Why high inflation can be a positive for future agency and client relationships

It's time for agencies to price based on the value they add to their clients’ business, says Ogilvy's worldwide commercial director, James Cornwell

James Cornwell

While we all wish to see a peaceful end to the Ukraine/Russia conflict and move on from the remaining difficulties associated with the pandemic, the reality is we have some way to go.

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To different degrees, these two “events” are why we’re seeing some of the highest levels of inflation in recent memory, at least on a global scale – we have China largely still in lockdown, supply chain disruption, soaring demand for goods (granted, more so in H1) and, of course, increasing energy prices.

In the UK, the pound was getting smashed even before the mini-budget – Kwasi managed to wipe out a decade of gilt returns in a month and… actually, let’s not go there. Frankly, you could be forgiven for thinking you’re back in 1970.

How can this possibly be good for agency and client relationships?

Much has been written about the inability of agencies to secure terms of remuneration that better reflect the value they add to a client’s business, contributing significantly to the commercial challenges agencies currently face.

This is a result of agencies competing on price, rather than value, and not having the ability or belief to differentiate their capabilities. These are factors that go beyond the chemistry between agency and client teams.

Arguably, we are already at a point of no return. Agencies continue to try and compete with one another almost solely on price, yet most still have shareholders to satisfy.

If agencies/holding companies continue with this practice, then the only possible compromise is on their talent. This, ironically, is the single most important factor in how to solve their clients business challenges, differentiate themselves and survive long term.

Agencies can of course continue to look to improve operationally but more than 20 years of procurement intervention has meant that many working practices have already been optimised.

While many holding companies are currently restructuring, post pandemic, particularly in terms of property portfolios, this is just masking the problem.

Many of the big gains from transformational changes are more of a “one-off” and, while there are some material gains to be made, they are less likely to drive year-on-year operational efficiencies – you can only sell your office building once.

So, how can this possibly be good news? Without such pressure in the market, agencies would continue to price as they do today and ultimately die a death of a thousand cuts.

We will lose more and more talent from our agencies if we continue to work our people harder and reward them less. It’s not just wages that are under pressure, but discretionary spend, working practices and, ultimately, the very cultures employees join their agencies for.

I believe this sea change in the market will wake agencies from their commercial slumber.

Any business operating within such fine margins, cannot simply absorb the current levels of inflation and expect to survive. Only this month, the Advertising Association has issued a report raising concerns about how salaries are falling behind, not just inflation, but plenty of other attractive parallel industries to work in.

Yes, changing working practices and further efficiencies can still play a role, but ultimately, any agency that is not prepared to change the way they think and behave commercially, will simply not survive.

Agencies must learn to price based on the value they add to their clients’ business, or at the very least learn to negotiate, that is to trade rather than discount. Ironically, if all agencies were to start to do this the market dynamics would change – a refreshing alternative from the current race to the bottom.

Nobody likes to say no to a client, but there are ways to do so that lead to better outcomes for all – a negotiation doesn’t begin until one of the parties says no.

Ultimately, clients will benefit if agencies start to price professionally, at its simplest, smarter commercial practices will ensure agencies are able to continue to attract and retain the very best talent and thus better solve their client’s business challenges. 

While agencies need to embrace more innovative commercial models, rewarding the tangible business value they add to a client’s business, this approach works only if clients are happy to pay their agencies more than they do today – that is for exceptional results.

Many clients love to have this intellectual debate. However, this is often a hurdle that proves too much. This is where the industry, collectively, needs to get to.

But first, agencies have to start being more disciplined about how they price their services and the levels of “investment” being made, one step at a time.

Pitching for new business is a real opportunity for agencies and clients to redress this. Clients rarely pitch simply to save money, at least not when wrestling with their real business challenges.

Clients are looking for an agency they can enjoy working work with but, more importantly, they’re looking for a partner they believe can deliver on their strategic priorities enabling their business to flourish.

All at a competitive price, of course. Procurement’s job during the process, among other things, is to make agencies believe it is a price led decision, this is rarely the case.

I’m fortunate to work with many forward-thinking procurement clients, who are far more concerned about partnership, quality and business value, than saving x% through a tender.

For the record, I don’t blame procurement; why shouldn’t they keep asking for more if they’re successful at each ask?

Agencies must decide whether they want to thrive or die trying. Many are now at the precipice.

While critical to agency survival, this change is “win win”, as clients will only benefit from the quality of talent and innovative thinking a commercially smart agency is able to deploy.

So, why might inflation be a good thing for agency and client relationships? The current economic pressures, will mean these essential commercial behaviours are adopted far more quickly than they might otherwise be.

This article first appeared on Campaign UK