Commentary

The Agency Holding Company Model Is NOT Dead -- Just Challenged

After WPP’s poor financial showing in its latest results, much has been made of the imminent demise of Sir Martin’s agency conglomerate, and the ad agency holding company model in general.

Let’s be clear: there are a lot of pressures on that model.

First of all, the ANA reports on agency media and now production transparency has impacted and will continue to impact the bottom line of the agency holding companies. Media contracts have been renegotiated by most of the big advertisers.

This has happened “on the quiet,” as advertisers and agencies were both keen to keep these discussions out of the spotlight — since they had advertisers basically admitting they had not read and/or understood the finer details of what their agency contracts stated.

In other words, advertisers had not managed their fiscal responsibility for one of the largest expenses in any marketing-driven organization. And you don’t want that to play out in the open, for all of Wall Street and your shareholders to see.

The agencies had equal reason to negotiate quietly, since they had to admit that those contracts had little to do with their clients’ key interests — and everything with their own.

Most of the big advertisers have completed this process, but there are still many middle-sized marketers who are only now beginning “Project Clean-Up.” So the pressures on agency holding companies revenues will continue, but slowly taper off.

The second pressure point on the holding companies’ bottom line is the transfer of responsibilities from agencies to marketers in-house, or to independent white-labeled third parties. Think of programmatic, data management, marketing insights, etc. These are all areas which were highly profitable for agencies, because they either represented a high growth and/or high margin service. But advertisers, driven by technology available to them, are taking the reins of these services, cutting out the holding companies.

And third, there are the newcomers chipping away at agency holding company revenues. These are the likes of Accenture, Deloitte, IBM, but also Facebook and Google, and outsourced production companies. These are all service providers who are taking on responsibilities such as production, content development and distribution, etc., that were traditionally the domain of the agency holding companies.

So all of that hurts, and is now providing the perfect storm that is causing pain at the holding company level. As I’ve noted, this will most likely continue for a bit — and, more importantly, is irreversible.

However, to declare the agency holding model “dead” is a gross exaggeration. Rishad Tobaccowala, Publicis’ chief growth officer, famously likened holding companies to cockroaches: always able to find something to survive on.

I think this is true. As much as clients are changing the way they work and contract with,with agencies and their holding company parents, there will always be a need to outsource much of what is required to deploy marketing to the masses.

Advertisers often underestimate the amount of manpower and effort it takes to create the content and distribution output needed today. We all too often hear clients asking to “in-source everything” — only to learn that, actually, they can’t afford the required headcount or all of the tech needed to do it. Plus, they are headquartered somewhere in flyover country and the talent wants to live in New York. I am keen to see the next evolution of the cockroach.

4 comments about "The Agency Holding Company Model Is NOT Dead -- Just Challenged".
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  1. James Smith from J. R. Smith Group, August 26, 2017 at 5:51 a.m.

    Maarten:  Perhaps the mega-agency model is evolving but it's also likely M&A activity will continue, perhaps on a more selective basis.  Do you think it's time for agency holding companies to take their lead from some mega-clients?  Much has been written about cost shaving at P&G and Unilever.

  2. Henry Blaufox from Dragon360, August 28, 2017 at 10:24 a.m.

    Technology adoption almost always yields cost savings. Inefficient or less than optimal processes are revealed, and management has good reason bto alter them once they are found. So major marketers are well within bounds when they seek new service providers that will stand by their offerings, and willingly offer measurable results to achieve client goals. If they don't, they will be replaced by another who will. So marketing executives should not shy away from the new breed of digital, data driven agencies that will stand by the results. That's transparency that benefits everyone.

  3. Ed Papazian from Media Dynamics, August 28, 2017 at 10:50 a.m.

    Once again, we seem to be zooming in on media buying as if it is the beginning and end of "advertising". It isn't. When an agency and advertiser work together to develop a positioning strategy and, later, an ad campaign to convey the basic message to the consumer, a lot of information is---or should be---- exchanged and research conducted, before the agency comes up with ideas and eventually the client signs off on one of them. Is it reasonable to expect the agency to guarantee sales results in such cases, when it has no control over the actual production, distribution and marketing functions---just the creation of the ads---with client approval---their testing and, finally the media buying---often under pressure from client bean counters to get the lowest CPMs?

    So, when we demand that agencies "deliver" what was promised---or implied---we must be talking not about ad awareness or message registration and consumer motivation, but, rather, whether the planned target group GRPs and/or reach were delivered. Sorry, but "audience" buying isn't "advertising", its just part of a much larger and more complicated process----a final step that brings the message to the cobsumer. I do agree, however, that advertiser CMOs---aka marketing directors----have paid far too little attention to the media buying function-----but this certainly isn't true of the  larger "advertising" process.

  4. Henry Blaufox from Dragon360 replied, August 28, 2017 at 11:01 a.m.

    Point about all the elements of advertising beyond the media buy well taken, Ed. A reminder to me to think back to my late father-in-law. Through the 1960s and early 1970s, he was advertising director for Pan Am Airways. I recall from conversations he concentrated more on the ad creative quality and message, whether broadcast, print or billboard format, then on to the buys and placements delivering the message. He mentioned as much years later when I showed him the various ad management systems I handled as part of trying to explain what I did for work.

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