Holding companies have been prominent innovators for the past forty years, ever since Martin Sorrell completed WPP’s hostile takeover of J. Walter Thompson in 1987 and established the operational template for the industry.
Holding companies have aggressively acquired agencies and other companies in the marketing communications space, ruthlessly cut agency head counts to generate growing margins, and entered into holding company relationships with major advertisers.
Increasingly, holding companies are positioning themselves as single integrated companies rather than loose portfolios of individually owned companies.
The holding company innovation has succeeded. From very modest beginnings in the ‘80’s, the five major holding companies (WPP, Omnicom, Publicis Groupe, IPG and Dentsu) generated $64 billion in 2022 revenue and $64 billion in market cap.
Each of the holding companies generates this income principally through the “labor-based fees” earned by their subsidiary companies for doing client work. Crudely stated, the subsidiary companies “sell the time of their people” rather than charging for the work they do.
When companies are big and successful, like the holding companies, there is a lot to protect. Professor Clayton M. Christensen of Harvard Business School (d. 2020), studied the behavior of leading innovators and wrote a best-selling business book titled The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (1997).
This influential book investigated why market-leading companies often lose their dominant position when confronted with disruptive technologies, even if they are well-managed and attentive to their markets.
Part of this can be attributed to a company’s culture and history. As Christensen wrote elsewhere for the Harvard Business Review:
In other words, it’s hard for people to change when what they have been doing has created success over time. They are motivated to continue “business as usual.”
Companies must innovate to survive, but once they have been successful, they tend to be more protective of their success than innovative for their futures.
For this reason, successful, innovative companies tend to ignore competitive threats, particularly if the threats come from smaller companies or new technologies that are different from the technologies that have created success to date.
Artificial intelligence, in its many guises, is a new technology that can easily replace many of the people who work in agencies today.
I have personally seen AI programs that cranked out more than 600 video, TV, radio and print ads for an automotive dealer’s association — and doing this in less than 30 minutes, delivering the same amount of unique work that would require a creative agency to use more than 100 full-time people for one year.
If the holding company business model is predicated on selling the time of its people to clients, and a new technology threatens to replace people with AI software and outputs, what is to be done?
A successful solution for this “innovator’s dilemma” does not involve 1) using AI technology and charging clients less (because there are fewer people)
. Instead, a successful solution requires a holding company to change its business model, and charge for the amount of work to be done rather than for the number of people who do the work.
This is not at all easy. A new pricing concept needs to be developed, pitched to and accepted by clients, and used to retrain the hundreds if not thousands of individuals who have client-facing jobs — including those who will operate the AI, replacing those who are no longer needed as before.
Holding company CEOs who pursue such a major transformation will find themselves generating most of their income “the old way” while they are trying to replace it with “the new way.” The organization will find itself managing risk rather than managing certainty. This kind of change is uncomfortable for all, and it could lead to a major exodus of employees. Any hiccup in sales or margin performance will be severely punished by Wall Street, so Wall Street executives, too, need to be educated about the new directions and reassured that they are necessary.
In the face of such uncertainty, many CEOs “take a pass” and continue to run their companies in traditional ways. As Christensen points out, these companies tend to disappear over time.
To date, in my experience, only Huge, the modest-sized digital creative agency owned by IPG has gone through such a transformation, led by Mat Baxter, Global CEO. Huge’s example could serve as a bellwether for other agencies — or for the holding companies themselves. (Huge’s transformation has been documented in “Madison Avenue Makeover: the Transformation of Huge and the Redefinition of the Ad Agency Business,” to be published in the summer of 2023).
Holding companies will lose their dominant position in the industry if they do not innovate again to fundamentally revise their pricing strategies for an AI future.
Are the holding company CEOs up for this challenge? They are certainly well-paid by any standard— Holding company CEOs earn $3 to $20 million today.
These high remuneration levels will certainly be under pressure if the holding companies fail by not innovating in the face of AI.
There is a big transformation job to be done, and it needs to begin today.