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Not only are agencies losing valuable ethnic talent to industries such as film, fashion and broadcast, the predominantly white middle-class make-up of most advertising and marketing communications agencies means they lack the understanding and empathy to correctly target ethnic groups, and are failing to exploit a growing and highly lucrative market on behalf of clients.

Ray Barrett, creative director of Barrett Cernis and co-chairman of the IPA's Ethnic Diversity Project, explains: "We estimate the combined disposable wealth of this group, which has a younger age profile and is more technology-savvy than the population as a whole, to be about £32bn. But too many agencies only think about the ethnic minority market if they are given an 'ethnic' brief."

Members of the project team, including representatives from Barrett Cernis, TBWA, Saatchi & Saatchi and specialist ethnic agency Media Moguls, are taking positive action - and urging other agencies to do likewise - to break down perceived barriers to entry and encourage more ethnic minority candidates to consider a career in advertising. These initiatives will include open days, proactive role modelling and persuading recruitment consultants to fish in a bigger pond.

But having a more ethnically representative workforce is by no means the whole answer to either representing ethnic minorities appropriately in ads or getting them to buy more.

Both Barrett (who is black) and co-chair Jonathan Mildenhall, managing director of TBWA\London (who is of mixed race), admit they became sensitised to the issue only recently. And two of the most racially controversial adverts of recent years were heavily influenced by non-white agency staff.

Racially risque

The 'Two Thumbs Fresh' execution produced for Typhoo by Mother, which featured fictitious tea plantation owner Tommy Singh extolling the freshness of his tea while surrounded by grinning employees, was co-written by an Indian woman.

And a commercial for Reed Employment featuring a black man apparently about to pick someone's pocket, before proving to be a 'guardian angel', was created by Abbott Mead Vickers BBDO, an agency that claims to have more ethnic minority staff than most and whose managing director, Farah Ramzan, is Indian.

While Reed claims the ad was praised by ethnic minorities as a clever way of reversing prejudice, it was pilloried by others for racial stereotyping.

Although the British Advertising Clearance Centre (BACC) upheld the complaints, the ITC rejected them. Such polarised views starkly demonstrate the difficulty of targeting and representing ethnic minorities appropriately - and explain why so many British advertisers shy away from the issue.

Mildenhall believes the advertising industry must take the lead in educating and advising clients about the potential of ethnic minority audiences but, in reality, those organisations that have tackled the ethnic issue head-on have taken the initiative themselves and used agencies only in a supporting role.

As Tyrone Jones, diversity manager at Halifax Bank of Scotland (HBOS), puts it: "Organisations sometimes have unrealistic expectations of agencies and assume they are automatically in touch with the market and the client's objectives."

Halifax's highly successful 'Howard' campaign features a black man purely by chance: the original intention was to use a variety of staff in the advertising, but Howard rapidly became the friendly face of the bank.

HBOS knows that representing ethnic minorities in its advertising is just the tip of the iceberg. The group is testing the market by using business relationship managers of ethnic origin to find out what motivates ethnic communities in London and the Midlands and target communications at them accordingly.

Over the past year, it has run product ads, often in dual languages, on billboards and local radio in selected areas, and has developed specific marketing tools designed to engage with ethnic customers at local branch level around festivals such as the Chinese New Year, Eid and Ramadan.

Jones explains: "We are adopting a steady approach, rather than a blaze of glory that we may be unable to deliver on." For that reason, the bank has no immediate plans to offer specific ethnic 'products', as HSBC has with its Islamic mortgage.

Jones continues: "Ethnic marketing has become fashionable and you have to ensure that what you do is sustainable, or you leave yourself vulnerable to a backlash. For example, it's no good advertising your products in different languages if the people in the branches can speak only English."

HBOS is drawing heavily on the grass-roots intelligence provided by its business relationship managers to inform its marketing to ethnic communities.

"Our business relationship managers are educating the agencies, rather than the other way around," says Ruth Southern, head of CRM development for retail at HBOS. "But if we decide to step up our ethnic marketing campaign, we are likely to turn to specialist agencies for help."

The specialist route is trusted by the COI, which has run bespoke campaigns for ethnic minorities for several government departments.

Patricia Macauley, the COI's black minority ethnic communications manager, explains: "We run targeted ads when there is low take-up as a result of a mainstream campaign, where there is an issue of particular relevance to an ethnic group, or for a targeted recruitment drive. We have a completely open tender process, but the specialist agencies always come up trumps. They have an in-depth understanding of ethnic consumers - their needs, sensitivities, cultural habits, community structures and media consumption - that the big agencies just can't match."

Equally, some ethnic brands have turned to specialist agencies such as Media Moguls or Media Reach to represent them to a wider audience. Zaynab Mirza, founder and managing director of Provoke, a cosmetics brand targeted at Asians, was keen to get mainstream PR coverage for its launch last year. "A more mainstream agency might have dismissed us as an Asian brand," she says.

