Profitable growth in testing times: 5 lessons agencies can learn from the last crisis
I was catching up on my Agency Hackers community feed last week and there was a lot of talk about “growth”. (Don’t say it too loudly, touch wood, etc.)
Mike Lander shows us what lessons history can teach us about market recovery
As we consider a cautiously optimistic return to normality, I started thinking about what this might look like for agencies.
I asked my network, “As the markets recover, are you planning to increase headcount in the next 12 months?”
Here's what they told me: 29% believe there's too much uncertainty. 40% of my sample said they were keeping headcount growth below 25%, while 22% said they were considering growing their teams 25-50%; just 9% said they were looking to hire more staff than that.
The results (albeit pretty high-level with 35 voters) appear to be telling us:
- There is still a lot of uncertainty (29%) and firms are rightly being cautious about growth expectations.
- The great news is that the vast majority (71%) are feeling confident or very confident about growth.
But let’s go back in time for a second, to late 2009...
We’d just started to see a glimmer of recovery following the worst economic crisis since the Second World War.
Back then, a lot of big brands (and procurement teams in particular) started to negotiate extremely tough deals, slash costs and stretch payment terms. The “sword of Damocles” was wielded by big companies with significant force.
This impacted agencies over the following decade, leaving many working with incredibly tight margins and leading to a number of mergers and closures.
I think you know where this is going...
I don’t want to be the party pooper, but we have to make sure we don’t repeat history.
One of the key questions that should be on the minds of agency leaders and sales/commercial directors this time is:
“What should we be doing differently this time, when negotiating deals with clients to ensure they’re profitable/sustainable and not just helping us run faster to stand still?”
In this article, I’ll cover:
- What lessons can history teach us about market recovery?
- What are brands/procurement likely to be looking for commercially?
- How should agencies be preparing to negotiate profitable deals?
What lessons can history teach us about market recovery?
Let’s look at a few of the stats based on previous recovery cycles:
- 17% of companies didn’t survive the last big recession (2007/8).
- Circa 80% of those companies that did survive the 2007/8 crash had not regained their pre-recession growth rates 3 years after the recession.
- Only 9% of companies flourished after a slowdown.
- Industry consolidation increases as big companies acquire smaller, recession-hit firms.
- The debt-mountain creates “zombie companies” which accounted for up to 20% of the business economy last time.
Sources: HBR 2010 study, Datastream, Mike Lander prior experience
The key lessons relevant to this recovery, I believe, are:
- Once all the financial support systems are taken away, we’re likely to see an increase in insolvencies in 2021 (buyers and sellers both large and small).
Tip: Credit scoring your clients and not being over-exposed becomes critical.
- For the survivors, cash reserves from trading activities will have been depleted and leverage (e.g. CBILS, Bounce Back loans, etc) will have increased significantly.
Tip: Cost reduction and payment terms will be firmly on the corporate agenda, so sharpen your negotiating pencil.
- It’s a buyers’ market.
Tip: Focus on your niche capabilities to cut through the noise.
What are brands/procurement likely to be looking for commercially?
Buyers (procurement and functional heads) will have been tasked with cost saving targets of between 10% and 30% on previous rates. However, they can’t simply “buy cheap” at the expense of quality.
If the pattern is similar to the last recession, as a procurement buyer, I believe the following will be on the corporate shopping list when talking to agencies:
- They’ll want flexibility and short-term agreements due to the continuing uncertainty.
- They’ll want more accountability from suppliers including performance related commercial models.
- The pros and cons of “outsourcing vs insourcing” marketing models will be back on the Board agenda.
- There’ll be a big debate about the best mix of Brand vs Performance based marketing activity.
How should agencies be preparing to negotiate profitable deals?
If there’s only one thing you do after reading this article, it should be preparing thoroughly; whether it’s with a new client or re-negotiating existing agreements.
A practical 5-step model to prepare:
- Gather evidence about the tangible ROI you deliver - this is critical if you’re going to have any chance of defending your prices/margins.
- Review all your existing major contracts. Work out where clients may try to squeeze your prices/margins and prepare where you can yield in exchange for something else of value (e.g. longer term commitments).
- Review your commercial models rigorously, e.g. bundled “end-to-end” full service models, fixed price retainer plus performance related bonuses, service credits, etc.
- Audit your internal and client facing efficiency and innovation. Can you transform your delivery model to provide the same service for less and/or more insights/performance?
- Build out your negotiating variables, BATNA and MDO/LAO (feel free to contact me for more explanation if required).
And most of all, keep building your cash reserves – corporate payment terms are going to be challenging for some time.
Encouragingly, a significant majority of agencies surveyed are optimistic about growth potential.
However, history teaches us that post-recession recovery means tougher negotiations — and it’s likely to be a buyers’ market. Therefore, thorough preparation, demonstrable ROI and clear negotiating strategies are critical to agency success.
If you have any comments or questions about anything in this article, I’d love to hear from you. Drop me an email: firstname.lastname@example.org
Mike Lander is the CEO and founder of Piscari, which empowers agency leaders with better negotiation skills and insights into how procurement professionals work.
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