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
Nobody will mourn the loss of holding companies.
ReplyClients will still need to advertise, communicate and connect.
It just won’t do it with agencies belonging to holding companies.
Why pay high prices, endure delays for sub standard ideas from the cheapest of juniors?
Cheaper, faster and just as good, if not better solutions are available.
And that’s the Plan A of the independents.
Just because holding companies have no Plan B, it doesn’t mean that smart individuals also don’t.
A very good and crisp article indeed. The holding companies have to revisit their model. If we notice the financials of most of the network groups, talent alone costs averaging around 60% of the revenues earned. Whilst the majority of costs are towards value generation,there is still a significant portion that can be shaved especially at the holding levels and brands/sub holding/ levels.
These levels were created in the past based on the archaic models and thought processes where reporting and management was a very manual and tedious process. However we have moved to a new technological dimension where automation, AI and many catalyst allows these tasks to be simplified. One then wonders why with such tools and possibilities, the holding companies are still operating on the defunct structures. I can only suspect that the management of such holding companies aren’t well versed of the possibilities (most unlikely) or they are not willing to change as it would threaten their existence altogether along with the heavy pay checks they receive along with it ( I am sure they are a huge contributors to the talent costs mentioned above).
Holding companies have to revisit the structure even at the operating levels and reduce the number of brands and integrate the services offered which is key towards providing value to the clients. Perhaps we have to have one point solution drivers and simplify the decision making for clients, however Utopian this concept might be.
Many holding companies proclaim to have taken that directions but it still lacks the true essence of an integrated provider due to the inherited silos and misaligned KPI’s attached to the brand drivers.
Regardless, change is inevitable and Plan B or C (whatever you call it) is the only way forward, status quo isn’t.
Replygreat article and spot on
but actually Plan B has been mooted, by some, for years (at least more since digital kicked in) but seems the focus was always on short term growth and milking while the going was good and too many silos remain (many / most of whom are not incentivised to work together for the greater good. 18% profit year on year, even for the newly acquired entities in this economy, is just a joke)
It is now time indeed for Plan C…but I can’t see what happening anytime soon unfortunately….it’s too much of a gear change and will not deliver a short term ROI, but it’s certainly what everyone (clients alike) needs right now
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