Is this the silver bullet for agencies?

Name me a topical issue that agencies currently face – staff churn, diversity, work-life balance, digital transformation – and I’ll tell you where it comes from and how to fix it.

A silver bullet to everything? 

That’s right.

OK, maybe not so much a silver bullet, but a single, underlying issue for agencies from which all other challenges flow.

Fix that issue, and you are then in the right place to start addressing everything else; you will have the means and resources to start tackling any current challenge your agency is facing.

The problem is a widespread lack of agency commercial skills. Agencies simply don’t know what they are selling and don’t know how to price it. In a race to the bottom of cost-plus billing of “time spent”, ever-decreasing margins make it impossible for agencies to solve other, more worthy issues, because there simply aren’t the financial resources available to address them properly.

Work-life balance? Requires a shift to an effectiveness-based pricing model that supports higher margins and a moderate-hours culture.

Staff churn? Requires investment in a strategic HR function that recruits and retains top talent with incentives and above-average rewards for above-average work sold for above-average prices.

Diversity? Requires higher margins to support attractive salaries, career progression and investment in professional training and qualification.

These are all issues that agencies need to address, and the greatest challenge is not so much identifying the solution as funding it. The solutions are all relatively straightforward; the problems are not unique to marketing services and other sectors have managed to address them successfully.

The single, most fundamental underlying issue for all these challenges is money – the ability to invest in the business. Unfortunately, that approach simply doesn’t work for agencies on the current model.

Few agencies are run on a long-term growth-and-investment model; most follow a short-term efficiency and cash-maximisation model.

It’s almost as if an industry based on persuading clients that marketing is an investment to be maximised that repays in the future, rather than a cost to be cut, didn’t get the memo that training in commercial skills is an investment that repays in the future to be maximised, rather than a cost to be cut.

Instead, many agencies hand out over-inflated job-titles with below-inflation pay rises and make their profits on the back of unpaid staff overtime.

How the industry got to this ever-decreasing circle of lower prices, cost-cutting and investment-slashing is moot, the only question is whether the machine can be put into reverse.

The sector is mature, with holding companies looking more at consolidation and efficiency gains than at maximising growth. There simply aren’t the funds or the risk appetite to make investments in greater commerciality. In owner-manager land, where there is more freedom to take a different approach, the knowing-doing gap remains strong.

Agencies first need to get better at being commercial; they need to acquire skills in training on pricing, selling and negotiation, formalise a centralised pricing function and establish a professionally trained sales force incentivised to maximise selling prices.

A more commercially successful agency will start to charge higher prices and make higher margins. This surplus needs to be reinvested in talent recruitment and retention: hire great people and pay them well when they do great work. A proper talent strategy will also reduce staff churn and ultimately become self-funding.

Better talent, better trained and more motivated staff, will then produce better, more effective work for which the agency can charge an even greater premium.

With higher margins, agencies can start to walk away from the sort of low-grade work that they have historically had to accept in order to keep the lights on every month.

It’s a simple virtuous circle: better commerciality leads to better margins which, when invested in better talent, leads to better effectiveness, for which a higher price can be charged.

There is an element of bootstrapping to all this. Cash-poor agencies need to find the resources from somewhere to start the process of commercial upskilling.

But the much greater challenge is the change in attitude needed at the very top. Agency heads need to make a fundamental change in the way they approach running their businesses and take the uncomfortable risk of shifting to a different revenue model.

Additionally, the industry membership organisations need to focus on helping their members become more profitable (except where Charter status prevents them from doing so).

They need to recognise that improvements in the practice of marketing services accrue to clients, not to member agencies. Agencies benefit commercially from their membership organisations when they learn how to sell their existing services more profitably.

Doing better work for the same price is good only for clients; achieving a better price for the same work benefits agencies.

Membership organisations, with their access to member insights, have a unique opportunity to document best business practice by correlating agency behaviours to successful outcomes:

• Codify best commercial practice to agency financial success (identify the activities that lead to higher revenues per head)
• Codify best talent practice (practices that lead to lower staff churn)
• Codify best effectiveness practice (what do agencies that win more awards do differently).

Put these three sets of insights together, and you will have a comprehensive training programme in the business of running a marketing services agency.

Better commerciality underpins all of this. You can invest only the funds you currently have, so if you are short of investment funds, you need first to improve your commercial skills before moving on to addressing the other challenges whose solutions involve spending those funds.

Tom Lewis worked in senior finance roles in marketing services businesses for 20 years, including as finance director of the IPA. He now advises companies on profitable growth.