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.
