Marketing and advertising agencies continued to experience depressed profit margins in 2016, despite many reporting improved growth in fee income. According to the latest Kingston Smith survey, which analyses the annual performance of over 250 marketing service companies globally, five out of the eight sectors surveyed saw operating profit margins fall, despite all sectors managing to grow total fee income compared with the previous year’s financial performance.
Daniel Marcus, CEO of Magnetic Software – a business intelligence platform designed to enhance efficiencies and profits for marketing agencies – says that while recent economic conditions have undoubtedly proved challenging for businesses across the board, advertising and marketing agencies are, in particular, finding their margins being squeezed due to changing client behaviour, increased competition and more stringent procurement practices in the industry.
“Companies experiencing budget restraints will often cut marketing spend first, opting to run certain campaigns in-house instead of outsourcing to an agency. There has also been a growing trend for clients to opt for project-based engagement, rather than retainers, which can make it challenging to optimise resource efficiencies.
“With each line item, including staff costs, being closely monitored by clients, agencies are no longer able to achieve the markups that existed ten years ago.”
Marcus points out that agencies are also experiencing continued pressure on salaries, driven predominantly by a widespread skills shortage. “The proportion of fee income spent on staff costs, according to the Kingston Smith survey, reached a record high of just over 60% across all sectors combined. This pressure is then further compounded by the increasing need to use freelancers – most of whom come at a higher cost – on more project-orientated work.”
While many agencies feel helpless in countering these margin pressures, Marcus believes that much can be overcome through improved process management and controlling the controllable elements within an agency. “The reality is that agencies have little to no control over their macroeconomic environment, but are able to change the way they run their business.”
He adds that agencies also need to be wary of over-servicing clients in an attempt to win or keep them. “While winning and retaining new business is vital for the future success of any agency, if the over-servicing of clients begins to eat into agency profits, this strategy is essentially counter-productive. Unfortunately, many agencies aren’t even aware that this is happening because they aren’t able to accurately track the number of hours that are spent on acquiring and servicing each client.”
This is where Marcus says the right agency workflow platform can make a profound impact on an agency’s financial success. “A workflow platform is no longer just a way to monitor employee tasks. From key sales metrics to instant profitability reports, innovative software such as Magnetic can help agencies manage projects effectively to deliver on time and within budget. With the ability to track multiple areas of the agency at any moment, users can now work proactively, not reactively.”
Marcus concludes that with this level of technology available, agencies really don’t have any excuse to be working inefficiently. “Agency efficiency begins and ends with controlling the controllables, and with tailored software available and accessible to agencies of all sizes, it’s never been easier.”