As wage bills rise, agencies are warned they face ‘worst-ever’ recruitment crisis

The findings come after last week’s profit warning from S4 Capital, which company spokespeople blamed in part on rising staff costs.

The WFA study – Media’s Got Talent? – surveyed 400 executives across media, adtech, agencies and brands, with its director of global media services Matt Green telling The Drum that the findings showed how agencies are particularly badly affected by competition for recruits.

”The talent crisis is affecting all parts of the industry and clients are feeling the pinch within their internal global media teams,” he says. ”But, as this research shows, the impact is particularly pronounced on the agency side and this is having a profound impact on the ability of clients to execute campaigns globally.

”While the industry couldn’t have predicted a global pandemic, this study also identifies intractable, but more predictable, issues that have had a dramatic impact, including training, talent management and even a perceived lack of purpose. These factors need to be addressed for the health of all our businesses and in the interest of a stronger client-agency dynamic.”

Why are agency businesses in a talent crisis?

The survey found that respondents blamed poor training (76%), talent management (68%), poor client behavior (61%) and competition from tech firms (58%) as the primary factors behind the crisis.

Others pointed to the industry’s notoriously poor work-life balance for staff (76%), a lack of flexibility for staff (73%) and opaque career paths (72%) as barriers to swifter recruitment.

67% of all respondents reported that a lack of staff and the higher cost of hiring talent that is available were major barriers to business growth.

“We know the impact this has on future growth, so it is vital that businesses start to invest in talent in a more meaningful way, ensuring they strike a better balance between specialists and all-rounders, youth and experience, expertise and attitude,“ says Gerry D’Angelo, vice-president of global media at Procter & Gamble.

How does this limit business growth?

The impact of the rising cost of staff (and the outright lack of staff) was most evident in last week’s profit warning from S4 Capital. The parent company of digital agency Media.Monks told investors that its wage bill had risen high enough that it needed to reassess its operating margins. In response, it has put in place a hiring freeze and lowered its profit expectations by almost $50m.

According to Forrester’s global agency analyst, Jay Pattisall, agency networks and holding companies (S4 included) have been particularly exposed to fluctuations in the North American labor market.

”Digital networks, holding companies and consultancies range between 50% and 75% of their revenues from North America,” he explains. ”That does make them susceptible to the North American labor market.”

Competition for skilled recruits in digital roles has been especially fierce, he notes, but those roles are key to businesses growing their digital transformation or digital media offerings. ”As agencies are competing, they’re competing for digital talent. That falls in the wheelhouse of Media.Monks and its core set of competencies.” That side of the business, he says, ”is having the most acute time attracting talent”.

S4 may be more exposed to rising staff costs because the company had grown through multiple acquisitions, he says. Agencies that had recruited new staff directly, rather than absorbing teams from businesses they had acquired, would typically be able to exercise closer control over wage bills.

Interpublic Group and Publicis Groupe both reported that they had hired thousands of new recruits last year, but each increased their labor costs by less than 2%. Pattisall says: ”When they grow, they’re buying or acquiring growth. But they’re also acquiring the necessity to maintain a labor force.”

Barry Dudley, a partner at consultancy GreenSquare, tells The Drum that failing to keep a lid on staff costs would damage investor confidence in S4. ”It is suffering from a set of external factors that are hitting pretty much all businesses at the moment. But it has added a few self-inflicted wounds on top of that with its internal accounting and financial controls not keeping pace with its rapid growth. Perhaps this was again part of the reason for the latest share price drop – it’s one thing to see revenues shift up and down in forecasts, but your staff costs are not unknowns even if it is seeing upward pressure right now.”

This could, in turn, force its leadership to rethink S4’s aggressive acquisition strategy, says Dudley. ”To date, it has ‘merged’ with businesses by paying 50% of the price for a business in cash and 50% in S4’s equity. The equity portion has just got a lot more expensive for S4 with a share price at £1.30 as I write, versus the £8.78 at its peak last October.”