OPINION: Beware of the desperate and dateless

By Robert Morgan | 15 September 2011
 
Clemenger BBDO group executive chairman, Robert Morgan.

It's not news that major advertisers are unleashing their procurement departments to negotiate contracts with us, in the same way that they would negotiate for commodities such as paper, pens, sugar and furniture.

But, the advertising industry (this also includes media agencies) is not helping itself by allowing itself to be treated like a pen supplier. As an industry we need to educate our clients on the intrinsic value that we can add to a brand’s equity through not only the creation of an idea, but also the production and placement thereof.

The way most procurement departments set out to negotiate fees is through a multiplication factor of direct labour input, based on a proposed scope of work. On top of the direct labour charge, an agency will need to include in its rates a factor for labour on-costs, senior management, finance and administration departments, rent, electricity and cleaning, depreciation, head office costs and operating expenses, etc. And there’s meant to be a profit margin!

I recently heard of a pitch in which the starting point for offers in the RFP was set at a rate far below what could conceivably be break-even, let alone profitable.

But here’s the problem. The ‘desperate’ incumbent will probably drop their fees below ‘the ask’ because they figure the cost of empty floors in their building and the redundancy costs associated with losing its client will be worse than the reduced profitability.

The ‘dateless’ aspirant agency will also drop their fees because they need a foundation client to augment their puny agency. Together, they will be locked in a downward spiral and in the process encourage the view that we are suckers. And further embolden the procurement industry, all of whom talk to each other.

Perhaps their other clients would like to have the rates that they are subsidising. It’s nuts. For too long, industry profitability has been a dirty word for many agencies.

It irritates me that we are one of only three agency groups in this country that actually publish profit results. The others hide behind the global result announcements or blame Sarbanes Oxley for not publishing results. Or perhaps they are too embarrassed at their lack of profitability.

We expect to make 20% operating profit on revenue. The deal that will be done on the advertiser cited above will be at best 5-6%. You’d be better off putting your money in the bank.

The agencies that work on this basis will never be able to afford great people who can do great work that works. Clients need an agency that does great work.

In most cases, fortunately, the power of a brilliant idea will win. We recently pitched a brand against other well-known agencies. It was pleasing to note that even after one ‘dateless’ agency offered to do the work FREE, it was the power of a great idea that won the day.

Maybe it’s time for a different reward system – one that actually values what we do. Maybe it’s time for a system where part of our remuneration is intrinsically linked to the growth that we generate in brand equity or product sales.

For all the many good agencies – hold your nerve. You seldom win a client worth having on the lowest cost. Those clients are itinerant and you can’t build your business around them. Leave them to the ‘discounters’ who won’t be around long either.

Robert Morgan
Group Executive Chairman, Clemenger BBDO

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