This race to the bottom is a dangerous game to play
A view from Danny Rogers

This race to the bottom is a dangerous game to play

The advertising business has arrived at a commercial crossroads. The economy has started to improve, there's now little doubt about that, but many big buyers of marketing services are continuing rather too gleefully to screw down costs and extend payment terms.

This week, there has been consternation by many agencies at the Government’s "reverse auction" approach to buying its media planning. Some agencies – such as Goodstuff Communications – declined to take part at all. Many of those that did were highly stressed by how to price their expertise during a real-time auction. Others reluctantly dropped their trousers, only to experience an aftermath of self-loathing.

In the private sector, big advertisers continue to stretch their payment terms. GlaxoSmithKline, which has just completed a global media review, has tried to extend payment terms to 90 days, but the big media agencies involved have resisted this. This is understandable when one calculates that the monthly interest payments on media space are worth hundreds of millions of pounds.

Another answer lies in new models of charging for business-changing advice, such as better ownership of IP

Elsewhere, we have British Airways reviewing all creative and production suppliers. To be fair, this review is at an early stage – to be completed by January – but the pitch document is a complex list of specific services, with procurement clearly prominent in the process. One hopes that BA prioritises the quality of ideas and strategy over cost as things progress, because the airline has some "previous" here – a few years ago, BA ran a controversial reverse auction for its global PR services.

Fortunately, history will show that marketing spend in the UK and the US has held up reasonably well during the recent recession, with many advertisers taking the good advice to hold their nerve, build brands and grow share. But many of these successful companies are now tempted to further squeeze their agencies as a result of their newfound power.

On the agency side, more business nous is required to counter this trend. Creative SMEs need to bolster their own financial negotiation muscle. Another answer lies in new models of charging for business-changing advice, such as better ownership of intellectual property, payment by results and even taking equity stakes in clients. But, in the meantime, it will continue to be a tough-talking war between the big buyers and the service providers, with the latter starting to regain
their confidence.

Ultimately, advertisers must realise that they will get what they pay for and that they can easily lose the smaller, entrepreneurial creative agencies amid these ball-breaking negotiations – along with some of the most effective thinking.

danny.rogers@haymarket.com
@dannyrogers2001