Tag Archives: Publicis Groupe

Advertising Delivery Models Are Evolving. How Will the Holding Companies Respond?

12 Jan

dreamstime_xs_127777381When agency holding companies were birthed, they did nothing that directly impacted client businesses. They were corporate entities that owned a number of smaller agencies and the attendant portfolios of real estate, trademarks, copyrights and licenses attached to those agencies. Their primary role was to create shareholder value through structural leveraging.

As time progressed, three things happened that form the basis of the challenge faced by agency holding companies today.

Firstly, aided by low barriers to entry, there was a proliferation in both the number of agencies and the types of functional specialist shops that came to be. In the early days there were “above the line” full-service agencies and “below the line” shops such as sales promotion, direct marketing and PR. Over time, specialists in diversity advertising, shopper marketing and digital media have come into vogue. Highly focused agencies continue to emerge today, as witnessed by the arrival of Amazon “specialist agencies” that assist marketers seeking to do business with or sell goods online via Amazon. Along the way, specialization led to fragmentation and full-service agencies fell by the wayside. Marketers in turn saw their agency networks expand in size as they added specialist firms to their rosters creating a range of agency stewardship and coordination challenges.

Secondly, the holding companies continued to acquire marketing services and advertising agencies. Part of their acquisition strategy involved bringing on specialist firms across a range of competencies to fill out their service offering. Another part of their strategy involved the acquisition of branded agency networks to consolidate activity within select clients (e.g. WPP’s acquisition of Ford agencies J. Walter Thompson, Ogilvy & Mather and Young & Rubicam) and to create walled silos that would allow them to handle competitive advertising accounts. Financial benefits were realized by consolidating functions and paring expenses in areas such as human resources, legal and finance while allowing the acquired agencies to operate independently in virtually every other area.

Finally, along the way the holding companies began to compete as agencies, creating stand-alone client service entities such as; Enfatico (Dell), Team One (Toyota), GTB (Ford) and We Are Unlimited (McDonald’s). The value proposition with these dedicated agency teams was to provide larger advertisers with scalable, seamless solutions served up by the most talented personnel from across the holding company’s portfolio of agency brands. While the premise was certainly compelling, the holding company model did not readily lend itself to a blended workforce concept and often suffered from the lack of centralized business platforms.

Fast forward to 2019 and advertiser preferences remain unchanged. Advertisers desire breakthrough, transformational business solutions served up on an integrated basis and of course, they want them faster, better and cheaper.

In their search for a better “mousetrap” advertisers have begun to take certain aspects of their advertising in-house and or have engaged non-traditional partners including management and technology consulting firms to augment their traditional agency rosters. Of note, the consulting firms, represented by global monolithic brands, blended workforces, common processes and centralized business platforms have made significant inroads with CMOs. This has raised speculation among many industry pundits with regard to whether or not the consulting firms would supplant advertising agencies. Fueling the speculation has been the management consulting firms’ pursuit of agency acquisitions to round out their marketing/ advertising service offerings, it will be interesting to see how well they fair integrating those acquired firms into their organizations both structurally and culturally.

Many in the industry are waiting for the revelation of a new “agency model” that will emerge to magically address advertiser desires and resolve agency holding company challenges. It is our belief that these pundits will likely be waiting for some time.

Advertisers, for their part, will continue to seek out and retain responsive, agile marketing partners that can provide breakthrough, scalable business enhancing solutions. While the idea of an integrated, end-to-end provider is intriguing, it is likely not feasible. Rather, assembling a team of specialists, albeit narrower marketing agency networks, with the advertiser serving as strategist and integrator across the “marketing ecosystem” as Martin Sorrell, Chairman of S4 Capital refers to it is the most likely solution.

As for agency holding companies, we believe that Arthur Sadoun, Chairman of Publicis Groupe got it right when he stated that “the old holding company model is dead” in April of 2018. Advertisers will not embrace a one-stop solution from any of the holding companies. Thus, the holding companies will likely continue their recent focus on right-sizing their networks through the consolidation of both brands and functions and the divestiture of redundant and non-core entities. After all, how many agencies that place or distribute digital media or in-house studios does a holding company need? There may also be a subtle shift from a focus on cost reductions to enhancing the holding company’s ability to cost efficiently scale operations. This could include an expansion of the old “shared services” model, looking beyond HR, Finance and Legal to create centers of excellence around functions such as Data Sciences, Technology, Media Procurement and Production to provide clients across their network with faster, better and cheaper solutions in these areas.

