Phew. The IHS Markit/Cips flash (or interim) UK purchasing managers’ index for services rose to 47 in June from 29 in May. Not exactly heralding a return to normal but, as the 'Financial Times' says, we may have “moved closer to stabilising”. ('Downturn in UK business activity eases sharply in June').
Some of the services the purchasing managers might be buying again could include creative services bought from agencies. Which will give the agencies' business development team a lift but which may, yet again, lull the agency's management team into believing that the only way to lift profits is to grow top line revenue.
They'd be wrong. And here's why. A recent presentation given by Emeritus Professor of Cranfield University School of Management, Malcolm McDonald, at a webinar organised by the Business Marketing Club, on the subject of developing 'financially quantified value propositions' makes clear that, all other things being equal, cutting costs delivers higher profits. Figure 1 below delivers a simple but powerful message to that effect.
Let's look at the same topic but from a different angle. According to a recent survey of 130 agencies in advertising, design, digital, PR, media buying, and TV and film, carried out by Moore Kingston Smith last month, and reported in 'PR Week' the majority of respondents expect pre-tax profits to be in the range of 0 - 5%.
So that big account win, let's say worth £100,000 to the agency, is therefore only delivering £5,000 in profit. Another way of making that profit might be to look at removing, replacing or rebroking purchase items such as mobile phone charges, subscriptions, licenses, banking charges and insurance policies. These can all be reviewed relatively quickly and with a lot less wear and tear on the pitch teams.
Nothing can replace the euphoria of winning new business. It's fun, uplifting and great for morale. It's also exhausting.
Agency leaders should take the pressure off their pitch teams and place it on their finance teams (and themselves) instead. They should ensure that their procurement strategy is as robust and effective as their new business strategy.
Double your money: cut spend on purchases