By contrast, international money transfer company Western Union, whose customers are predominantly ethnic, has used Leo Burnett for many years, relying on the deep ethnicity of its own employee base for in-depth understanding of its market (see box).

And Gala, the casino and bingo group, which has a 50% ethnic minority customer base, turns only to specialist agencies for research into its key Chinese audience. Gala's group sales and marketing director, Richard Sowerby, says: "Provided you have great research, the ethnic make-up of agency staff is less important than having sensitive writers and art directors."

But Sowerby had to go to Hong Kong to find an agency with specialist Chinese knowledge, and the lack of meaningful data on ethnic minority markets is proving a major barrier to companies wishing to target them.

Perhaps part of the problem is that ethnic minorities are a dynamic, fluid and multi-dimensional group that defies easy categorisation. Even within the many different ethnic cultures, attitudes vary dramatically, depending, for example, on age, socio-economic status and whether they are first-, second- or third-generation.

Auntie's ethnicity

Of all UK organisations, the BBC is arguably the most sophisticated in its understanding of, communication to and representation of ethnic minorities.

Galvanised by Greg Dyke when he took over as director general four years ago, the corporation's drive for diversity was boosted last year by an initiative called 'Connecting with ethnic audiences', which involved drilling down to a greater level of detail when talking to and representing ethnic communities.

The research was based on focus groups involving 6000 people and was designed not just to find out what sort of programming they want to see, but also to get a better understanding of their lives, habits and concerns.

"Because ethnic groups are so diverse, we want to make sure we really listen to our audiences so we can give them the kind of programming they want rather than what we think they want," says Rebecca Paine, the BBC's communications project manager, focusing on diversity.

But the picture is set to become more, not less, complex, with more mixed-race marriages and cultural dilution, predicts AMV's Ramzan. She herself comes from a privileged mixed-race background, attended private school and Cambridge, is married to an Englishman and feels more sense of community with other harassed working mothers or advertising industry executives than with any cultural group.

"I just want to be me," she says, adding that she would have "laughed out of court" any attempt by the ad industry when she was at university to invite her to an open day "along with all the other brown people".

While agencies and their clients should be wary of falling into the fashion trap, there is a huge opportunity to tap into a demographic that has been largely overlooked. While the number of specialist agencies is growing, there are rich pickings to be had by mainstream names - particularly in the field of market research - if they set their stalls out.

As Anjna Raheja, managing director of Media Moguls, points out, though some of the "obvious" areas are being explored, few lifestyle brands have grasped the nettle. "And we use toilet roll too, you know."

FORD: THE SPECIALIST AGENCY APPROACH

Ford's marketing has come a long way since 1996 when a promotional poster in dealerships was doctored for European markets to replace turbaned Asians and Afro-Caribbeans with white faces.

This was just one of a number of race-related issues that brought Ford to the attention of the Commission for Racial Equality and prompted then-chief executive Jacques Nasser to set up a diversity office, based on the incontrovertible business case that an ethnically sensitive company would retain more staff and sell more cars.

The diversity team spawned a number of employee resource groups, designed to ensure the company meets the internal and external needs of different minorities by breaking down barriers, combating ignorance and providing support.

Anu Kalia, process improvement manager, marketing sales and service, chairs the Ford Asian Association. It is grass-roots knowledge from this group that has led to a relationship with Media Moguls and driven specific ethnic marketing initiatives, such as Ford's sponsorship of Mela, the Asian lifestyle exhibition taking place this weekend at Wembley.

"In the past, if I had approached Ogilvy or MindShare, our mainstream agencies, they would have said, what's Mela?" says Kalia. "We depend heavily on Media Moguls: even though I am Asian myself, I don't know everything about the Asian market."

WESTERN UNION: THE MAINSTREAM AGENCY APPROACH

Western Union's customers come from 40 different countries, but their diversity is matched by the 60-strong marketing team for EMEA, which represents 60 different nationalities, most of whom were born in one country, grew up in another and now live in a third.

As a consequence, says Laxmia Hariharan, marketing manager for the UK and Ireland, "we are very close to our customers" - an almost unique situation that largely obviates the need for specialist agency input.

"Direction comes from us and Leo Burnett reflects our consumer understanding in its creative and media planning," she says. "It's a joined-up team effort." The agency has just launched a global campaign in Europe that has many different executions, cut both by target nationality and purpose - husband sending money to wife, son to father, friends to friends and money for education or emergencies, for example.

"We try to reflect all the nuances of our market, based on constant tracking studies by our research department," says Hariharan.

The ads appear in English and other languages where appropriate, and run in a judicious mix of mainstream and specialist media.