Are agencies well placed to weather spiralling inflation?

After a rocky period in the wake of the pandemic, prospects for the agency sector looked much more positive going into 2022. The most recent IPA Bellwether report, for the third quarter of 2021, showed total UK marketing budgets increasing at their strongest rates in four years.

However, this week we learned that consumer inflation reached its highest levels in 30 years in December – increasing by 5.4 per cent - driven by rising manufacturing costs related to spiralling energy and labour overheads. With major brands looking to keep a lid on their spending, should agencies fear that there will be resulting downward pressure on their own fees?

Richard Robinson, the managing director of Xeim Engage, which includes the Econsultancy and Oystercatchers businesses, thinks that they should be alert to the issue: “Clients are looking at their total bottom line, inflation’s going up so they’re looking at everything from wages to supply chains to energy and trying to work out where the price rises that are absolutely necessary are going to come from. It’s not that creativity will be singled out per se, but clients are trying to work out where they will take costs, and where they will reduce or get rid of costs.”

From philanthropic to commercial

Robinson says that this could require a change of attitude from many in the agency sector, which involves moving from a “philanthropic approach to being more commercial”, investing more seriously in roles such as commercial director and being willing to “thump fists on the table” during financial negotiations with clients: “They need to be much more commercial, and see the reality of what they’re selling. A commercial product rather than a creative one. And once they’ve embraced that, and realise that they’re one part of an entire financial model created by the client, it will liberate them creatively. I would like to see agencies employing more commercially-minded people.”

Tina Fegent, who has 30 years’ experience consulting on marketing procurement issues, is less sure that inflation will be a significant issue for agencies. She says she’s spoken with one major client, an FMCG advertiser, which is considering off-setting some of its rising manufacturing costs by making marketing savings but feels that in many cases it’s a seller’s market for agencies: “I’m seeing it as a good time for agencies, in terms of big clients with big spends it’s busy out there. And, from a procurement point of view, it’s a seller’s market. And I also think agencies have earned the right to say ‘no’ a bit more, because of the shortage of talent.”

Robinson says that this talent shortage is an issue for agencies due to rising costs for people but that it will be resolved as we move further into 2022. He says: “The recruitment market is over-cooked. Some of the prices being paid for fairly mediocre people is eye-watering. There will be a reckoning in six months or so, where if people haven’t delivered they will be out. We’re almost moving to a football manager view of hiring into agencies.”

Not all "doom and gloom"

But, more positively for agencies, there are potential savings to be made in areas such as the cost of property and work-related travel as they adjust to hybrid working models. “This isn’t a doom and gloom situation,” says Angus Crowther, the co-founder of marketing advisor Alchemists.

However, Crowther does believe that now is a good time for agencies to build closer commercial partnerships with clients to guard against being singled out for cost-cutting. He worked with the IPA on its Pricing for Success report, which was released in 2020 but contains many insights which remain relevant today. For instance, the report recommends “partnerships comprising several commercial components, should be built with clients; different components can be expanded or cut according to client and business needs. This allows agility and flexibility and forms the basis of the commercial relationship between agency and client.”

There’s still room for progress on this. Earlier this month Julian Douglas, the current IPA President, identified in his Pitch Positive pledge that this starts at the beginning - with the pitch process: “Over the years, there have been many attempts to improve the agency selection process. Despite best intentions, diligent work, and many best practice guides, little has changed.”

Charge for outputs

Angus Crowther argues that agencies have an opportunity in making changes to the ways that they charge clients: “They need to stop charging purely for time of people or individuals, as few clients will accept an increase in agency fees. Better use of tech will be critical and agencies’ ability to start charging for outputs and outcomes will be ever more critical.”

This should include, according to Crowther, a greater emphasis on payment-by-results when negotiating contracts during the selection process: “Clients are already concerned about their current fee amounts and to increase these due to inflation will be a very difficult ask. However, those agencies that can link their work outputs and outcomes are going to be in a much better position to ask for greater income if their work justifies that. Many more agencies need to grasp that nettle and those that are still saying the gap between what the agency does and the impact it has on a client’s business is too wide are getting it wrong.”

In addition to a greater focus on commerciality, Richard Robinson feels that agencies can offset any concerns about downward pressure on fees by seeking assurances from clients that they won’t pitch the business for an agreed period, say 24 months, in order to provide greater stability for the agency: “The best client/agency relationships are the ones where you can walk in and have that conversation. Are we being pitched this year? No you’re not. Worse than this is a double negative situation where you’re holding on price but not having the conversation about not being pitched. The win-win is if you hold your price you have to have a clear assurance that you won’t be pitched.”

And Angus Crowther agrees with Tina Fegent that, overall, it’s a positive time for the better agencies in UK advertising and media: “If you’re good enough then it’s a fantastic market. Those that are struggling probably need to look to themselves,” he concludes.