SURVIVAL OF THE SMARTEST: Ten Lessons you should have learnt from the last recession

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.


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