Many years ago, traditional ad agencies dominated advertising, led their clients and innovated in TV, print and radio with highly creative ads that established and grew client brands. They weren't very good at managing their costs, though -- they over-invested in creative and account management departments and under-performed in the profit department. JWT famously earned only a 4% profit margin in 1986 when purchased by WPP, and this was at the height of the media commission era, when agencies were extremely well remunerated.
Holding companies saw agency under-performance as a financial opportunity -- buying under-performing agencies, bringing financial discipline through budgeting and cost controls, and driving up their profits. This, it was argued, would make agencies stronger and better able to keep abreast of technological and global client developments. It was also good for holding company share prices, which were driven upwards by growing profits, making future acquisitions cheaper. Agencies and holding companies both benefited -- a genuine win-win situation.
How things have changed! Agencies are still being squeezed for profits, of course, but in an era of procurement-driven low fees, the profit squeeze leaves them unable to afford much in the way of strategic spending. Traditional agencies find themselves unable to invest in digital resources; travel and hiring freezes are frequent; even downsizings have to be deferred to the beginning of new fiscal years because end-of-year separation costs are a drag on budgeted profits. Traditional ad agencies struggle to handle growing client workloads with slimmed-down, junior resources. Traditional agencies are enfeebled by these developments, and their clients have to increase the number of agencies they work with in order to carry out their diverse marketing scopes of work.
Holding companies are gradually taking over the marketing leadership role once held by their traditional agencies -- offering "holding company relationships," led by holding company executives, buying major digital properties in a race to offer comprehensive digital solutions to clients. Traditional agencies are neither strengthened nor weakened by this holding company trend -- they hang on to the pieces of their relationships where they have expertise, but compared to the past, they have reduced client leadership roles, and this limits their ability to influence marketing directions or fees.
Traditional ad agencies are major links in the holding company chain. How strong is the chain if the major links are weakening in operational ways? Growing workloads and declining fees were viable financial possibilities when there were surplus agency costs, but these surplus costs were squeezed out long ago, and it's muscle, not fat, that is squeezed out now in the quest to deliver profit margins.
Holding companies should not be blamed for squeezing agencies for profits -- that's their job. Procurement departments should not be blamed for reducing annual retainers -- that's their job, too. Traditional agencies should be blamed for letting their operations run out of control. They deliver growing volumes of advertising output for declining fixed fees, and this is no longer viable. They need to run themselves as businesses, and spend as much time on operational management matters as on new business development and winning creative awards.
The diverging strategies of holding companies and their traditional agencies will end in tears at some point in the future. There is still time to re-balance the situation. Holding companies should look within their portfolios at agency operational management practices and set new standards for them to ensure that the weakened links become strong once again. Workloads, fees and resources need to be put into balance to shore up agency profits. Traditional agencies need resources to invest in digital capabilities. Holding companies cannot afford let their traditional agencies take back-seat roles with weakened capabilities. The divergence in strategic direction is not a healthy trend.