Engine trouble: can NFC turn around UK agency group following staff exodus?

Under its previous ownership, private equity concern Lake Capital, Engine had been ”starved of investment.” But the talent present in the business persuaded NFC that it was worth a punt. ”The more time we spent with them,” he told The Drum, ”the more we thought: this really is good.”

Betting on the agency’s staff as the foundation for its future growth, however, may take longer than hoped to pay off for its new parent company. Engine has seen a series of high-profile departures in the months leading up to – and since – its acquisition. These include UK chief executive officer Jim Moffat in April 2021, his replacement Ete Davies in January of this year, client managing director Louise Hayward in February, and vaunted chief creative officer Billy Faithfull and chief strategy officer Gen Kobayashi, who both departed in April.

With the exception of Davies, whose chief executive role was filled by Odd Group’s Phil Fearnley as it merges with Engine Creative, each of those roles are still open.

According to sources within Engine, the exodus hasn’t been limited to the C-suite. ”There have been a lot of senior and mid-level staff leaving over the last few months, and over the next few months,” says an Engine staffer. While the previous ownership may be primarily to blame, the departures are a major problem for NFC.

Why are staff exits an issue?

According to Michael Seidler, founder and chief exec of M&A consultancy Madison Alley, it’s crucial for incoming acquirers to hold on to key staff.

”It’s a very critical question to any acquisition because you’re buying the people at the end of the day, with these agencies and the clients,” he says.

Staff are the anchors of client relationships, and departures might mean the disruption or loss of a smooth working correspondence. Furthermore, the loss of key talents (such as Faithfull and Kobayashi, in the case of Engine) may endanger client confidence in the acquired agency’s ability to keep supplying a quality service.

The typical strategies for keeping key personalities in place in an agency acquisition, such as founder earn-out deals, won’t have been available to NFC since it acquired Engine from a private equity firm, he points out.

”Private equity acquisitions tend to be short, or no earnouts with very short timeframes. Often it’s equity that’s provided to the management, and most private equity groups that are buying, they’ll provide an employee incentive pool for the rest of the team to ensure, because they don’t have an earnout, that everybody has a stake and an equity interest in the business.

”It’s a bit more challenging when a company is private equity-owned and the management team owns less than 20%. Then sufficient incentive structures need to be devised, because 80% of the proceeds, or the vast majority of the proceeds [of the sale], are going to the private equity investors.”

That doesn’t mean NFC doesn’t have any options. Headhunter Sasha Martens, founder of recruitment firm Sasha the Mensch, points out that acquirers can persuade staff to stick around by committing itself to them – expensively, if necessary. ”In the eyes of the employees, the best actions the acquiring company can take are in the way of increased salaries and better benefits, demonstrating that a larger organization isn’t always a bad thing. Things like greater access to more resources, the ability to work in different offices and bigger budgets,” he says.

Agency culture is another factor that can keep staff in place, and while acquiring companies tend to steer clear of major changes within the first year of ownership, Seidler explains: ”The offices are maintained, the culture is maintained. So a lot of that preservation of that culture is important. And any transition to ’integrate’ needs to be done carefully. Because the last thing you want to lose is people who have built up the success of the agency.”

Martens tells The Drum that ”first, the acquiring company should demonstrate that it understands and values the culture of the agency. In the best cases, it should be ‘hands-off’ and let the organization function as it has, allowing its employees to hold on to a feeling of autonomy.”

But Next Fifteen has a more activist mindset. It is integrating Engine’s creative practice and Odd, while merging away Engine’s transformation and media businesses with other agency properties.

Martens says ”by nature it is very difficult to maintain staff in these situations, as there can often be a major shift in company culture with new processes and expectations coming into the fold.”

Furthermore, he adds, Engine’s good name in the industry may not survive the acquisition process fully intact – motivating some staffers to look toward the exit. ”Some shops are what I call a ’reputation agency’ – meaning they can lift a career just by being on a resume.

”When those agencies go through an acquisition, they tend to lose that X factor, and no amount of incentives can reverse what creative types are seeking in a working environment.”

What can NFC do?

NFC is no stranger to acquisitions: the company owns almost 30 agencies in total. And according to Fearnley, it expected to do some repair work within Engine following the lengthy merger process.

”Any sale process ... is quite destabilizing, particularly for the leadership team. And when that process is elongated, as the process was, it’s even more destabilizing.”

The process of combining Engine Creative and Odd into a new entity – with a new brand name – is set to be complete by the end of July, he tells The Drum. ”We’re halfway through that process of bringing the businesses together; they’re still separately run.”

Bringing in new staff has been a major focus. Both Odd and Engine had a ”number” of open roles going into the merger (the former’s due to an influx of new work with clients Tesco and Marks & Spencer) and Engine Creative had a number of roles held by staff on fixed-term contracts (FTCs); the agency saw very little recruitment activity going into the sale. ”That meant there’s a number of roles that probably should have been filled under normal circumstances, that should have been recruited into rather than having FTCs.”

Since the sale, he says his team has ”opened up the recruitment gates for the new creative teams, the recruitment ban is over and we are now in hiring mode.” In the last month, around 20 new staff have been brought in, while another 20-30 roles are still yet to be filled across the combined team (prior to the merger, Engine had about 600 employees).

”Whenever there’s a change of ownership, there’s always going to be a change of personality, the family decides, you know, for their own good reasons,” says Fearnley. But, he adds, ”Engine was bought by NFC to invest rather than drive costs. There’s been no redundancies, or any kind of targets for cost savings in the merger; none of that is affecting our business.”

Some headway is being made, both with internal and external hires. Kobayashi’s role has been taken on by Matt Rhodes, formerly head of strategy.

Meanwhile recruiting to replace Faithfull following his departure for personal reasons ”is a process that’s in train,” says Fearnley, who says the relationship with the Royal Navy, work for which Faithfull was heavily associated with, is still ”really, really strong.”

The other major focus will be attracting new clients. New business coming in to Engine had effectively dried up prior to the merger, he says, and much of the work of the last three months has gone on unblocking its new business pipeline.

”We’re in the process of pitching for some stuff at the moment. We’ve done a number of pretty good pitches recently,” Fearnley says, and though no clients have been lost, he admits that ”it’s inevitable there’s a bit of uncertainty around,” and that the combined business hasn’t yet picked up any new clients.

NFC has, largely under the radar, constructed one of the largest agency groups spanning the Atlantic in recent years. But to continue to grow and compete with similarly structured businesses such as MSQ Partners, it will need to ensure large mergers such as Engine – and the acquisition of M&C Saatchi, itself a drawn-out sale – succeed.