CLOSE-UP: LIVE ISSUE/STAFFING COSTS - The tough legacy of cost-cutting years in adland. Rising staff costs are now impacting on the industry, as Richard Cook finds out

The ad industry is not for the faint-hearted. And it’s not for the risk-averse. After all, when agency bosses retire, you should still be able to find the words ’boom and bust’ tattooed across their hearts.

The ad industry is not for the faint-hearted. And it’s not for the

risk-averse. After all, when agency bosses retire, you should still be

able to find the words ’boom and bust’ tattooed across their hearts.



But nowhere is this rollercoaster ride more steeply pronounced than in

the vexed realm of staff pay. The lurch from the overstaffed and

overpaid agency of 80s legend to its exact opposite has been one of the

defining characteristics of adland life over the last decade and more.

It’s a cycle which might just be starting all over again.



That at least, is the suggestion contained in research carried out by

the specialist accountancy firm, Willott Kingston Smith (Campaign, 28

August). The research confirms what apocryphal evidence might have

already suggested: that costs, especially staff costs, are now rising

faster than agency revenues.



’The problem is that all agencies, big and small, are finding an

increasing demand for the sort of staff they want to take on,’ Steve

Waring, a partner at Willott Kingston Smith, says. ’The result of that

is that wages are now representing too high a proportion of their

overall costs.’



In fact, employment costs rose from 52.8 per cent of gross income last

January to 53.2 per cent in June. They are still some way short of the

nadir reached in 1993 of 58.2 per cent, but then that, after all, was in

the very worst days of the last recession.



And it all seemed a bit different five years ago when agencies couldn’t

get rid of staff fast enough. The ad industry shed about 3,400 workers

in the five years to the end of 1993. That was about 700 a year - or two

a day, every single day, for five years.



And that’s just figures for members of the IPA, which declined from

15,400 in 1989 to 11,000 in 1993. Numbers for the industry as a whole

were much greater - from half as much again to twice as much, depending

on how wide you drew the defining net.



The problem since things started to pick up again is that agencies have,

this time, been too reluctant to make the corresponding transition from

recession by adding to staff levels. The result is a serious skills

shortage that is pushing prices ever higher.



’As an employer you are always a little frightened whenever there is an

upturn,’ Deborah Holdgate, the finance director at Partners BDDH,

explains.



’You tend to expect existing staff to work harder at first, rather than

take on new people, because you are frightened that the upturn won’t

last. And then, of course, you suddenly find yourself recruiting staff

in a hurry as you start winning more business. We’ve had to add another

50 per cent to our staff numbers over the past 12 months alone.’



Unfortunately, as this kind of demand increases, so does the price

commanded by quality staff - typically those of three to five years’

experience who can contribute from day one. Those staff, in other words,

who entered the industry in the last recession, when hirings were at

their lowest level.



A seminal report published two years ago by the industry and company

data analyst, ICC Information, revealed how draconian the cost-cutting

had been. It pointed out that the ad industry had shed its 80s

reputation for profligacy with a vengeance. Staff numbers at top

agencies had dropped from a pre-recession high of around 150 in 1991 to

100 in 1995, while average salaries had fallen and profit per employee

risen sharply.



And of course it’s precisely this legacy of cutbacks that agencies are

now encountering, in these more buoyant times. Because for so many

agencies, one of the first acts of the recession was to cancel graduate

training schemes.



’It is a key issue for all agencies now to get a decent share of the

talent,’ the Publicis chief executive, Richard Hytner, says. ’There is a

yawning gap at a certain level because of the industry’s failure to

recruit the bright young things when the going got tough.’



Perhaps more worrying still are two new factors that have added to the

problem since the last recession: increasing competition for the best

graduates from other sources, and the trend for agencies to offer

clients fully integrated services, without receiving fully integrated

compensation.



’We have started to recruit graduates for the first time and it

surprised us how much we have had to pay for these entry-level

positions. And that’s primarily because everyone - management

consultancies, the law, accountancy - are now after the same people,’

Holdgate says.



What could prove to be the most devastating blow for many agencies,

though, is the fact that they painted themselves into a service corner.

Clients increasingly expect their agency to provide additional staff to

add value to their accounts in ancillary marketing areas, but don’t

always expect to be billed for it.



’One of the biggest factors in this increase in the percentage of wages

to overall costs has been the fact that so many agencies have forgotten

they are communications specialists and started taking on a greater

proportion of clients’ overall marketing operations,’ Adam Crozier, the

joint chief executive of Saatchi & Saatchi, says. ’They are taking on

staff and offering themselves to clients as integrated shops without

being adequately paid for these services. They are losing sight of the

fact that they are really specialists, and seeing their wage costs

spiral.’



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