Agencies battle the profit squeeze

Malcolm Rankin, CEO, Aprais Australia

There is little doubt that ad agency remuneration is under increasing downward pressure, and advertising agencies are striking revenue deals that are simply unsustainable.

Today, procurement departments are involved in most agency selection and fee negotiation processes for major clients, and this trend will only increase in line with international trends. Procurement departments' role in the selection process is often seen purely as a cost-saving measure, rather than having anything to do with the concept of true "value". While this approach will hopefully change over time, it still has a long way to go.

Coupled with this, many multi-nationally negotiated contracts results in subsidiaries of the MNC agencies in smaller countries such as Australia and New Zealand receiving fee levels that are negotiated on their behalf by their parent companies. There fee levels are often unsustainable.

In the relationship management work we do, we are now seeing more and more cases where agencies are finding the original deals being struck - and admittedly, being initially agreed to - mean they are forced to reduce servicing levels to make money, or at least to stop losing money, while this does not yet represent a majority of the thousands of relationship appraisal we currently handle worldwide, it is nonetheless an increasing trend.

This, in turn, is causing significant friction in relationships, as clients are finding that while the initially negotiated deal "looked really good on paper", the agencies simply cannot provide the levels of servicing that is both expected and required.

There is little doubt the change from commission and service fees to retainer-based contracts has had a very positive impact upon client-agency relationships, as it has resulted in a high degree of transparency in terms of exactly how much an agency is earning from clients fees. This has in turn resulted in the ability of clients and agencies to forge a greater sense of "partnership" in their relationships via increase trust - as opposed to the previously held view by kost clients that agencies were "ripping them off".

The downside has been that come clients have used the change to screw agency feed down to a point where they are not sustainable for the levels of service clients actually want and need.

For example, in most reports we deliver, "agency initiative" consistently scores lower than other values. While clients constantly complain about this, the agency retort is most often that within the agreed scope of works, there is no allowance for "over-and-above" initiatives. This is also often linked to the client underestimating the scope of work required on their business in the first place.

In the main, agencies today are seeking to receive genuine cost-recovery and a reasonable level of profit, and clients appear to accept this ti be fair and reasonable. However, while they might realize that the deals - as they are originally struck - are in some cases unsustainable for the agency, they are rarely prepared to renegotiate an existing contract.

To be fair, it is understandable that clients find it difficult to renegotiate contracts, as to do so would mean them going back to their management or procurement departments "cap in hand" for approval.

But it nonetheless means the problem rarely gets either properly addressed or resolved.

So we are now seeing situations develop where clients are dissatisfied with the level of service they are receiving but are not prepared to pay more than the originally negotiated deal.

Ad agencies in turn, are dissatisfied with the level of remuneration they are receiving, yet keep working for the client because they feel they cannot afford to lose business due to its contribution to overall revenue and overheads.

In other words, no one is happy, and yet nothing is done about it. Ultimately, something has to give, but what?