While many lament the decline of the agency holding company, other than the world’s top advertisers, most organizations hire agency brands. While some of the agencies they hire may be owned by the same holding company, more often they are not. Thus the challenge of finding “integrated” solutions for the development of relevant, quick, agile and engaging solutions has been the purview of marketers… at least since the days when the full-service agency model was the standard. As such, the evolution of the advertising delivery model will more than likely be driven by advertisers and less so by agency holding companies.

 

 

 

The Ad Industry is Metamorphosing

30 Jun

dreamstime_xs_83082522It was the best of times; it was the worst of times…” Most of us are familiar with the opening line from Charles Dickens in his epic work A Tale of Two Cities. Many marketers may even consider it an apt description of both the current state of the advertising industry and the challenges that they face in sustaining brand relevance and driving growth.

Phoenix risingSo, who will marketers count on to assist them with the tasks of deepening brand engagement with core target segments, revitalizing sales and profits in a low-growth environment and in differentiating their brands for competitive advantage?

Over the course of the last few years, many have opined on the viability of the ad agency model and what it portends for advertiser/ agency relationships going forward. And with good reason. Concerns cited include threats from non-traditional competitors such as management consulting and technology firms encroaching on their turf, talent recruitment and retention challenges and margin compression due to downward pressure on fees and expanded scopes of services.

It may be as some predict that management consulting firms will leverage their capabilities in the area of strategy and integration to pirate work from ad agencies and that ad-tech providers will enable marketers to take certain tasks in-house. The question remains, how will marketers adjust to this dynamic and the evolution of their agency networks to potentially include consulting, data and ad-tech firms? There are already very real challenges related to agency stewardship today due to under-resourced client marketing staffs.

The aforementioned challenges, combined with the rate of digitization and the emerging role of artificial intelligence occurring within the ad industry, certainly pose challenges for advertising agencies and could serve to lessen their stranglehold on the marketing and advertising sector. In a recent McKinsey article entitled; “The Global Forces Inspiring a New Narrative of Progress” the authors note that “disruption is accelerating.” They opine that this dynamic is raising serious concerns for many organizations relating to the question, “How long can their traditional sources of competitive advantage survive in the face of technological shifts?”

That said, in spite of these risk factors and other marketplace developments, ad agencies are doing just fine:

  • Agency holding companies have continued their aggressive acquisition drives, supporting both their horizontal and vertical integration strategies. While overall M&A activity is down from 2016 levels, WPP and Dentsu have consummated twenty acquisitions with a combined value of $700 million through the first 4 months of 2017. (Source: R3’s “State of Agency M&A report” for January – April, 2017).
  • While down from 2016’s 5.7% growth rate, global ad spending is projected to grow 3.6% in 2017 (Source: Magna Global, June, 2017). Of note, this is higher than the International Monetary Fund’s projected increase for global GDP growth.
  • Even though 1Q17 Advertising Industry gross margins fell to 44.15%, the industry itself is healthy. For instance, within the services sector, the Advertising Industry achieved the highest gross margins, net margins, EBITDA margins and pre-tax margins for the quarter (Source: CSIMarket.com).
  • Some 86% of mid-sized ad agencies are confident that this year will be better than last in terms of profitable growth (Source: Society of Digital Agencies (SoDA) survey).

Importantly, since the demise of the “good ole days” of full-service agencies and the fifteen-percent commission remuneration model, agencies have demonstrated a unique ability to not only keep up with industry changes, but to take the lead from both a thought leadership and innovation perspective. They have been able to scale, attracting more clients and deeper talent pools, they have invested in emerging technologies to deal with increasingly complicated, data driven processes and to pioneer the use of algorithms and artificial intelligence to efficiently execute deliverables ranging from digital media investment to creative adaptations… all while dealing with evolving client expectations.

