Profit squeeze for ad agencies

All is not well in adland: a report commissioned by the Marketing Communications Consultants Association highlights the profit squeeze that advertising agencies are now under.

The report, an annual fees and remuneration survey, has been conducted for five years looking at the salaries and charge-out rates of its member agencies, and this year the data has been collated across the period.

Figures from the MCCA’s report show that on average account handling rates are down 8.2% on 2002, from £116 to £106.44 per hour, and down 0.3% on 2006 from £106.81. Planning rates are down 6.1% on 2002, from £147.50 to £138.43, but up 1.2% on 2006 from £136.77 – possibly highlighting the growing importance of the planning function within marketing communications. Finally, and possibly most disturbingly, creative rates are down 26.9% on 2002, from £137.50 to £100.53, and down 2.5% on 2006 from £103.16.

The report also shows that salaries across all departments have increased, although by less than headline inflation. The average annual headline inflation rate since 2002 is 3.2% and, if salaries had increased in line with this, they would be up by 17.1%. However, average account handling salaries have gone up 7.5% since 2002, from £40,666.67 to £43,710, but down 2.4% on 2006, from £44,780. Planning salaries are down 9.5% from 2002, from £67,000 to £60,666.67, and up 10.7% on 2006, from £54,783.33. Finally, creative salaries are up 13.2% on 2002, from £33,866.67 to £38,357.81, and up 5.7% on 2006, from £36,281.25.

This is not a sustainable scenario, and while there are signs that things are levelling out, this is strangling the profit margins of advertising agencies. The worry is that there is not enough money for agencies to invest in the development of their people and creative thinkers. Indeed, in a squeeze, training is very often one of the first things to be cut.

However, at a time when consumers are becoming more savvy and technology is pushing the boundaries of communications and how advertisers engage with consumers, when there’s now so much more than the 30-second advert – from brand experience to digital – agencies and brands alike need to be investing in their future thinking.

The MCCA says the industry needs great people, and to get those people it needs to be able to attract, train and develop them. If there’s not enough money in the industry then the quality of output drops. And for the past few years it has been seeing just that, with clients starting to get very much what they pay for – with some very mediocre brand communications in all channels.

Agencies and brands need to get to together to look at the real value and return on investment they are getting from their communications, rather than cutting costs for the sake of it. When clients see this ROI model they, hopefully, will realise that more money needs to be put into marketing communications spend. The wiser and tighter that money is spent then the more the whole industry can benefit from greater investment.

If that doesn’t happen there will be a continual decline in creative output. Not because agencies are getting weaker, but because clients are not investing and are getting what they are paying for.

While it may be true that agencies have, in the past, been guilty of charging excessively high mark-ups on areas such as production, print or staffing, this is something that has not been around in the industry for a long time. The control which procurement departments put on ongoing costs and managing the supply chain is now very rigid. Instead, this is about the cost of having great thinking people. To have great engaging communications brains must be on top of that business. It is not, the MCCA insists, simply the market coming down to a more sensible level.

An acceptable model for agencies is that they should be able to make 20% profit. In reality, less than 5% of the agency sector is able to deliver that. If the industry wants bright creative thinkers they have to want to come to a place where they can make money, both on client and agency side.

At the moment the MCCA believes the industry is in danger of slipping into a territory where clients are having mediocre people working on mediocre communications, because that’s all they’re prepared to pay for. But, all they are going achieve by doing this is to devalue their brand. The MCCA says this is unacceptable: it has drawn figures out of the past five years to show clients that enough is enough.

MCCA managing director Scott Knox contributed to this week’s Trends Insights