Sell, scale or sink: what is the new model for independent boutique agencies?
The recent news that holding company alternative The Marketing Group’s share price was sliding, alongside a stream of controversial headlines, was an own goal for agency model innovation.
What is the future indie agency model like?
The company has now spoken out about the issues that it has faced, as well as ways in which it hopes to still turn round the fortunes for the group and its 18 agencies. However, there are still many independent agencies wondering what their next move should be, as they work out how best to scale and service clients.
Pat Law, founder, Goodstuph, believes that comparing indies to network agencies “isn’t fair.”
“Challenges work both ways, regardless of whether one’s a network agency or an independent agency. Same shit, different office, so to speak,” said Law.
“We don’t have phenomenally high overheads to worry about like the big boys may have, but conversely, we have no sugar daddies to come rescue us if we need,” she added.
Resources are stretched at indie agencies, and Law would rather concentrate on the bird in hand than the ones in the bush.
“Particularly from a pitch perspective, resource is certainly an issue. In most cases when we decline an invitation to pitch, it is because we have existing campaigns on hand. Wives come first, pun not intended, and we would much rather spend our time on clients who already believe in us, than to try to woo another client into bed for a one-night stand,” said Law.
“We don’t have the luxury of a dedicated new business team; the same team pitching for a brand will likely be the same team working on the account. When you’re up against a seasoned new business team whose only KPI is to win new business, it is admittedly hard to match up. I have witnessed firsthand the first-class showmanship in presentations, and it is very impressive,” she added.
Wong Voal Voal, managing partner, IN.FOM, disagrees and believes that the challenges around resources for indie agencies are fading.
“IN.FOM often takes on networked agencies in pitching for regional remits. We feel that traditionally perceived challenges against networked agencies such as resource, scale and brand name, are slowly eroding in this region,” said Wong.
“This is due to several market-shifting factors, such as shrinking budgets, new client needs, tight talent market, increased savviness in selecting communications agencies, etc. Of course, there will be still some global-level communications procurement exercises that will exclude independent agencies like us. But, there is a strong case for independent agencies in a fast-evolving market where communications leaders are increasingly demanding agility, innovation and deep expertise in new areas of comms,” he added.
Joseph Barratt, chief executive officer, Mutant Communications, admits that there is a brand recognition issue for indie agencies at times, as well as being able to wield more control.
“In the early days, one of the biggest challenges was a lack of brand recognition and client comfort levels around not working with a known agency. A lot of the big players like to work with big agencies because it’s a safe move, even if it’s not the best one,” said Barratt.
“For us, finding brands that wanted to do things differently or were keen on creating a different type of relationship was key - and there are plenty of them. We’re working with some of the biggest brands now, but the key to this was finding people who wanted to do things differently to get our name out there as a quality and reliable agency.
“We hit a tipping point for growth when we reach that $1m in a calendar year, so around $85k per month. From there, doubling our revenue only took another six months and the team grew considerably. It also put us in a very different position as an agency. Having the power to say no or to turn away business opportunities is empowering, and it allows us to focus on sustainable growth, as well as clients who value the partnership,” he added.
For Dan Day, chief executive officer, Invisible Artists (IA), ultimately quality is what sets itself apart from the big boys.
“For IA, we are most concerned with the quality of our work as this is what differentiates us from other larger companies. We've stuck to our core value that at IA, we continue to trade based on the quality of our work and have developed relationships with smart clients and agencies like Facebook, Nielsen, Unruly and Dentsu Aegis Network who understand the value they receive from working with us,” said Day.
While these indie agencies continue to jostle with the big boys, the giant holding companies are still on a buying spree.
For Goodstuph’s Law, it reflects the reality of the markets and might provide a quick fix for the bottom lines of the ‘big boys’.
“I think it’s perhaps a reflection of the slowing economy. Acquiring a local agency and their revenue is sometimes a faster way to justify one’s Profit & Loss statement than to pray for organic revenue growth,” said Law.
