It’s that time of year again – ad-agency-contract-renegotiation-season. And here is a truth that might surprise some clients: agencies sometimes do silly deals.
They agree to terms they know won’t make them money – and that’s bad news not just for them, but for the client who rely on them.
In agency circles, this isn’t news. But many clients, especially in marketing procurement still believe agencies always make healthy margins. They assume that agencies don’t do silly or unprofitable deals because why would you? Therefore, many in marketing and procurement 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.
There are a few reasons why these assumptions are wrong, but we will look at the following three.
- The agency business model is unusual.
The agency business-to-business model is different to many. Many big creative agencies won’t have more than about twenty significant and active clients. 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 only makes a contribution to overhead, the choice is obvious. If your house is on fire, and you’ve only got two of the three fire extinguishers you need, you don’t refuse them – you take what you’ve got.
- Old reputations die hard.
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 – and for how long? The days of regular extravagant lunches are long over – reserved mostly for entertaining clients. Flash company cars at relatively junior levels have been gone for decades. In the age of transparency, economic uncertainty and stagnant budgets, agencies are struggling to keep their fees in line with inflation, so perhaps procurement needs to take its foot off the negotiation gas.
- Agencies aren’t great negotiators.
Unfortunately, many agencies aren’t terribly good at the renegotiation process, and for a number of reasons:
- Agencies rarely have time and resources to prepare for negotiations like procurement teams do.
- Agencies are in the service business, so for them arguing with clients feels counterintuitive. 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).
So, the result is a little like over-fishing. Agencies’ financial health and their ability to hire and/or retain the talent (upon which their ability to create value depends) is like a diminishing stock of fish. Their clients are like the fishermen who can’t see that the stocks are diminishing because whenever they cast their line, the hungriest fish eagerly swim towards them.
What can each party do about it?
For marketers:
There is an intrinsic danger in the reduction of an investment without a strategy to protect ROI. Don’t think of the agency’s value as the amount you pay them, but as the amount you invest in 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:
Yes, it looks like there are plenty of agencies out there 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 very rapidly when you exclude those with competitor brands, those too large or those too small.
Strategic and creative services need strategic buying; it is vital to protect the health of the suppliers upon which you rely.
For agencies:
Prepare, prepare, prepare. Hope isn’t an effective strategy for negotiation. Agencies need to prepare, train their negotiators, equip them with the tools, strategies, techniques and tactics to be convincing negotiators who can stand their ground and defend their legitimate business interests. Finally, you need to explain how your agency’s financial needs have direct impact on solving your clients’ business problems.
That’s the only way agencies will survive – and even potentially thrive.