The Insider's Guide to Production: The Perfect Market - Sponsored by the Advertising Producers Association

It's a buyer's market for commercials production, and companies vying for a slice of the action are having to produce their best work to succeed.

This is an exciting time for commercials producers. They work in a super-competitive market for commercials production, and digital media is opening up new means of communicating with consumers through moving-image advertising.

Abundant competition coupled with heavy downward pressure on both budgets and margins apply to post, editing and music companies - and agencies too - and make for a buyers' market.

Given that environment, it is strange, as well as unfair, that it is even suggested production companies are making too much money; the only businesses that attract criticism for making too much money (rather than criticism for making too little or praise for operating profitably, which is what most businesses expect) are companies that dominate and control markets, such as the oil companies and banks, not those operating in perfect markets.

There was a time in the 70s and early 80s when production companies' profits were very healthy. In a union-controlled industry cloaked in technical mystique, it was closed to all but the card-carrying few who could master the elusive craft.

It was typical, in other words, of all immature markets: think of web designers in the 90s, who could charge what they liked because they had the magic, everyone wanted it, nobody understood what they were buying and there were too few of them in the market.

But look at the commercials production market now: around 1,500 people in London identify themselves as commercials directors. There are about 100 production companies in the APA. There is competition, too, from production companies in other markets - with many more countries offering interesting directors and good-quality production than was the case 20 years ago. All of them compete for the 4,000 or so commercials produced from UK agencies each year. So, clients and agencies are spoiled for choice.

They can have the pick of the best talent and they can get it at a good price. Production companies will invest in sophisticated mini pitches to win the commission and, even if they do not regard the budget as adequate, put every possible effort into making the commercial as good as possible because, as well as professional pride, they know their future in the business depends on it.

Budgets, in any event, are pre-determined by the client and agency; they will, in nearly all instances, tell the production company exactly what the spend is. Illogically, after the production company has found a way to make the film for the budget, often employing a mixture of creative guile, logistical ingenuity and use of their expertise and contacts to bring the necessary economies to the task, the budget is subject then to a lengthy cost-control process.

Why? The agency and client have made their choice. The production company in turn has committed to being the chosen one at the expense of alternative work and, in agreeing a fixed price, has taken responsibility for the risk of the production costing more.

The introduction of a cost consultant is not only pointless (because the market has already determined the price) but, perversely, likely to increase costs by diluting the producer's spending power and jeopardising the film's creative success.

Indeed, the whole system of detailed budgeting - where the client has significantly less money than would clearly be required if the commercial were budgeted properly - serves no purpose: if the budget is what the client is willing to spend and the production company is willing to make the commercial at that fixed price, that should be sufficient.

The fact that some production companies, at least, make a profit, is something clients and advertising agencies should welcome. The nonsense is that these profits are somehow excessive and are the product of shady practice.

In the over-competitive world described here, there simply is not the slack to be taken up. And let's be realistic about this: profitability is at the very centre of free-enterprise success and the cornerstone of the economic model that all the advertisers who commission production companies to make the commercials hold central to their success and their survival. Ironically, it is these self-same commercials that are designed to raise those profits and make higher returns for their directors and shareholders.

The excellent IPA/ISBA/CIPS report Magic and Logic, on the client/agency relationship, supports this. It recognises that it is in the interests of clients for agencies to make a fair level of profit, and analyses good performance by agencies in terms of operating profit, income per head (of staff), etc.

Why? Because clients want good-quality people working on their business and those people have to make money from providing a good service because, otherwise, they will be less motivated in the short term and likely to pursue other career/business paths in the long term.

The principles of Magic and Logic apply equally to the agency/production company relationship.

Profit is not only the oxygen that keeps companies alive - but allows them to breathe life into new talent and ways of working that benefit the industry as a whole. Profit is often hysterically perceived as money for a new Porsche, whereas it actually pays the overheads, develops young talent, funds research and hopefully rewards the owners for their highly skilled labours.

So, a client making a commercial should start with confidence that they have the run of the sweet shop; a vast array of directors and production companies fighting to do their work and negotiate to get the commercial made at the price that is right for them, while allowing production companies to make sufficient profit to ensure that that array and depth of talent continues to be available.

John Hackney and Lewis More O'Ferrall are the joint chairmen, and Stephen Davies is the chief executive of the Advertising Producers Association.

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