Marketing services firms hit by macroeconomic conditions

09 February 2016 4 min. read
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Marketing services companies find themselves increasingly under pressure as a range of macroeconomic and structural challenges emerge. Macroeconomic conditions, which include the expected increasing cost of borrowing, exchange rate fluctuations as well as downturns in emerging markets, rank in the top five biggest risks identified in a recent survey by BDO. Liquidity and cash flow issues come in as the biggest risk to the industry, with clients payments that push out further and further while suppliers tend to expect relatively short payment schedules.

In a recent survey, titled ‘Tackling Risk Head On: Marketing Services Risk Factor Report 2015’, BDO looks into the key development in the marketing services landscape. The research considers financial data from companies across the globe, complemented by the findings from several interviews held with executives of marketing services companies, for insights into the risks affecting their short and long term growth.

The survey identifies a number of risks that the industry perceives will likely affect their operations in the coming years. The risks in part highlight that the industry is going through a period of significant and disruptive upheaval as new technologies and ways of working challenge traditional practices, while macro-economic conditions – such as exchange rate volatility – create uncertainty. The result of macroeconomic conditions is that the global ad spend has been revised down, now estimated to be a rise of 3.8%, down from the 5.1% anticipated at the beginning of last year. Volatility in emerging markets, particularly Russia, Brazil and China, are contributing factors.

The top 20 risks identified by marketing services companies

The biggest risk that marketing services companies identify is liquidity and cash flow, as cited by 72% of those approached. Marketing services companies find that clients are less and less willing to provide relatively short payment deadlines, while suppliers tend to expect payment within 45 days. Particularly multi-national clients – potentially seeking favourable exchange rate changes – seek longer payment rates of 90 or 120 days. As a result, marketing companies find themselves with cash flow and liquidity issues.

The second equal risk for the market is thought to be currency exchange rate fluctuations and access to growth financing, while the number four risk is cited as interest rate fluctuations. The three issues are related to each otherwhile interest rate hikes improve the strength of the US dollar, it creates exchange rate fluctuations as well as increases the cost of debt. With respect to exchange rate volatility, it is particularly the strength of the dollar and euro against currencies in emerging markets across Africa, Asia and Latin America that is seen as problematic.

The issue of uncertainty – what is favourable one year becomes unfavourable the next – requires companies to invest more into repatriating profits and to deal with the tax and currency issues arising. The latter is a result of expected increases in the cost of money as interest rates are again pushed up from their historically low levels in the US and the UK. The consequence is that the servicing of debt for marketing services companies becomes more burdensome, requiring them to consider other forms of financing than bank finance.

Marketing Services

Further issues highlighted in the top ten include the changing demand and reduction in client spending, often as a result of cost cutting measures where the CFO is quick to target the marketing department, in part due to a lack of clear KPIs about the success of marketing operations.

Dependence on key personnel is the number six issue, which is further tied into the wider issue of attracting and retaining talent (#9). As the channels through which advertising is disseminated changes through technological advancement, the kinds of skills required to perform well in the advertising space too have changed. Sought after skills are now more difficult to get hold of as demand for quantitative skills is in short supply across a range of industries, placing further pressure on companies.