However, Law does not see selling as an exit, but remains pragmatic about that future.
“I don’t think there is any loss of appeal in selling GOODSTUPH at some point. It’s a marriage, isn’t it? So the rock, firstly, has got to be legitimate in size, but at the same time, we’re not about to say yes to someone we can’t get along with regardless of how big the rock is. Chemistry and synergy are important factors too. So with the right person, we will say yes,” said Law.
“Having said that, GOODSTUPH was never born with the intent of selling and hence, our decisions made were never based on short-term gains. There is no way in hell I would undercut our fees to win a regional account so that we could impress the network gods with our portfolio.
“I’m not worried but I’ll be foolish not to recognise the need to be constantly evolving as an agency. It is my job to think 10 steps ahead for the agency,” she added.
For IN.FOM’s Wong, the M&A activity reflects other regions trying to muscle in on a piece of a fast-growing pie.
“M&As will be pervasive in fast-growing regions like Asia Pacific, where Americas and Europe regions struggle with stagnant or slow-growing markets. Every market will have two types of agencies, assuming that they are thriving: those that are created with passion and deep ownership; and those that are purpose-built to be sold eventually,” said Wong.
“However, at the end of the day, no agency owner would ignore a good offer on the table. It’s a question of whether there is alignment in the M&A terms and vision for future direction of the agency between the transacting parties,” he added.
As for Mutant’s Barratt, being unaware of the increasing deals is bliss, as “it’s not something that worries me because I don’t really think about it.”
“We have grown 100% year-on-year for four years and we are on track to do it again in 2017. This year we are gearing for regional expansion with a couple of new offices on the horizon,” said Barratt.
“That’s what I find exciting. I love what I do. Having more resources to work with sounds great, but not if I lose control and have to deal with all the rest of the baggage that comes with being part of a corporate beast.
“From a financial point of view, when I see the multipliers along with a 4-year earn-out, it doesn’t look very attractive when you consider what you could do with a business in 4 years,” he added.
For IA’s Day, quality is what ultimately suffers when the big boys take over the operations.
“The issue with big holding companies is that quality levels are lower or the quality is only being propped up by the supply chain. There's a clear pattern being followed by holding companies in the industry to develop a machine-like entity that lacks the return in quality versus price. Because every dollar spent with IA is considered and used wisely, rather than worry, we stay efficient and are held accountable for the quality of work we produce,” said Day.
Some of these issues were, ultimately, the driving force behind The Marketing Group's model. CEO Adam Graham remains bullish that its model can work as an alternative.
"Last year we were the third most active company in the M&A space after WPP and Dentsu, followed by a period of consolidation and stitching together. We are bringing the 18 agencies under four business units, and are seeing collaboration within the network,” said Graham.
“This is really just the beginning with the new board. Last year we saw some of the teething pains, but we’ve moved into a different phase with a more mature setup, and are looking to round-off our service offerings in hub countries Australia, Singapore, UK and the US,” he added.
For dealmakers like Alyssiah Tsui, director, SI Partners, such M&A activity between indie agencies and holding companies hardly falls through after a letter of intent (LOI) or memorandum of understanding (MOU) is signed.
“Once a strategic fit has been confirmed, and broad commercial terms have been agreed, there is a 95% chance the deal will complete,” said Tsui.
However, there are still instances of deals falling through, such as the regional business unit saying yes but not getting the go ahead from headquarters, according to Tsui.
“The ‘target’ having a really bad year and not making the budget – therefore changing the value too significantly for a deal to complete. Due diligence – the legal structure was complicated and became costly to acquire. An acquirer reducing the initial offer, deeming the IP was not worth as much as they thought it did,” she added, listing some reasons in the last six months for deals falling through.
Is there a disconnect then between acquirers and acquisitions? Tsui doesn’t think so, instead she believes that some deals are just better integrated than others.
“Some have an integration process they will follow, with assigned ownership, and others leave this to the acquiring business unit,” said Tsui.
