Tom Lewis is the Finance Director at the IPA
Tom Lewis is the Finance Director at the IPA
A view from Tom Lewis

IPA ADAPT: Adapting into higher margin businesses

Adapting to thrive is the central message of IPA President Ian Priest's agenda, but how can we apply this to the bottom-line - essentially, how can we adapt into higher margin businesses? asks IPA finance director Tom Lewis.

Almost 100 days on from the IPA’s Performance Adaptathon, IPA finance director Tom Lewis draws on the key learnings from the day to explain the industry’s challenge of demonstrating its value, to highlight the role of time-based billing within an agency’s portfolio of remuneration models and to provide a checklist of the foundations an agency should have in place in order to adapt. He also highlights why talent and effectiveness hold the key to future profit.

The challenge of selling ad services

Advertising services (advertising, media planning, brand strategy) are some of the most complex services to sell - it is a bespoke, non-distressed purchase whose value is economic rather than financial.

Measuring the cost of advertising is extremely straightforward, but demonstrating its value is extremely difficult

Measuring the cost of advertising is extremely straightforward, but demonstrating its value is extremely difficult.

By contrast, legal services (when there is impending litigation) are a distressed purchase where power lies with the seller. Tax planning is a considered purchase, but has a measurable financial benefit and an easy value consideration – the tax saved vs the cost of the advice.

As a planned expenditure, ad spend allows the buyer time to negotiate on price. As a bespoke service, it is not transferable from one potential buyer to another, so switching costs (for the supplier) are high.

And its value is neither short-term nor financial - advertising's role is to boost the top line over a period of a number of years - so measuring and attributing value in the short-term is more difficult.

As a result, there is an appeal to both sides of the time-based billing model; the client gets a good indication of its likely costs whilst the agency gets the revenue and cash visibility it needs to survive.

The theory of time-based billing

As set out in the ‘tips for clients and agencies’ section of the IPA Performance Chapter, in an ideal world, the client and agency must - among other things - work together to be clear on the business issue that needs solving, be clear on the communications objectives and outcomes, and share a common vision and KPIs.

Where it can go wrong in practice is where there is a failure to clarify the scope of work and / or excessive haggling on rates.

By not agreeing the scope of work agencies can find themselves at risk of over servicing the client. Agencies must also ensure that they can clearly demonstrate their value to their clients and robustly negotiate the appropriate rate for this.

Peter Field has provided the solution to part of this in The Long And Short of It by explaining that for campaigns to generate maximum profit and efficiency they need to have a 60/40 split of long-term brand building vs short-term brand activation. He also points out that campaigns with an emotional engagement or the fame factor drive volumes and pricing. These are things that great advertising instinctively knows, but something that hasn’t been empirically demonstrated before.

Campaigns with an emotional engagement or the fame factor drive volumes and pricing

However, the solution to demonstrating the value of advertising is more complex than these strategic findings - agencies need commercially astute account handlers and finance staff who have the skills and training to negotiate professionally.

Agencies need to have relevant management information - timesheets and client profitability data - in order to open conversations about over servicing. They also need to have data and a rationale for the rate card, in order to facilitate discussions on cost constraints in a positive manner.

This in turn needs a focus on effectiveness - agencies that can demonstrate the effectiveness of their people are better placed to justify their rates than those that can't.

For agencies, the doors are - in many cases – open to clients who are willing to enter into sensible conversations about agency remuneration models; but the agency needs to come armed with facts, data and a negotiating strategy in order to put their case properly.

And it all starts with a tight scope of work - if that is not pinned down initially, then dealing with the inevitable scope creep becomes a game of "he says, she says".

Lessons learned and looking forward

Overall, the Performance Adaptathon highlighted the importance of building on solid basics and answered the question of what does an agency need to look like before it can start to adapt into a higher margin business.

We know that the requirements, which the IPA works with its members to help them achieve, are:

  • good revenue and profit visibility

  • commercially-astute account handlers who know how to conduct a business negotiation

  • the ability articulate value and defend the agency’s rate card accordingly

  • business-savvy finance staff who can work closely with the account handlers to keep fee proposals realistic

  • a focus on managing the client relationship strategically

  • up-to-date, meaningful management information so financial issues can be raised with clients promptly

Looking at this list and the challenges our industry faces, there are clearly two strands for further development – the intellectual challenge of demonstrating and quantifying effectiveness plus the practical challenge of ensuring that staff can verbalise it in negotiations; to put it another way, good performance is where talent and effectiveness meet.

These are strands that the IPA will be progressing at next week’s Adaptathon that will focus on how the industry can recruit and retain talent that is less one-dimensional, more diverse, and that leads to better commercial creativity. The IPA’s Finance Policy Group will also take forward the key learnings from the Performance Adaptathon, which have been neatly summarised in the Performance Chapter, at next year’s IPA Commercial Conference.

Ultimately, once all these basics are in place an agency and its clients will be well-placed to look at moving towards more value-based and risk-based remuneration models.