The Mad Men era is gone – so what use are the holding companies?

Following the ongoing erosion of their share prices, agency consultant Michael Farmer weighs up whether there is any value left in the holding company model

The marketing communications holding companies, like the industrial conglomerates that preceded them, were created through M&A transactions and run as decentralised 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 ‘unrealised 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. However, recent downwards pressure on share prices suggests that something is amiss.

A great deal has changed:

Creative agency “unrealised performance potential” is drying up. Creative agencies have gone to the wall annually to deliver improved margins for 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 under-investment. It’s obvious that agencies need to start being paid for the growing work they are doing rather than accepting the declining fees that clients have been dictating. For this, agencies need to vigorously document, track, measure and negotiate their S’copes of Work – something that they do not do today.

Media agency contracts and fees are under increased scrutiny. The furore 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.

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 agency-of-record concept and reduced the influence previously enjoyed by these lead agencies. It also encouraged clients to bring work in-house.

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.

Publicis Groupe has gone the furthest in defining itself as a super-agency, using “the power of one” as its battle cry. Unquestionably, Arthur Sadoun, the CEO, will continue in this centralised (and very French) direction, arguing that although Publicis Groupe’s ‘silos’ have been destroyed, the branded agencies will still flourish. It’s a complicated and confusing concept, and it is not clear that Saatchi and Leo Burnett, for example, are flourishing under this concept.

Risky challenges: Publicis Groupe’s CEO Arthur Sadoun

WPP, which under Sir Martin Sorrell has aggressively sought holding company relationships under the ‘horizontality’ concept, takes a more pragmatic approach, and encourages agency CEOs to take initiatives that strengthen their branded positions in the marketplace. He should encourage his agencies to be among the first in the industry to take SOW management seriously as a way of increasing WPP growth for the future.

Omnicom under John Wren maintains a low public profile, but it celebrated loudly its holding company McDonald’s win. Omnicom has formidable branded strength in BBDO, DDB and TBWA, and Mr. Wren is not likely to take steps to compromise these assets. Of all the holding companies, Omnicom agencies are most wedded to ‘award-winning creativity is our product’, even though it is evident that many of their clients’ brands are not growing and that award-winning creativity cannot be relied on to generate premium fees.

The jury is out on Interpublic, but Michael Roth has resolutely (but tardily) invested in holding company staff to strengthen Interpublic’s ability to pitch and win holding company relationships. Its key agencies McCann and FCB are strongly led and remain very independent.

The devil for the holding companies is in the detail – in the balance between centralised initiatives and decentralised strengthening. In the meantime, though, clients continue to weaken all branded agencies through fee reductions and workload growth. This is a problem that does not go away. Clients have failed to recognise that the weakening of their agencies has not improved the growth of their brands. Clients are now cutting back on marketing spend – a self-defeating strategy if there ever was one.

Arthur Sadoun faces the greater and riskier challenge if he moves headlong to increase the strength of the centre without fortifying his branded agencies. Should he falter, Publicis Groupe’s performance and share price will surely fall.

Holding companies are now a mixed metaphor – decentralised financial holdings that squeeze improved profit performance from their stretched branded agencies, and operational super-agencies that win new business and assemble the necessary resources. Are holding companies effective at helping clients grow their brands? The jury is out on this one.

Will these super-agencies run themselves better and become more capable than their challenged agencies? Or will they go down the same reduced-fee path? It’s early to know, but this particular challenge is one that they clearly need to face today, and the recent erosion of holding company share prices makes the question an urgent one to answer.

Michael Farmer is chairman and CEO of Farmer & Company LLC, and author of the award-winning book Madison Avenue Manslaughter: an inside view of fee-cutting clients, profit-hungry owners and declining ad agencies


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