Instead Tsui sees falling out happening over the following reasons:
- Targets think the acquirers would provide access to clients and anticipate big projects being handed to them – this rarely happens
- Targets not making their forecast for the above reason
- Acquirers perhaps being quite vague about what are the real benefit of joining a network?
- Founders are usually entrepreneurs and they find it hard to adapt to being now an employee again
Aside from that, Tsui believes that M&A deals are still attractive to indie agencies, citing recent activity from Finn and WE.
“Smaller agencies are more flexible and creative in what they can offer a seller, and can make a deal look more attractive than standard deals from big networks,” said Tsui.
The future of the indie agency model
While indie agencies find their way, WE Communications has launched a new alternative to holding companies called The Plus Network.
“To accelerate a brand story today nimbleness is critical, as is the right set of experts who can set ground breaking ideas into motion across an ever expanding media ecosystem,” said Melissa Waggener Zorkin, chief executive officer and founder of WE Communications.
“Unlike traditional agency network models, The PLUS Network is a unified proposition that puts client needs first – not leadership, whose main concern is next the next quarterly profit target,” she added.
The network brings together WE, The Garrigan Lyman Group, Salt Branding, YouGov, Interel and Envy Create to work together as a standalone brand to deliver integrated capabilities spanning the entire media ecosystem.
The network claims that the combined billings of the six agencies exceed $300m globally, providing the scale and muscle to compete with the holding groups.
“We are incredibly excited about what we can do together with clients under this new revolutionary model,” said Aaron Petras, vice president of agency and partner strategy, WE Communications, and managing director of the PLUS Network.
“Our PLUS Network partnerships deliver a new way to problem solve modern day marketing, policy and communications challenges – unencumbered and with the client at the centre,” he added.
As for Goodstuph’s Law, the new business model for the indie agency still has to stand out from the networks.
“I reckon it depends on what the product and service offering is for the independent agency. But without a doubt, there must be a unique selling proposition, a distinct culture that runs through the veins of the agency, for survival,” said Law.
“It doesn’t make cow sense to offer the same thing as a big boy with less resources and less revenue,” she added.
IN.FOM’s Wong believes that ultimately competing purely on price is going out the door for indie agencies.
“The comms industry has been in a disruption mode for a number of years now. We have seen clear shifts to a new world of comms that demands new approaches and hence business models. For independent agencies to succeed, we firmly believe that we should compete based on agility, innovation, strategic thinking and passion, and not on pricing,” said Wong.
For Mutant’s Barratt, the ultimate value proposition that indie agencies offer is in great value.
“It’s different for different styles of agencies. Our model won’t work for everyone, but it works well for us. The overarching goal for us to provide great value. Great value doesn’t mean cheap. We’re not cheap, but an equivalent campaign with the big agencies would be twice the price, yet we still get our 15-25% margin. Our focus is always on what we are delivering for the client and ensuring they get good returns,” said Barratt.
“I hate wasteful meetings, bullshit sessions or unnecessary reports. It pads out contracts that could be better used getting things done. The world has moved on. There is no room for bloat in my world. People want shit to get done, they want it done well, and they want it done now, and I get that.
“In fact, we signed a client recently after they got pissed off with another agency that was suggesting a series of branding workshops and other unnecessary rubbish when they clearly just wanted someone to hit the ground running,” he added.
This boils down to hiring go-getters rather than managers according to Barratt.
“Structurally we’ve achieved that by hiring proactively and building a strong culture. We’ve hired a lot of senior do-ers, but never the floaty managers earning more than everyone else but not actually delivering value,” he said.
As for IA’s Day, independence is still the ultimate goal for their business model.
“Independence is all about having a light footprint. This means IA can pivot and quickly find the right people in market to work on localised projects at a much larger scale than bigger agencies. This is an important ability of IA that provides a platform for other growing agencies to also enter Asia and be able to operate effectively,” said Day.
“We continue to be on a growth trajectory and work with ambitious agencies across Asia, Europe, and the U.S. that are keen to work with us,” he added.