OPINION: FARMER ON ... AGENCY REMUNERATION

The latest agency performance league table (Campaign, last week) highlights a brutal truth which has been evident for some time: advertising agencies are valued less by their clients than other professional service providers.

The latest agency performance league table (Campaign, last week)

highlights a brutal truth which has been evident for some time:

advertising agencies are valued less by their clients than other

professional service providers.



If we take revenue as a measure, and compare it with the cost of the

professional resources provided to clients, the ad agency’s Professional

Staff Multiple (PSM = revenue divided by professional cost) is half that

of management consultants and about two-thirds that of commercial

accountancy and law firms.



Where management consultancies are paid between three and four times the

cost of their professional people, and accountancy companies and law

firms between 2.5 and three times, agencies are typically paid only 1.7

to two times the cost of their professional people. This means, quite

simply, that clients pay proportionately less and thereby value less the

provision of professional advertising services.



At such a low PSM level, agencies struggle to earn 8 to 9 per cent

operating margins, and they do so only by squeezing overheads, thereby

underinvesting in training, information systems and technology. In

contrast, management consultants achieve operating margins of 30 per

cent and accountancy firms well in excess of 20 per cent. This provides

an ample cushion for investment in people and systems.



Agencies are on the defensive with their clients and looking anxiously

over their shoulders at professional competitors like consultants. Yet

if they could raise their PSM to only a 2.5 ratio, and keep overheads at

existing levels, they would achieve operating margins in excess of 20

per cent, enough to begin some much-needed training and investment.



How has it come to this? Over the past ten years, advertisers have

focused on reducing the costs of all suppliers and this has put a

tremendous squeeze on agency margins.



Agencies have reacted by ploughing more resources into accounts, in the

belief that this was necessary to respond to new requirements and to

keep the existing business. While clients have reduced costs and become

more efficient, agencies have done the exact opposite.



Worse, most of the additional resources have been put into client

service people, many of whom do not have the training or capabilities of

the consultants who wander down the same client corridors.



What can agencies do to redress this situation? The first thing is to

make sure that professional staff capacity is budgeted according to the

work required, not independently of it. This is a job, and a crucial

one, for the chief executive. In discussions, he/she needs to forecast

the amount of strategic and creative work for each client, and through

careful reviews and the use of resource management tools work out the

definitive client service, creative and production headcounts

required.



Efficiently carried out, an agency resource planning process can

increase margins and start the process of transforming agencies from

victims to respected advisors whose PSMs are equivalent to others in the

professional service industry.



Michael Farmer is chief executive of Farmer & Co, a strategic management

consultancy.



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