Agencies Adapt to More Cost-Conscious Clients
Charting the future of public relations
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Agencies Adapt to More Cost-Conscious Clients

Twelve months ago, these agencies were selling public relations as a value-added service; today it’s being sold as a commodity—buy 11 months, get the 12th month free. What’s next? A free toaster oven?

Paul Holmes

Four of the top 20 public relations firms in the country recently competed for a half-million dollar piece of business. It was the kind of account for which they would hardly have broken a sweat 12 months ago, when clients with half-million budgets were standing in line for the chance to audition before agency new business committees. But times have changed, and these agencies pulled out all the stops. The winner was hungriest—it offered to provide the first month’s service free of charge.
 
Such offers have become almost commonplace in today’s dire economic climate. Other agencies report competitors’ offering free months, even a free quarter, as well as throwing in some services for free. Twelve months ago, these agencies were selling public relations as a value-added service; today it’s being sold as a commodity—buy 11 months, get the 12th month free. What’s next? A free toaster oven? A set of steak knives?
 
Agencies that sell themselves short in this way may perhaps justify it by claiming they want to send a signal to clients that they’re hungry for the business, but there is a fine line between hunger and desperation—desperation rooted in the belief that your agency doesn’t really have anything special to offer in the way of insight, ideas or execution.
 
“There’s a feeling that more pitches are based on price, not quality of thinking or creativity,” says Rich Jernstedt, president of Golin/Harris International, who worries that “cutting rates or giving services away sends message that we are desperate and that public relations is not as professional or critical as other consulting services.”
 
But Jernstedt also sees some advantages to increasing cost-consciousness on the part of clients. Like many other industry leaders, he believes rates became inflated during the boom of the late 90s. Moreover, increased sensitivity to cost may help clear up budgetary issues early in the relationship—before they become a problem—and if the focus is on value rather than on price, it may help agencies sell in measurement tools.
 
Says Helen Ostrowski, who heads the U.S. operations of Porter Novelli, “The market is definitely more price sensitive than a year ago, although I wouldn’t say this necessarily translates to pressure on agencies to reduce pricing, but more on ensuring they’re getting the best value they can for the resources they have available.”
 
Clients are more interested than ever before in how agencies are spending their money. More and more new business pitches include—and in some cases are being run by—financial people rather than corporate communications people. Jernstedt says his people have seen more procurement people in pitches “usually with a total focus on costs, not value.”
 
“There are a few more of the internal procurement folks out there, as well as consultants who bill themselves as brokers for the process, but who are serving as procurement consultants and building databases from the information they collect from agencies regarding billing structures,” says Ostrowski. “However, prospects by and large are more value conscious than price conscious—it’s less about questioning billing rates and more about value: what kind of results can I expect and how will this affect my business; how can you, agency, be efficient in working with other communications disciplines; and what will the agency will do to get the relationship off the ground successfully.”
 
Almost all agencies have responded by cutting costs—something they would undoubtedly have done anyway, given the tough economic climate—and passing on many of the savings to clients.
 
“One of the things we have done is try to eliminate the kind of costs that don’t add a lot of value to our programs,” says Bill Chess, chief operating officer at Ogilvy Public Relations Worldwide. “Those are the kind of costs we need to squeeze.” To do so, Ogilvy earlier this year appointed its own procurement officer Jim Berlangero—a decision that came out of an audit conducted by PricewaterhouseCoopers. Chess felt Berlangero could help Ogilvy manage its own bottom line; the fact that so many clients have been so appreciative of his role is a bonus.
 
“Jim an I have had meetings with pharmaceutical clients who are very responsive when we tell them what we are doing to cut travel costs or telecommunications costs,” says Chess. “In some cases, we can work with the clients and get better rates jointly than we could get individually. Those are things we can cut without having an impact on the quality of the programming.”
 
Berlangero, for his part, says the challenges of managing procurement expenses are no different in the public relations industry than in any other business. “The process of negotiation is the same. You try to minimize the risk and maximize the benefit. You negotiate contracts together with your clients in areas that you have greater leverage.”
 
The new cost consciousness has also raised questions about the make up of the account team, with demands for greater senior level involvement.
 
“Prospects are looking for efficiencies,” says Ostrowski. “They want to know the broader offering an agency can provide, how they manage the team—a lot more questions about the team, the members, who does what, and they certainly are looking to consolidate agency relationships to further save money.”
 
Porter Novelli has several initiatives in place that respond to the new price sensitivity. The firm offers what Ostrowski calls “a disciplined program of investment for major new clients,” under which the firm invests time in the relationship, charging less for activities that help it come up to speed on the account. It also offers several models for performance-based compensation that link payment to the client’s success satisfaction, and is providing stronger measurement models.
 
“We have increased education of staff about budgeting and billing to ensure optimal fiscal
management of clients’ budgets as we start out the relationship,” says Ostrowski. “We also created new positions of financial analysts to assist account teams and clients with financial management.”
 
Ogilvy has taken a similar step, creating a new business manager role—also at the suggestion of PricewaterhouseCoopers—to handle the financial aspects of each client relationship.
 
Says Ogilvy president Bob Seltzer, “More and more, clients want a guarantee they will have senior level involvement on their accounts. In some cases, they have asked us to write into the contract how much senior management involvement they have. That means our senior people have to be more billable than they used to be.”
 
Office general managers, who were 25 percent billable are now 50 percent billable, Seltzer says. To accomplish that, the agency has appointed business managers for each of its accounts—individuals who are responsible for budgeting and billing. Says Bill Chess, “We now have someone on every account whose core competence is accounting. That frees up everyone else to focus on delivering quality programming.”
 
Bob Muldowney is one of Ogilvy’s business managers, an MBA whose background is in finance rather than public relations. “We help clients get more timely information so they can understand what is happening financially. We help make sure we are billing in a more timely fashion.”
 
While there is concern about the desperate measures some agencies are taking to give themselves an edge in the new business process, there is also a feeling that the new cost consciousness is a good thing, leading to improved efficiency and greater fiscal responsibility.
 
“While everyone was very happy with the heyday of the late 1990s, one could argue the growth we all experienced was not sustainable and possibly even a bit over the top,” says Ostrowski. “Certainly with the meltdown of the dot-coms, and the resulting bad debt many agencies were saddled with, one could argue the growth wasn’t as great as it appeared. Now, budgets appear to be more solid, and that’s a good thing. Agencies need to focus on demonstrating they can build enduring and successful relationships with new clients, so anything agencies can do to show they run a fiscally fit ship is critical.”
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