Why cost savings are counter-productive

February 2018

Tom Lewis has worked as a CFO in marketing services businesses for over 20 years. As Finance Director of the IPA, he established benchmark data on how top agencies think and act differently to outperform. He is now a consultant to agencies seeking to improve their commercial performance.

We know that the best advertising is created when there is a trusting relationship between the client and the agency; trust is needed because the relationship is collaborative not transactional – client and agency need to work together as a team.

Client buying teams (Procurement) will often seek to reduce the price paid for the advertising services on numerous occasions – multiple rounds of bids, requests for fee reductions, benchmarking comparisons; it can feel like it never stops.

My hypothesis is that client fee antagonism (pitches with no budgets, constant requests for fee reductions) may be the single biggest destroyer of trust between a client and their eventual agency; the inevitable result of this is withdrawal of discretionary effort by the agency and therefore loss of potential value created for the client.

Put bluntly, cost savings are counter-productive.

To clarify this provocatively-worded point, excessive pursuit of cost savings will have a counter-productive effect when applied to collaborative suppliers where the organisation’s aim is to secure access to motivation.

 

This hypothesis is grounded in several principles:

  • Money speaks to a sense of self worth; take money away from someone and they feel less good about themselves and therefore less motivated
  • Loss aversion; we feel losses more strongly than gains. So requests for fee reductions have a disproportionately powerful effect on the recipient of those requests.
  • Stability / predictability; we are destabilized and demotivated by unpredictable events; requests for fee reductions are most effective when timed to be least expected.
  • Resentment; if we feel that someone is taking advantage of us but we are not in a position to respond, we feel resentful and less inclined to trust or give discretionary effort