Margin erosion is a losing tactic

Although Europe is now seeing an upturn in economic fortunes, agencies are still being squeezed on margins, mainly because of client pressure. But this can only be self-defeating, says John Shannon. John Shannon is president of Grey Internatio

Despite continued economic growth in Europe, the region’s advertising industry has suffered a steady erosion of margins during the past few years.

The effects of recession, competition and downward pressure on agency remuneration by clients struggling with their own profitability problems, have combined to squeeze margins to a point where, in many cases, maintenance of servicing resources and standards, particularly in the creative area, has become a growing challenge for management.

With staffing costs as always the core issue in a service business, new and unconventional ways to deploy resources are being explored to address the problem without compromising clients’ business interests and continuing financial viability.

One area of significant apparent potential is that of information technology, with its promise of an increase in productivity and efficiency, coupled with a reduction in operating costs. To an extent this has proved true and the potential has been exploited across several key areas of agency operations. But its attendant capital costs, and the need for continual up-grading as technology progresses, clearly indicate it cannot alone represent the required solution.

Inescapably, it is in the selection, training, organisation and management of people where the real qualitative competitive differences between agencies and networks will emerge and where getting it right in terms of quality of talent, rather than numbers of bodies, will contribute most towards improving both professional performance and agency margins. Nowhere is this more true or critically important than in meeting the needs of major accounts that require managing and servicing on a multinational basis – particularly in creative terms.

But agencies cannot shoulder the burden of current financial pressures alone or on a limitless basis and it is clear that in all too many cases, multinational clients are seeking to impose ever more stringent agency remuneration terms as they strive to reduce their own operating costs.

There comes a point when such pressure becomes self-defeating; where it risks forcing agencies to compromise on resources, resulting in impairment of output quality.

The relatively small economies to be gained, by shaving a point or two of commission on even major budgets, are easily outweighed by its weakening effect on the critically important re-sources necessary to give clients the only remaining “unfair” advantage legally open to them. It is a truism they should surely ponder carefully.

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