This post is by Michael Farmer, Chairman of TrinityP3 USA and author of Madison Avenue Manslaughter: an inside view of fee-cutting clients, profit-hungry owners and declining ad agencies, which won the Axiom Gold Business Book Award for the best marketing / advertising book of 2016.
The marketing communications holding companies, like the industrial conglomerates that preceded them, were created through M&A transactions and run as decentralized financial holdings.
In this business model, acquired agencies and businesses are expected to improve their financial performance by growing revenues, profits and profit margins. The holding companies make additional acquisitions, using their ever-increasing stock market prices to buy more efficiently.
The holding companies become perpetual “share price growth machines” as long as their acquired businesses have “unrealized performance potential,” and as long as there are businesses left to acquire at reasonable prices. Interpublic (1960), WPP (1985), Omnicom (1986), Publicis Groupe (1988) and Dentsu (1997) have had exceptional track records of success, and the senior executives of the holding companies have been well-compensated.
Looking ahead, though, the holding company machine is unlikely to operate as in the past. Too much has changed:
1. Creative agency “unrealized performance potential” is drying up
Creative agencies have gone to the wall annually to deliver improved margins to their holding company owners. This has been done in the face of procurement-led fee declines and marketing-led SOW workload increases. Creative agencies have few additional reserves to call on. Their people are severely underpaid and stretched; employee morale is at an all-time low, and agency capabilities have been diminished through underinvestment.
2. Media agency contracts and fees are under increased scrutiny
The furor over “media transparency” is leading clients to pay closer attention to media agency contracts and remuneration. Media agencies have been the cash cows of holding companies, helping to plug the performance gaps of their sister companies. This role for media companies may be harder to achieve in the future.
3. Reduced agency influence with clients
The original ad agencies of the holding companies, like McCann Erickson, FCB, JWT, O&M, BBDO, DDB, TBWA, Publicis, Leo Burnett, Saatchi & Saatchi, etc. did not expand their advertising capabilities into direct, digital or social marketing under their brand names during the early days of media fragmentation. These capabilities were developed by sister or other agencies, and clients, who wanted integrated services, had to work with many rather than with one single agency. This killed the AOR concept and reduced the influence previously enjoyed by these lead agencies. It also encouraged clients to bring work in-house.
4. Relationship ambiguity
In the face of AOR declines, and in a desire to safeguard their revenues, holding companies became proactive in seeking “holding company relationships” with clients. They turned themselves into “super-agencies” that offered the full and exclusive capabilities of their diverse portfolios. However, this put their agencies in an ambivalent situation. They had to be subordinated players in holding company relationships — providing the expert people that the relationships required — and, as well, fiercely competitive branded agencies that continued to win business and deliver growing profits.
Continue reading “What are we to make of the holding companies in 2017?”