Agencies must negotiate better to help improve margins

There has never been a time when agencies have faced such adversity, says the chairman of the Marketing Agencies Association

Campaign's article, by Esther Carder at Kingston Smith, highlighted some difficult trends for marketing agencies. Profit margins have fallen to a new low of just 6%. And in a market where overall fee income has increased by 6.8% to £460 million, we see the twin forces of greater competition and downward pressures on fee income are exerting their power in a big way.?

In fact, the report didn't paint a pretty picture across all sectors. Only five of the 250 agencies hit the benchmark KPIs, down on last year. And, of the six sectors reported, only two – PR  and media – were up.

A key driver to maintaining a margin is good negotiating, which is possibly why the PLC Groups have maintained a better performance than the independents. But, whichever way you look at it, there is a downturn across the majority of categories, indicating it’s been a very testing year all round.

Weaker currency impact 

The outlook for 2017 doesn’t look much better either. Setting aside the negative impact of uncertainty surrounding Brexit negotiations, the weaker currency is already having an impact on pricing. At an event for our members last week, I expressed the view that there has never been a time when agencies have faced such adversity.

Research from the MAA, such as our Agency of the Future study,  shows the need for agencies to think and do differently in meeting future demand from clients. However, it’s clear that taking the time to plan for the future and making the necessary investment is really difficult in a market where clients want more for less and where agencies, in attempting to deliver the earth, are sometimes falling short of expectations.

We understand that clients will put further pressure on agency remuneration to offset increases in cost of imported goods. We are already seeing evidence of this. But we argue that this need for greater understanding cuts both ways.

Recently we’ve witnessed ridiculous behaviour from clients both in terms of hiring and paying their agencies. The MAA’s Pitch Watchdog recently intervened in the Huawei pitch when we found out yet another instance of agencies being undervalued, and their work being given away.

The protection afforded for agencies from services like the MAA’s Pitch Watchdog remains vital. And on a more proactive note, following this report, we will work extremely hard with marketing agencies to ensure that relationships between clients and agencies are as strong as they can be, and that agencies focus on delivering services that are profitable.

But it's not all doom and gloom. There’s a great opportunity for agencies to be more successful in future, by focusing on new methods of problem-solving, meeting the appetite from advertisers for measurement and proving results, and through greater collaboration with both clients and other partners.?

Rapidly changing landscapes

This brighter future of possibilities was shown in the Kingston Smith report (if you could see past the doom). The more successful marketing agencies run businesses with strong teams punching above their weight. But the results made it clear that, while the sector is challenging, there are outliers to learn from. The best of which achieved revenue growth of 14% margin of over 20%, and productivity of more than £330,000.

The MAA has a big mantra around supporting and helping its member agencies secure their future as it’s clear that clients value commoditised services least. So it’s fundamental that agencies lead in areas such as technology.  In recognition of this we have a number of services and initiatives, including Agency of the Future, aimed at supporting agencies to evolve in a rapidly changing landscape.

This is important because our industry can be terribly reactive. Rather than stepping back to see what good looks like, we tend to plough on making the same mistakes. Yet, if the latest Kingston Smith report tells us anything, it is that success is possible and there are agencies out there delivering it. 

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