Insights

How can this happen to an agency? The unintended consequences for agencies of major clients.

I was saddened to see an agency I worked with many years ago has gone into administration. Around 60 people were made redundant. That’s so sad and devastating for many of those people. A scary time with rent or a mortgage to pay, the fear of being unemployed and looking for a new job. Though for some it may be the fresh start that they needed!

The agency was not a naïve start-up – they had been trading for probably 20-25 years so a huge wealth of experience within the senior team.

So why did the agency go into administration?

I don’t know the full details so there’s probably more to the story, however …..what I understand is that ONE major client stopped spending and they accounted for well over 50% of the revenue, possibly more. In addition, there was no notice period for the client. Why? How can that happen?

Having worked with a huge number of agencies and spoken to many more, I’ve seen so many other agencies make similar mistakes. One client gives you more and more work over time. Wonderful. They spend more and more money with you. The agency switches more people onto resourcing that client. More senior agency talent is moved to look after the client, to protect and nurture this highly valuable piece of business. More business continues to flow to the agency from this one client. The agency becomes increasingly dependent on this one (or sometimes two clients) at the same time the agency’s finances can look great on paper. And so it goes on…. Or does it?

We assume tomorrow will be the same as today. However, things change, people change, businesses change, relationships change. Many agency folk are optimists which is wonderful but we can’t afford to bury our head in the sand.

In parallel with the over-dependence come some unintended consequences. Because the client is so important to the agency other changes typically happen within the business.

• No rate or fee increase to the major client because of a fear of ‘rocking the boat’.
• That lack of fee or rate increase then spills over to other agency teams working with other clients. Their fees and rates are less likely to be increased.
• As a consequence, the agency’s profitability declines.
• The agency’s work becomes increasingly safe and risk averse, especially on the major client (exactly what the majority of clients do not want)
• The agency’s people move from being ‘partners’ to being ‘suppliers’ and ‘YES’ people – scared to push back for fear of losing the client.
• The agency’s culture changes and their confidence declines.
• The agency can become a factory producing safe average work.
• The agency’s people start to wonder if this is the agency in which to build their career.
• The fear of losing the major client leads to a paranoia for the senior agency team.
• Eventually recognising the over-dependence, the agency invests in a major new business push. However often they pursue poor quality new business opportunities as chasing revenue becomes the be all and end all.
• The agency’s reputation declines.
• The vicious spiral downwards continues.

This can happen over several years – like a creeping cancer in the business. It’s so slight nobody notices the downward trajectory in the early days as they are so busy working on the business for the major client.

Sometimes agencies post-rationalise their over dependency and live in denial. For example, if 40% of the agency’s business is with a major client like Diageo, their argument is that it’s spread equally across 4 different brands such as Gordon’s, Smirnoff, Pimms and Baileys so only 10% is at risk, so there’s no problem.

I reckon the thinking is flawed. A new Marketing Director or new client CEO decides to move the business and all the business can be lost overnight, not just one brand.

A few suggestions to agencies in the early days of recognising their over-dependence:

• Ask yourselves “What if we lost client X tomorrow, what would the likely impact be on us?” “What can we do to avoid this situation?”
• No client bigger 12-15%. You need a good spread of business. That way when you lose a client it’s a small hurdle to overcome but not devastating for the agency.
• If a major client gives you more and more work that’s wonderful. However, ensure your contract and notice period are sufficient.
• Focus on growing the other smaller clients to reduce the over-dependency.
• If you are over-dependent then build up a financial war-chest for that rainy day – it’s a question of when the rainy day happens, not if the rainy day happens.

To conclude, over-dependency is one of the most common mistakes I see agencies make. Are there other common mistakes agencies make? You bet!