know this from a simple supplier preference model.
So the result is a little like over-fishing. Agencies’ financial liquidity, profitability, their ability to hire and/or retain the talent (upon which their ability to create value depends) is like the diminishing stock of fish. Their clients are the fishermen – but they can’t see that the stocks are diminishing because whenever they cast their line the hungriest fish eagerly swim towards them. Which is why reports like those of Kingston Smith are so important. And there’s plenty more being written about the decline in agency financial health – Michael Farmer’s Madison Avenue Manslaughter is a good read for starters.
So what is the consequence to the fishermen? To mix metaphors, aren’t they just making hay while the sun is shining? Won’t the agency market simply correct itself? What should be done about it? Well, here are some thoughts for marketers, procurement and agencies:
For marketers: there is an intrinsic danger in the reduction of an investment in the absence of a strategy to protect the ROI – and this is most often the case with fee reduction either absolute or in real terms. Don’t think of the agency’s value as the amount you pay them, but by the amount you invest behind the work that they do – because that’s what’s at stake. If your procurement partners are incentivised to make fee reductions, are they equally incentivised to protect your ROI? You will have to spend a lot more media money behind mediocre advertising than you would behind the excellent work to which most clients and agencies both aspire.
For procurement: it might look like the agency market is over-supplied and therefore you can exploit your buying power – but you will struggle to ensure quality measures for the kind of value your ad agencies should provide. And although the agency market appears to be over-supplied, it shrinks rapidly very quickly when you exclude those with competitor brands, those too large and those too small. Strategic and creative services need strategic buying strategies; it is vital to protect the health of the suppliers upon which you rely – the lowest possible price is not necessarily the best thing for you.
For agencies: prepare, prepare, prepare. Train and prepare your negotiators with the tools, strategies, techniques and tactics to be convincing negotiators who can stand their ground and defend legitimate business interests. Finally, when you focus your financial needs, explain and how those needs have a direct role in the solution of your clients’business problems – because if you can’t do that you’re sunk.