“I sometimes feel like my agencies are using their time with me to up-sell me rather than help me grow my own business....”
This is usually followed by a growl or a sigh...
We hear this a lot from clients who are concerned that their agencies often treat meetings like a sales pitch for their ever-expanding service offering. The client’s frustration mirrors the agency’s determination to spread their exposure to ever more parts of the client’s business. Understandably, this approach can become somewhat exasperating for even the most understanding and patient of clients, trying to survive in tough conditions themselves.
This may be a scenario that you are also familiar with - and perhaps you’ve wondered how to address it without confronting it - let’s consider why it might happen and what you can do about it.
Ahh, the falling in love bit...
Let’s imagine that at the start of a flourishing new relationship, a client and their agency agree a 3 year deal. Negotiations have been lead by the client’s procurement team who have driven a hard bargain, leaving the agency somewhat battered and bruised, but nonetheless still very excited about their new client win. Although the agency may have conceded some ground and their margins in the first year are squeezed to death, the agency will have high hopes that this position can be improved over the remaining years of the contract. They hope for their income to grow over time. Meanwhile procurement believe that they’re going to improve the deal in their favour in years two and three. Of course this creates a tension from which (in our opinion) most client-agency relationship failures stem. Two parties with ambitions of moving in opposite directions. Some might call it a recipe for disaster.
So then how do agencies improve their profit margins?
Remember the joke: Why do agencies usually have such big windows? So they can see you coming a mile away...!
Well, there's no great science here. They have two basic options - cut their costs or increase their income:
1. Cutting costs - People is the greatest cost of an agency. Luckily there’s a lot of them and they’re pretty tolerant and flexible. Reducing costs based on the same income level can be achieved by thinning out resource as far as possible, cutting corners and generally being less proactive with the client once the relationship has been bedded in.
This is a fairly common strategy for the latter years of an agency contract, especially where those contracts have been based on commission income because the more the agency reduces head count, the more margin they make on that commission income. Also, commission contracts rarely include a named set of individuals working on the business and so the resources of the agency are not accountable on these terms.
2. Increasing income - No chance of increasing the commission or fee. So, the agency can look to increase their income by building out their scope of work. This will normally include pitching for new disciplines like mobile, social and sponsorship. This is a valid strategy - especially as most contracts are moving to a more transparent fee basis, which makes it more difficult for the agency to ‘hide’ resource. The focus is therefore on improving income by expanding the different services that the client buys from the agency and increasing billings in that way.
You can certainly see this trend within media agencies - if you stroll into a major agency you’ll find all manner of impressive and wonderful job titles relating to retail marketing, PR, sports sponsorship, activation and content.
Why is this important?
This is important to know because you can start to spot the agency behavior here and you can see that depending on the agency remuneration model, they may look to grow margin in different ways. Which brings us full circle to my opening point - that meetings are being dominated by the agency account team pitching themselves into new disciplines under the “full-service” or “integrated / better together” agenda.
Innovative services also tend to be run at a decent margin - for a while - before the agency eventually has to concede (or cannot defend) its value to the client and then finds the offering commoditized and off they go searching for the next decent margin business to acquire and offer to clients.
The other lookout for clients is that whilst their agencies push them to buy ‘integrated services under one roof’ (arguing that ‘everything is media’), the unfortunate possibility is that the agency is providing a ‘jack of all trades, master of none’ offering. In a time of serious talent famine within major agencies - good people are leaving to be specialists on the outside - its tough to be a jack-of-all-trades because that does not seem to be where the talent is moving.
It’s therefore very difficult to validate the ‘everything under one roof’ approach because the best talent of any discipline is likely to be heading for a dedicated specialist or to set up their own thing. That’s not a new pattern; a big, broad volume offering has always had to compromise on quality.
So what can be done?
Agencies are traditionally poor at negotiating their own income contracts (but perhaps getting better). Just ask Sarah Billson and Alan Smith, both of whom regularly negotiate with agencies and have an archive of agency-fail anecdotes in contract negotiations that can make you weep.
This means agencies can sometimes start a new client relationship on pretty ghastly terms of business but with high hopes of improving them. However this is at tension with the procurement leader sat across the table who has achieved some good deal terms and is looking for y-o-y improvements.
If remuneration models, contracts and negotiation were set up properly from the outset, then the agency would be less likely to seek to up-sell you at every chance.
I appreciate that “All Marketing Must Sell” - but when your marketing service suppliers do nothing but sell to YOU then its a good indication that something in your relationship is broken and at the very least some tweaks are required to your terms of business and contract which should put you right.
Note: We do a little (one morning) training session on this, give us a shout if you want to find out more.
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