Agencies Struggle with Declining Prices

To generate growing margins agencies had to cut costs per deliverable at a rate greater than the 70 price decline amp160J Walter Thompson was earning a 4 profit margin when WPP bought it in the late 3980s amp160If it is now generating the required WPP profit margin of 1520 it had to bring down its costs per deliverable by at least 85 in constant dollars amp160This is true for other agencies as wellHereamp8217s how it happensCreative agencies were heavily staffed during the commission era before 1992 amp160Mediabased commissions generated high levels of income relative to agency work amp160Agencies used the income to amp8220staff upamp8221 rather than generate huge profit margins amp160Thatamp8217s why JWT and other agencies were not particularly profitable in the past amp160They invested in highlypaid creativesamp160and they allocated multiple creative teams to each brief and generated a surplus of creative ideas for clients amp160BBDOamp8217s motto amp8220The work The work The workamp8221 established during the commission era was founded on the agencyamp8217s ability to work and rework client briefs until they were right BBDO had the creative resources that made this possible amp160In addition to high creative staffing agencies had even heavier client service staffs amp160For each creative agencies had 15 client service executives to deal with the complex management of clients amp160Cost per deliverable was thus very high during the commission era there were relatively few traditional deliverables and many creativesclient service executivesSurplus agency staff was eliminated as commissions gave way to fees amp160From 1992 to 2004 under pressure from clients and holding companies alike agencies downsized their creative departments largely eliminating the excessive number of creative teams assigned to creative briefs amp160This had the effect of reducing excessively high rework ratesamp160as well since fewer surplus ideas were being taken to clients for their consideration amp160Client service departments came under an even bigger knifeamp160and were cut until the ratio of client service people to creative people was reduced from 15to1 to 1to1 where it remains today amp160This meant that every downsized creative was accompanied by three downsized client service executives amp160By 2004 according to my research agencies were efficiently staffed relative to their workloads amp160They had neither surplus creatives nor surplus client service peopleamp160and they had enough production people to carry out their production workloadsSubsequently agencies have continued to downsize and juniorize amp160Prices continued to fall after 2004 driven by procurement fee reductions and digitalsocial workload increases amp160Although agencies were properly staffed in 2004 they have been driven by circumstances to downsize and juniorize to maintain or grow their profit margins amp160Senior more expensive people have been let go and agencies have staffed their work with a more junior mix of agency people amp160This is easily shown via 4As billing rate data and Glassdoorcom salary data over time amp160Inevitably creative output per head has had to rise amp160Since 1992 creative output per head has more than doubled since 2004 it has increased by more than 25 but the rate of increase is now accelerating amp160Creatives are seriously stretched I believe amp160Are increased outputs handled by more junior creative people having an adverse effect on quality Relationship duration has decreased to 24 years down significantly from the longterm relationships of the past and searchespitches have become commonplace amp160Furthermore clients now have internal agencies and rosters of production agenciesamp160and they depend significantly less on their creative agencies for partnership and creative leadershipOverall it is hard not to conclude that the pricing and profit pressures on creative agencies have led to a deterioration in their capabilities amp160But not all of the price declines had to happen amp160For reasons best known to senior agency executives agencies do not routinely plan document or negotiate their remuneration based on a measurement of the growing SOW workloads they carry out amp160In too many cases declining fees are set by clientsamp160and growing workloads happen on an unplanned ad hoc basis throughout the yearAgencies have either been inattentive to their workload problems or too wedded to the concept of amp8220weamp8217re great service providers and will do whatever our clients requireamp8221Holding companies will continue to need growing profit marginsamp160and procurement executives will continue to think that agencies have plenty of fat left in them amp160Until all parties get down to measuring and discussing workloads fees and resources industry prices will continue to fall with catastrophic consequences for the current playersamp1601 Price equals fees divided by deliverables amp160Deliverables were normalized by size to account for the variety of media types so an increased number of amp8220smallamp8221 socialdigital deliverables over time is not the cause for price decline amp160Inflation has been removedCartoon credit Benjamin Schwartz The New Yorker The Cartoon Bank With permissionClick the social buttons above or below to share this story with your friends and colleaguesThe opinions and points of view expressed in this content are exclusively the views of the author andor subjects and do not necessarily represent the views of MediaVillagecomMyersBizNet Inc management or associated writers

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Agencies Struggle with Declining Prices

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Michael Farmer

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Agencies Struggle with Declining Prices

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