Further, it bears noting that the publicly traded holding companies; WPP, Omnicom Group, Publicis Groupe, Interpublic Group of Cos. and Dentsu, had combined estimated worldwide 2016 revenue levels of $60.7 billion (Source: Advertising Age, June 2017). When one considers the pre-dominance of the estimated billing process and agency remuneration schema that includes direct labor and overhead cost reimbursement plus guaranteed profit margins of 14% to 17% or more, one must also respect the financial clout that these publicly traded entities wield.

Is there a need for near-term belt tightening to offset softer 2017 ad spending levels? Yes. Do the holding companies need to consolidate agency brands and realign capabilities to boost the efficacy of their service delivery models and generate much needed efficiencies? Yes. Will agencies need to improve their talent recruitment and retention practices, across a diverse range of specialties? Yes. But no business is immune from these challenges, including management consultants, ad-tech platforms and publishers.

The big question the industry in general and marketers will need to assess is related to whether these players will be able to boldly transform their current business models, repositioning their firms to deliver integrated, multi-specialist services in a nimble, cost efficient, on-demand manner.

Broadly speaking, all participants are facing challenges as the ad industry undergoes its current metamorphoses. We believe that it is too early to predict winners and losers or to suggest that marketers adapt an attitude of empathy toward any of their marketing supply chain partners. After all, it is their marketing spend that has built this sector into a $457.4 billion global machine in 2017 (Source: Statista, 2017). And they must vigilantly safeguard and optimize that investment.

Below is one of the closing lines from A Tale of Two Cities, one that many may not be as familiar with:

“It is a far, far better thing that I do, than I have ever done…”

With this parting thought, Dickens’ suggests that the main character in his novel and the city of France will be resurrected, rising above their present strife and “made illustrious.”

Here’s hoping that the ad industry achieves similar transformative success.

 

 

Is the Agency Holding Company Model Viable Going Forward?

19 Oct

dreamstime_m_35343815The pursuit of excellence is less profitable than the pursuit of bigness, but it can be more satisfying.” 

 ~ David Ogilvy

It is not our intent to suggest that scale does not have its advantages. There are multiple instances, within the professional services sector in general and specifically within the ad agency community, where size translates into meaningful benefits for clients.

That said, since Papert, Koenig, Lois went public in 1962 and other advertising agencies soon followed suit, the ad industry has undergone dramatic change. Ad agency IPO’s begot an uptick in agencies acquiring other agencies, which Marion Harper, CEO of McCann Erickson pioneered with the formation of The Interpublic Group of Companies in the early ‘60’s. This was then followed by the “unbundling” phenomenon of the late ‘70’s and ‘80’s.

Fast forward to 2016, where the top five agency holding companies; WPP, Omnicom, Publicis Groupe, Interpublic Group and Dentsu account for over 70% of the world’s estimated 2016 ad spend of $542 Billion (source: eMarketer, April, 2016). Further, each of these holding companies have broadened their acquisition strategies to further penetrate the larger $1.0 Trillion global media and marketing services category.

As a result, the portfolios for the top five agency holding companies contain between dozens and several hundred firms covering a myriad of marketing disciplines including, but not limited to:

  • Creative agencies
  • Media agencies
  • Digital agencies
  • Social Media agencies
  • Brand activation firms
  • PR firms
  • Relationship management firms
  • Programmatic trading desk operations
  • Research and audience measurement firms
  • Media properties

It is clear that the agency holding companies have successfully pursued and achieved “bigness.” The question is; “Has the holding company model achieved “excellence?” The answer may well depend on which stakeholder group one belongs to. Shareowners will likely have one viewpoint, suppliers and employees another and clients perhaps yet another perspective.

In the early days, the primary role of the holding company was to pursue efficiencies across their agency portfolios, while leveraging cross-agency synergies and driving strategy across their portfolio firms. Four decades later, this has evolved into holding company “agency” solutions consisting of cross-firm, multi-disciplinary client service teams served up to the holding companies top global clients.

Yet, the holding companies are struggling to define and evolve cultures, eliminate inefficiencies and break down silos across the numerous agency brands and marketing services firms that they have acquired. All while wrestling with issues and opportunities tied to the rate and rapidity of technological change and its impact on the business of creating and placing ads and not least of all… technology’s impact on consumer media consumption and purchasing behavior.

