Opinion: Perspective - Why ad agency finances need a marketing boost

Warning: our feature on the financial health of ad agencies makes for sober reading; look elsewhere if you want a smile this Thursday morning (try Diary on page 35).

Kingston Smith W1's latest Financial Performance survey suggests that many agencies are still failing to meet the benchmark 15 per cent operating profit margins expected of a well-run company. And that's using data broadly gathered from accounts filed well before the boom went bust.

There's acres of interesting stuff in the report. Despite the growth of the internet, digital agencies still perform poorly (blame inexperienced management teams and ridiculously high salaries). Then there's the divide between the independently owned agencies and the group-aligned ones when it comes to generating income growth.

And, though ad agencies still carry non-staff over-heads that exceed those of other marketing services sectors, advertising remains more profitable than comparable disciplines, with higher productivity and margins. But it took Lord Stevenson of Coddenham, speaking this week at KSW1's seminar unveiling the survey's findings, to highlight one of the key issues holding back the ad industry: the decline of marketing.

Stevenson started out his career in marketing services in the 70s, when he reckons it was quite usual to find himself, even as a relative junior, talking to client chief executives about the broader span of their business. By the time he was in high office on the client side (he's been the chairman of HBOS and Pearson, among others), he gave marketing scant thought and barely even met any marketers from the companies he worked for. The marketing discipline, and by extension its suppliers, has tumbled off the boardroom agenda.

Of course, this isn't necessarily the case with all client/agency relationships, but the marketing stats are clear. Less than 15 per cent of FTSE top 100 companies have a board-level marketer, and senior marketers now earn less than their equivalent colleagues in IT and human resources.

Clients need agencies' unique blend of consumer insight and creative counsel more than ever right now, but ironically, it could be the relationship agencies have with marketing departments that gets in the way of their access to the boardroom. All of which suggests that it's when ad accounts come up for review in times of recession that agencies have their best opportunity to forge relations higher up the client hierarchy. Incumbent agencies may (unfairly) find it hard to get the chief executive's ear; ballsy pitching agencies have the opportunity to offer solutions that go deeper than communications and engage corporate management.

The trouble is that in the current climate so many pitches are called because advertisers are looking for ways to trim their ad fees. As the KSW1 report suggests, agencies cannot afford to drive charges much lower, though there are still efficiencies to be found.

The smartest agencies will use 2009's pitches to foster more senior client relationships while exploring different types of remuneration systems. Payment by results might not be the shrewdest option in times of economic freefall, but retaining IP ownership and sharing the risks and rewards of work have to become more usual if agencies are to maintain the momentum expected by the KSW1 report.

Talking of momentum, I reckon the Cadbury's Dairy Milk campaign is back on track as of this week. By tomorrow evening you'll have seen the new work, "eyebrows", in all its sweet, ridiculous and infectious glory. Prepare for a YouTube frenzy of imitators.

As a blueprint for 2009 comms, it's a great example: clever, simple, cheap but thoroughly engaging and viral. And it recognises the power, still, of television to give a campaign the best possible lift-off while being fully aware of the way the web will allow consumers to interact with the idea and give it a life long after the TV budget has run its course.