Ad agencies and holding companies need a Plan B – so just exactly what is that?

As prospects remain uncertain in 2018, Michael Farmer argues holding companies should focus on rebuilding, not squeezing, their agencies 

We’re all familiar with the concept of ‘Plan B’. It emerges out of the haze when Plan A has self-destructed for one of a thousand reasons.

It’s when an unexpected snowstorm cancels our flight. When you have to scrub a key meeting. Too bad. On to Plan B, even if there is no Plan B – we’ll have to improvise.

So it is for ad agencies and holding companies today. Plan A is not working. Profits and growth are drying up, and it’s hard to recruit and retain talent.

Agencies are no longer seen as valuable strategic partners. Agency work has become executional in nature. Fees are commodity-like for creative and media agencies. Holding company prospects are uncertain. Something has fundamentally changed in the marketplace. Do we work harder on Plan A, or do we need a Plan B?

For agencies, Plan A was born during the heady media commission days, when TV advertising was new, and the consumer economy was accelerating in top gear. Highly creative TV and print ads excited agency clients, who (encouraged by their agencies) spent vast sums on media, showcasing agency work.

The better the creativity, the more clients spent on media and the better their brands performed. Creativity plus media spend generated positive results. Creativity plus media spend made agencies rich and successful.

Plan A for the holding companies was different. They acquired agencies who were commercially successful but poor at managing their operations. Agencies frittered away their high commission-based income. Agencies over-invested in headcounts, salaries and overheads. They underperformed in margin generation. They could be squeezed for better profit performance through holding company-imposed budgets.

These two Plan A’s were colossally successful for decades, through the ‘60’s, ‘70’s, ‘80’s and ‘90’s, but they fell on their face in the 2000’s. Brand growth slowed, and no amount of Plan A creativity made the slightest dent in brand performance. Globalisation, Millennials, e-commerce, procurement and fragmented digital and social media stopped Plan A success in its tracks.

Plan A cost-squeezing by the holding companies ran its course, and surplus agency resources disappeared in 2005, leaving agencies with inadequate headcounts and underpaid resources to deal with their clients’ complicated brand stagnation problems. Clients cut back on spend and invested in in-house agencies. Holding companies innovated with holding company relationships, but agency squeezing remained their primary strategy.

Plan A has played itself out for ad agencies and holding companies. Plan A strategies will not generate growth or positive returns in the future, and those agencies and holding companies who continue down Plan A pathways will pay a heavy price, indeed.

Time for Plan B.

Plan B must focus on restoring client brand growth. Lessons can be learned from the consulting firms, whose Plan A’s always involved 1) figuring out why clients underperform and 2) carrying out multifaceted action plans to correct the underperformance.

‘Analytical creativity’ served the consultants well. Agencies who poo-poo consultants for being uncreative need to take a harder look at the facts.

Market success for the consultants has given them consistent growth over the past 30 years and the ability to pay handsome salaries and bonuses – something that the cost-reduced Plan A agencies have not succeeded in doing. The consultants’ acquisition of media and creative capabilities poses a genuine competitive threat, since these new skills are being added to their existing analytical and problem-solving skills.

Plan B for agencies requires a consulting-like makeover in thinking, purpose and skills. It will take strong CEO leadership to bring this about.

What about the holding companies? They cannot keep squeezing while their agencies rebuild along new lines. Holding companies need their own Plan B’s, and this should involve helping their agencies become Plan B successes.

Holding companies could, for example, declare that the sole purpose of their agencies is to help clients improve brand performance. They could declare as a matter of policy that their agencies will be paid for all the work they do – not for some guesstimate of how many FTEs the client is prepared to pay for.

Holding companies will have to re-educate their investors to lower expectations for near-term growth. It’s a time to sell ‘rebuilding’.

It’s also a time to mourn the end of Plan A.

Mourning is appropriate – the loss is real, and the glorious past should be remembered and celebrated. Life will go on in new and different ways … with Plan B’s instead of Plan A’s. Plan A is dead. Long live Plan B.

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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