It used to be said among economists that, when the US sneezes, the
rest of the world catches a cold. The validity of that saying is being
put to the test again, and no-one expects the UK to be entirely immune
from the current US economic chill.
Economists may enjoy debating whether or not the US economic decline
actually constitutes a recession (a 'hard landing') and how resilient we
are in the UK to the consequences, but the reality is that a lot more
businesses are going bust over there and the knock-on effect has already
arrived over here.
A recession is not a new phenomenon, and the marketing and media moguls
should have learned how to cope with it by now. But have they?
One of the inherent handicaps in the industry is its deep-rooted culture
of make-believe. It is in the persuasion business, and that often means
putting a positive gloss on reality. To some extent this is an essential
quality of leadership, provided the leaders have also recognised, and
responded to, their own business realities in private. Hope springs
eternal, but bankers' credit lines don't.
The initial evidence is that memories are not as long as they ought to
be. In good times, marketing services companies are relatively easy to
manage, provided their owners take the task seriously. So it is easy to
become complacent, and some of the younger managers may soon be put to
the test for the first time.
However, in some respects the industry has matured over the past decade.
Borrowing levels are not as high, relative to the amount of
shareholders' funds invested in the sector. And a number of employers
have recognised the need to introduce more flexible - albeit unproven -
profit-related staff remuneration structures that will theoretically
help to cushion their businesses during a downturn.
Flexibility is crucial if companies are to weather an adverse economic
climate - whether in relation to people, property or financial
resources. It can be helpful to outsource certain fairly routine
functions and keep overheads as low as possible.
It is essential to ensure that the company has adequate long-term
financial resources available to it - whether in the form of
shareholders' funds or long-term loans. Short-term bank overdrafts are,
by definition, repayable on demand and bankers tend to choose the least
convenient time to call them in. Prudent cash forecasting and a strong
relationship with the bank manager will help.
The quality of business managers in the industry has improved, but there
remain too many who will always listen only to what they want to hear -
the soothing palliative rather than the blunt truth - and who constantly
put off remedial action in the forlorn hope that better news will arrive
tomorrow. Dream on. The army of receivers is already rubbing its hands
in gleeful anticipation.
1. Fees provide more certain income than commission:
Clients may try to renegotiate fees, but it requires mutual consent.
With commission, the client can simply cancel the campaign and the
agency earns nothing. At the very least agencies should aim to have a
core proportion of income in the form of fees, hopefully with scope to
earn some extra revenue if the client becomes more active again or the
agency can show that it's achieved outstanding results. A regular cash
inflow makes financial budgeting easier. There is nothing more
reassuring than a 12-month rolling income forecast - based on real
contracts - that covers the fixed costs of the business.
2. Parting with one or two employees today may save you having to part
with 100 employees in six months' time:
There are all sorts of good reasons why employers should try to retain
their best people at all times. But if too many staff are retained
without income to support them, the business will very quickly run into
losses and put everyone's jobs at risk. At the very least, be much more
cautious about recruitment. It's surprising how much work people can get
through if they are committed and well managed. But also beware of
demotivation when profit-sharing bonuses fall away. It's a great idea to
offer profit-sharing in good times and to keep core salaries at sensible
levels, but human nature is such that people tend to live up to their
3. A quality agency can increase its market share in recession at the
expense of weaker competitors - be confident and show it:
An impending recession can provide opportunities for the best
advertising agencies to improve their relative market share at the
expense of their competitors. Clients are inclined to gravitate towards
the tried and trusted, so not only will that be reflected in potentially
bigger income streams, but also it will cause weaker agencies to merge
or even fold. Winning market share during a recession should be a
positive objective for any well-regarded and successful agency.
Conversely, weaker agencies - possibly over-dependent on a long-standing
client - should be thinking about self-protection. Perhaps it is time to
sell while there is still a profitable business to offer.
4. If shareholders haven't been prepared to reinvest profits in the
business in good times, don't expect your bank manager to bale you out
in bad times:
Banks have always operated on the basis that their risk should be less
than that of the business owners. In other words, the funds retained in
a business by its owners (usually share capital and retained profits)
should be at least as great as the funds borrowed. A business that has
stripped out every penny of profit in good times may find it hard to
persuade its bankers to take on all the risk in difficult times. The
banks have a point, even if we don't like to admit it. So be prudent
with profits and retain a healthy sum in the company. Another prudent
way of looking at it is to retain sufficient profits to cover all the
day-to-day operating costs for six months ahead, assuming no income.
5. If you can't win or keep good clients, it's your fault not
Optimism is a great asset in business. But blind optimism can be
catastrophic. It may be difficult to face up to the fact that the agency
has never really attracted and retained good quality clients, but until
that fact is acknowledged it will be impossible to remedy the problem
(and it certainly won't be remedied by trying to expand overseas).
Bluntly, some agencies have very poor creative talent - or talent
unsuited to the type of client they work for. Others employ client
handlers who behave as if the client owes them a living. Find out what's
wrong. Take outside advice if necessary, and be brave enough to make
changes. Otherwise it may be too late.
6. If the management team isn't fairly united in good times, it will
fall apart in bad times:
When agencies start up, more often than not the majority of the founders
have worked together before. Why is that? Because they need to know and
trust each other. A business start-up environment is not the ideal place
in which to discover each other's weaknesses. But even the best teams on
paper may not always be able to unite under a single mission and work
well together. So if team-building is important in good times, team
cohesion is crucial in a recession. That is not an argument for avoiding
conflict. Quite the reverse. Address such issues and seek the best
solution for the business as much as for the participants.
7.Be as flexible as possible with property - it's not the time to pay
millions for a long lease or freehold:
Owning a freehold may be fine if the mortgage is not oppressively high.
But marketing services businesses are not normally created with a view
to becoming property-owning conglomerates and it usually pays to stick
to what you know and are good at. Now is not the time to take an
expensive long lease unless there is a convenient break clause. Space
requirements may contract, sub-letting could be tricky, and heavy
borrowing should be avoided. Many an agency has foundered on the rocks
of property commitments.
8. Measurable response carries more weight with clients than qualitative
This may or may not favour direct marketing agencies, but it should
influence the way in which every agency deals with its clients. To
ignore what will be uppermost in the client's mind (and the brand
manager's job retention prospects) is a very high-risk strategy.
Remember that the medium that will provide a readily measurable response
is not always the one that provides the best response. The key to
keeping the client comfortable is to be able to offer a credible means
of measurement, and valid arguments in favour, of your preferred medium
compared with an alternative one that on the surface may seem easier to
9. Clients are more inclined to fire their marketing and brand managers
- so make sure your relationships are secure right up the management
How often have you heard account executives make reassuring noises about
their relationship with their opposite number at the client? And how
often has that proved fallacious? The best cement between a client and
its agency is good work that achieves the client's aims through a sense
of common purpose and shared ideals. That means getting and keeping
close to client personnel at all levels. In a recession, decisions about
hiring and firing agencies may be taken by a chief executive or the
entire board, whereas in better times the board may readily put its
trust in the marketing function to make the right decision. Remember
it's much easier for a senior executive outside the marketing function
to fire an agency he or she has never met.
10. Proven media offer more security to clients than
Is this bad news for new media? Yes, to the extent that it offers no
measurable and proven performance record in the client's area of
marketing. But the point is more general. Even within old media, when
advertisers are looking to cut spending they will reduce the number of
titles they use and focus on those with the strongest track record.
However, even if clients are focusing on the more proven media, it does
not mean they will always feel happiest with boring creative work. Being
brave and distinctive will usually appeal, provided it is consistent
with a sound underlying marketing strategy.