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HOW AGENCIES ARE REACTING

I’ve been chatting recently with friends in top agencies (with a mix of technology clients in the Business to Business and Business to Consumer space). They have reacted with a short-term strategy to this abrupt change in the business climate. Agencies have found, not surprisingly, that competition has returned.

Last year start-ups would line up outside the door and ask to present their credentials so that agencies might consider taking them on. Agencies were routinely charging $50-$60K per month retainers and finding they barely had the staff to provide adequate service. If a mediocre person were available, s/he would be snatched up. In a conversation I had with a corporate manager, he said that he was brought on to replace a top tier agency receiving those fees -- fees that the company felt were completely out of line for the services provided.

One agency VP said that the firm was just asked to compete for a new client and was told there would be four other contenders. By the time the presentation was due, the potential client had invited ten firms to bid for its business. Last year, that client would have been happy to find one firm that could take its business -- without having to wait.

Budgets are coming down -- The monthly retainers companies are willing to pay under new contracts are being slashed dramatically. One executive mentioned the numbers were half of what they were last year, and the potential client expected a similar level of service as had been provided in richer times. Considering how competitive salaries and benefits are, maintaining profitable operations is becoming a daunting challenge.

Agencies/Staffing -- Last year every agency was in a hiring mode. Recruitment and retention were the universal challenges and agencies were hiring in house human resource executives to focus on recruitment or redirecting HR staffs to address those needs as best they could. That has turned around. Most of the firms I talked with said they were fully staffed. In fact there have been scattered layoffs where firms were heavily dependent on dot com business or where the management was lax in monitoring expenditures. (The comments I have heard indicate that if an outstanding candidate becomes available, the firm will move quickly to hire that individual, especially at the upper middle ranks -- generally a supervisor.)

There are agencies still aggressively hiring. Those are the firms, in many cases, who were not able to rise to the challenge of marketplace competition. They have had a history of not offering sufficiently attractive compensation packages, or their processes were too slow or they were not perceived as a top tier employer (for a variety of reasons). There may be a short window in the first quarter for these organizations to recruit talent and take advantage of a softening market.

Plan for Slowdowns -- So far, no agencies have yet to mention significant cutbacks of existing contracts. However, my sense is that budgets supporting marketing initiatives that are up for renewal will be carefully scrutinized and trimmed -- if at all possible. The exceptions will be in those highly competitive segments where the agency is integral to a momentum building strategy, or in niches that are not experiencing slowdowns.

It would be prudent for agencies to be financially conservative and curb expenditures based on anticipated budget reductions and watch for signals from existing clients. So far, corporations are demonstrating fiscal prudence by imposing hiring freezes and limiting increases in overhead. Should the economy more severely impact these companies, existing outside services will be cut followed by tighter controls on discretionary internal expenditures.

As we wait out the economic uncertainty, base salary figures will stay where they are. In fact, toward the end of the third quarter salaries that had been creeping up fell back and stabilized at mid summer levels. With companies demanding the same service for half the retainers charged, there is no way agencies can afford to increase base salaries. Increases will come in the form of performance-based incentives tied to profitability or contributions to increased revenue.

For those organizations able to take advantage of this market, the time is right to search for excellent candidates. These are the top performers who were wooed to exciting startups that have run out of funding or that have decided not to go public. Too energized to sit on a bench, these producers are ready to move, but not to repeat last year’s mistake.