History repeats itself – the first time as tragedy, the second time as farce. When comparing the current economic recession with that of 1991/2, it is difficult to know whether to laugh or cry. Slow economic growth, war in the Gulf, a president called Bush – the two periods share many characteristics.
Add in the cuts to marketing budgets and the story is wearisomely familiar. But there are also important differences. This time round, inflation is low, unemployment is under control and interest rates are more likely to be cut than raised. The tragedy of the early Nineties was that the opposite of all of these was the case.
Direct marketers are used to being somewhat insulated from recession, since their discipline tends to attract investment as others get cut. That was certainly the case in the previous decade, when the direct marketing (DM) industry experienced a boom. This growth created a cadre of agency directors, who are still in charge of many of the best-known companies.
So what did they learn, last time round? Can the effects of economic cycles be better managed if you have already lived through them once? Or are agencies like Tolstoy’s families: in happiness, they are all alike; it is only in unhappiness that they are different?
Carlson Marketing Group European development director John Shaw says: “In the early Nineties, I learned to be a steel fist in a velvet glove. Recession brought that to the fore.”
In 1991, Shaw was client services director at Wunderman Worldwide London, becoming managing director in 1992. In the early stages of the downturn, direct marketing agencies had it easy, he recalls: “You could go to a client and do a credentials pitch and pick up work. It was as simple as that. Then, in 1991, the economic and business realities bit and we suddenly found ourselves having to be a lot more considered and having to sell hard.”
One important change was in the agency’s perspective. It had to learn to look at business from the client’s point of view, rather than suggesting what best suited the agency. But it also brought into very sharp focus the underlying business drivers.
Shaw says: “Taking on the bottom line of our agency was not easy, especially in that environment. Your biggest cost is people. On the one hand, they are your key asset, but on the other hand, they become a target. You feel rather like Jekyll and Hyde when you turn around and fire them through no fault of their own.”
Learning how to deal with making people redundant was undoubtedly difficult for the generation of direct marketers who became agency heads in that era. But many of those who recognised the importance of getting through the recession in the best possible shape have gone on to bigger and better things.
That was close
EHS Brann chairman Terry Hunt lived through the near-collapse of his agency under the financial strain of the last downturn. “It is quite a scary experience when you are a bit naive about the business issues,” he recalls.
At the time, Hunt was a highly praised creative director and co-founder of an agency. “There are a lot of people in the agency world who are good at being agency people, but not at being business people. I became an agency person and a business person,” he says.
The Sisyphean issue of balancing agency overheads against income can come as a shock to the uninitiated. “I learned that you have a tiger by the tail, and you have to treat it cautiously or it will bite you on the arse,” says Hunt.
Having lived through those troubled times, Hunt is now focused on running a tight ship. That means that he is very careful about making expansion plans and evaluating investment opportunities.
He says: “As soon as you allow fat into the business, through too much speculative investment or on the assumption that everything will turn out for the good, it is dangerous. You have to be very selective in your investments for the future.”
That lesson was also learned by Tony Masters, now a director of the John Watson Partnership. In 1991, he was planning director of WWAV, one of the leading DM agencies, which had created a broader DM services group through investments in a mailing house, a computer bureau and list-broker.
“All of those things were capital-intensive. As a consequence, we had heavy financial gearing. The main thing I learned was that, in a recession, profitability doesn’t matter. We were very profitable, but the banks were still calling in loans. You always have to be careful about your borrowing,” says Masters.
At the time, some banks were criticised for the way they called in loans and overdrafts, a policy that was said to have a disproportionate impact on small and medium-sized businesses. Most DM agencies at the time were independent, and heavily reliant on support from their bankers.
But lenders have to keep a proportion of their loan book as free cash. When bad debt levels rise, they put pressure on other borrowers to repay. Masters says: “We had to make changes to our plans for the future. We had to let a number of staff go, on the basis that we needed to protect our cashflow.”
His new company is a small business with four full-time and four part-time staff. The pressures of high overheads are not yet a problem. But even so, Masters says, care is necessary: “The message coming through this year is about efficiency and cost-effectiveness.”
OgilvyOne executive vice-president Nigel Howlett was client services director at The Computing Group (TCG), part of WWAV, before joining what was then Ogilvy & Mather Direct in 1991. The early Nineties was his second recession – he worked in the engineering sector in the mid-Eighties, when one in five staff lost their job.
TCG had grown rapidly, from 20 to 250 staff, by the time he left. He says: “It was not a smooth line. There was a hiccup when growth suddenly plateaued. We did have to lose some people.
“The key lesson is that you have to move quickly. It is difficult, because human nature is to be compassionate. But the issue is not going to go away, so swiftness is important,” says Howlett. “It is much harder if you do it piecemeal, like a bacon slicer. You end up losing the same number of people, but you haven’t done it quickly enough and it doesn’t right the ship.”
In the current downturn, Howlett has had to confront a similar set of issues, particularly at the agency’s digital division. OgilvyOne bought NoHo Digital in 1998, when it had 20 full-time staff. This rapidly grew to 200, before the digital boom ran out of steam.
“We didn’t quite see what was going to happen, then all of a sudden the brakes went on. I found that the fundamental principles remain the same in a recession – transparency and honesty. You have to communicate very openly about the issue. You have to be seen to be doing everything you can,” says Howlett.
So hard to let go
Learning how to shed staff – OgilvyOne Interactive cut its headcount to 70 – is one of the toughest challenges for directors. It is not just dealing with the human issues – there are important legal consequences if the company fails to release staff from their contracts in the correct way.
Equally, shedding staff can rapidly demotivate those who are left in an agency. “One thing I learned from the early Nineties is that you need to keep people motivated and encouraged,” says Richard Marshall, managing director of Tullo Marshall Warren, the agency he co-founded in 1987.
During the last recession, TMW was only 20-strong and did not have to shed staff. But Marshall recalls: “In a small business, if you as leader start to look panicky and exude a negative attitude, it begins to infect your people.”
Confronted with the monthly figures, it can be hard to maintain a positive mental attitude. But Marshall says that sharing information within the agency can really help. His 140 staff get a monthly “show and tell” session, in which the current financial position is spelled out.
He says: “Most agency folk speak with a forked tongue. But having lived through a recession gives you confidence. Business is cyclical and one thing is for certain: this will not last forever.”
Not all agencies are suffering in the current downturn. Communications Agency chief executive Robert Prevezer says: “I am not sure it is a true recession at the moment. The most important thing I picked up from 1991 is that you need to run a lean team and not carry fat. That applies at any time – it doesn’t matter what the economy is like.”
He adds: “Agencies have an unhealthy preoccupation with their own size, a preoccupation which I don’t share.”
Instead, according to Prevezer, a careful focus on profitability can help agencies to avoid ill-considered expansion plans or retention of unprofitable activities. The key to surviving is productivity. He says: “A small number of people can deliver an awful lot.”
This also helps agencies to avoid the concertina effect, where agencies expand their headcount in good times and cut back in a downturn. “Employment is a very serious responsibility,” says Prevezer.
“Grey hair” wisdom is currently highly prized in business and DM agencies are no different. As a service business, they are subject to the rise and fall of client demand. While they may be relatively insulated from budget cuts, because of the accountability of DM, agency heads need to keep a beady eye on the bottom line. And, as Masters says: “I am not sure there is an easy way to learn these things.”