Today, the agency community is facing challenges related to attracting and retaining talent, evolving remuneration systems and regaining advertiser trust, all while being mired in a very public dispute with advertisers, publishers and ad tech providers regarding the issue of transparency.

Simultaneously, serious competitors have emerged, threatening the ad agencies stranglehold on advertising, media and marketing services. Consulting organizations such as Accenture, IBM Interactive, Deloitte Digital and PwC Digital now offer comprehensive, end-to-end consumer solutions, which include branding, graphic design, creative and media services to complement their analytical, strategy consulting, enterprise digital solutions and customer experience design skills.

This new breed of competition has monolithic brands, established cultures and highly trained, intelligent, flexible global workforces. Also looming on the competitive horizon are firms such as Adobe, Oracle, SalesForce, Facebook and Google that continue to focus on serving up marketing services and support to advertisers on a direct basis.  

Perhaps most importantly, the ad agency holding companies may not control their own destiny. At least not to the extent that they once did, when serving as valued, trusted advisors to their clients providing high-level strategic support and maintaining solid C-suite level relationships. Further, advertisers today have shown an openness to evaluating alternatives to the traditional client/ agency model, which has favored the aforementioned consultancies, technology and media firms along with in-house solutions.

It is certainly too soon to count the holding companies out, as they remain a formidable force in the industry. The question is can holding company leadership successfully chart a new course for leveraging their scale and talents to boost their relevancy in the years to come. What advice might one of the industry’s most iconic leaders offer to his holding company contemporaries?

“Leaders grasp nettles.” ~ David Ogilvy

 

Does Agency Size Benefit Advertisers?

6 Aug

ad agency sizeIn the wake of the announced “merger of equals” between Publicis Groupe and Omnicom much has been made of the clout which the combined organizations will yield in the advertising marketplace.  The question to be asked is; “Who benefits from that clout?” 

The merged entity will generate revenue of $23 billion and will yield efficiencies ranging from the elimination of redundant resources, real estate commitments and headcount.  To this end, management has already indicated that their union would generate “$500 million in efficiencies.”  Certainly the investors in both companies stand to gain from any post-merger enterprise expense reduction initiative.  And while it is anticipated that there will be some client fall-out due to account conflicts, revenues will still be significant.

Conceptually, in a blending of agency holding companies clients could benefit from having expanded access to a range of resources and competencies spanning multiple geographies and marketing disciplines.  However, blending the cultures, systems and processes of the various agency brands which will comprise the merged entity will require a significant investment of time and money and realistically could be years in the making.  

On the financial front, it is conceivable that clients could see a reduction in overhead rates and potentially a reduction in agency labor expense as the two firms balance salary levels across the organization… conceivable, not probable.  Further, some in the industry would like to believe that the combined media spending clout represented by the merged companies will yield media rate efficiencies for their clients.  Beyond this, it would appear as though there is little in the way of direct financial benefit to the client.  

Further, on the media rate front there is little in the way of hard evidence to support the notion that as media agencies have grown in size that they have leveraged their combined clout to drive savings for their clients.  A quick comparison of media inflation rates to the Producer Price Index would indicate that there are forces at work beyond media agency clout (i.e. supply and demand) which are driving media costs: 

       Year                PPI*               Media Inflation*              Variance 

       2012                 1.3%                       3.9%                             2.6%

       2011                 4.7%                      10.5%                             5.8%

       2010                 3.8%                       6.5%                              2.7%

*Source: Annual Producers Price Index for Finished Goods and Media Inflation Watch (MIW) 

As with previous agency holding company mergers and acquisitions, the near-term impact of the Publicis Groupe merger with Omnicom is not likely to benefit their clients in a material way.  Rather, clients will be asked to be patient and supportive through what will be a confusing and potentially frustrating transition period as the firms integrate systems, processes, personnel and cultures.   

Experience would suggest that agency size and certainly the size of an agency holding company to the extent that it impacts their ability to amass the requisite resources and attract talent may have some impact on advertiser success.  However, it is important to note that there are numerous examples of advertiser/ small agency collaborations that have resulted in demonstrable benefits to the advertiser which reminds us that size in and of itself is not a precursor to success.   

 

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