How are agencies handling the return of pre-Covid overhead costs?

Saving both money and time by not having to commute to work was surely a boon for those who worked from home during the pandemic. But it wasn't just workers who made savings. Companies like Google saved US$1 billion as employees worked from home owing to reduced costs related to travel, entertainment, promotions and in-office perks offered to workers.

Revenue for ad agencies also jumped during the pandemic, with some of the biggest profits recorded in years. "The reduced agency costs during the pandemic has led to great agency profits," says Darren Woolley, CEO of TrinityP3. "Basically the reduced cost went straight to the bottom line, such is the pressure on publicly listed holding companies to deliver financial performance."

But now as we emerge from the pandemic and back-to-office plans are underway, will agencies see overhead costs return to pre-pandemic levels?

"Our overhead expenses will increase, but not to the pre-pandemic level in the short-term," says Ji Watson, CEO, McCann Worldgroup Japan & CFO, McCann Worldgroup APAC.

For McCann, Watson says the biggest reduction over the past two years has been in travel and entertainment expenses due to city lockdowns and tight border restrictions in many markets. But with the easing of the border restrictions over recent months, travel is starting again and is more expensive than before.

L-R, clockwise: Ji Watson, Darren Woolley, Michel de Rijk

"The cost of travel, with limited flights, hotels, and Covid testing has increased significantly," says Watson. "In addition, following global employment trends [such as The Great Resignation], our attrition rate has gone up, which will result in us seeing increases in both recruitment and other staff costs."

For BBDO, the impact has so far been minimal. "We haven’t felt much change, but I think the biggest overhead costs would be related to office rental and related expenses," says Soo Siong Keoy, CFO, BBDO Asia & Japan. "Six months after the pandemic hit, many networks reduced their office space. People have also gotten used to working from home, so I imagine hybrid work will become more common, which will eventually reduce office and related costs."

Will travel and entertainment costs return to normal?

Certainly the hotel and airline clients are hoping that the industry returns to pre-pandemic spend levels or higher, but will business travel ever be the same or as frequent post pandemic?

"I see business travel will take a couple of years to return to what it was before the pandemic. There is definitely a need to meet face-to-face after two years of no travel," says BBDO's Keoy. "However, business travel will be more selective. Many networks have put an approval process in place to ensure only essential [trips] are made."

Ahead of Cannes Lions this year, a report suggested that CMOs were rethinking travel given inflation, continuing Covid health concerns, and the war in the Ukraine listed as considerations with regards to travelling to industry events, particularly in Europe. 

"As markets open up and travel becomes the norm for clients and agencies again, there will be an increase in work related travel," says TrinityP3's Woolley.

"It appears that the pandemic and the broad embrace of video conferencing is here to stay as reports indicate that many are being much more selective in attending face-to-face meetings, particularly when it comes to big industry events."
—Darren Woolley, Trinity P3

Aside from travel, in-office perks and entertaining costs also made up a sizeable chunk of overheads pre-pandemic. But if office perks were not to return as remote and hybrid styles of working become more common, will this have any impact on retaining or attracting new talent?

"The office has still got a very important role to play in a creative tech business. We are bringing back different events and opportunities for team building and collaborating on business, such as ‘lunch and learn’ sessions," says Michel de Rijk, CEO, Asia Pacific at MediaMonks. “We need to bring teams together for culture. Imagine just starting your first job during the pandemic, with no sense of culture. It’s particularly important for young talent to feel a part of that."

But even for agencies where back-to-office plans are not actively being encouraged, they are still confident that work perks will return in some form or another.

"Even if some perks of the pre-pandemic era might change, more will certainly emerge if the hybrid work-office model continues," says Keoy. "I think agencies need to understand what their workers miss from the office environment and create perks that appeal to current needs in order to keep their existing employees and to also attract new talent."

Additional pandemic-related costs

On the flip side, the pandemic and emerging from it will likely throw up some additional expenses. Are agencies prepared?

"With the exception of China, most of our offices in APAC have now returned to the office in a hybrid working model, which may require further CAPEX spend to refit office spaces to meet new requirements—either set by local governments or as part of transitioning to a new hybrid model," says McCann’s Watson.

"There are also additional expenses, like vaccines, cleaning supplies, masks, and temperature checking systems that we have incurred to ensure a safe working environment for all our staff."

TrinityP3's Woolley predicts that agency salaries and overhead costs will increase, but it will be interesting how procurement can contain these costs through the judicial application of competitive tenders to keep downward pricing on agencies.

"It is important to know that agency overheads have been under pressure in fee negotiations for the past decade or more and so in the face of inflation being experienced in many markets, these will only increase in the face of rising costs,” he said.

But on a more positive side, for some agencies, savings made during the pandemic have been reinvested elsewhere to the benefit of employees. "I believe the pandemic has reduced overhead costs overall,” says Keoy.

"Some of these [pandemic-related] savings have been reinvested elsewhere such as employees’ wellbeing—mental health sessions and on improved employees' medical coverage such as physiotherapy."
—Soo Siong Keoy, BBDO 

De Rijk of MediaMonks too sees any savings made during the pandemic as an opportunity to reinvest in talent.

He said: "Overheads, in some shape or form, will return to pre-pandemic levels but we’ve also been given a rare opportunity to reimagine the office experience for our staff and re-think where we put that investment. The best thing businesses can do is take the lessons learnt from the past two years and make sure it goes towards what’s best for its people.”