At the start of this year, we flagged Karmarama as one of the last independent agencies of scale left in the UK. We also said that it was unlikely to sell up unless a really interesting offer came along.
Well, as of yesterday (29 November) it is no longer independent as that offer arrived. In a move that surprised just about everyone, the Farringdon-based agency was snapped up by the consulting giant Accenture. Rumours started circulating late on Monday night and by Tuesday morning the deal was done. The figure bandied around was £50m, about 1.5 times revenue, although Accenture has not yet revealed how much it paid upfront or the deal structure.
Now, everyone knows that the big consultants have been eyeing the marcomms market for years – we’ve written about this, and their moves on the big ad groups’ territory, many times in The Drum – but Accenture’s swoop into the world of more mainstream marcomms offerings (rather than digitally-led) caught everyone out. None of the big consultancies getting into the space – EY, Deloitte, PwC and KPMG – have ever acquired such a large creative agency before.
So, now that the dust has started to settle, we can consider what this very surprising deal means. First of all, let’s look at the buyer and the bought.
Anderson Consulting began way back in the 1950s as the business and technology arm of the US accounting firm Arthur Andersen. It was established in 1989 as a separate legal entity operating independently from Arthur Andersen. That year it relaunched itself as a Dublin-headquartered entity, trading on the New York Stock Exchange.
A few years ago it established a unit called Accenture Interactive (named recently by US trade journal AdAge as “the world’s biggest and fastest-growing digital agency network”). Accenture Interactive has been buying up digital agencies including majority stakes in IMJ Corporation in Japan, AD.Dialeto in Brazil, Pacific Link in Asia, US creative shop Chaotic Moon and Swedish digital content business Brightstep. However, Karmarama is its first major UK acquisition and a step aside from Accenture’s digital stablemates.
And what of that acquisition? Karmarama was launched by partners Naresh Ramchandani and Dave Buonaguidi in May 2000. Previously they had worked together at HHCL and were creative directors of the London office of Chiat/Day before launching the first advertising agency co-operative St Luke’s, where they created memorable campaigns for the likes of Boots, Ikea and HSBC.
By the mid-2000s Karmarama was making a name for itself, winning big new business pitches and producing much-admired work for Amstel beer, Costa Coffee, BBC and Nintendo. In 2011 it received a cash injection from private equity house Phoenix Equity and went on an acquisition spree, buying up agencies Crayon, social media shop Grape and mobile specialist The Nice Agency. The Karma Communications Group thus became a force on the London digital agency scene and it is this, along with the agency’s wealth of creative and management talent, its reputation for effective campaigns and its client list (Unilever, Honda, Just Eat, and BBC to name but four), that attracted the interest of Accenture.
Yesterday’s deal is the clearest sign yet of the growing interest that the big consultants have in moving into more mainstream marcomms services alongside the digital offerings they are establishing. The idea of big management consultancies hoovering up creative agencies probably sends shivers down the spines of old-school denizens of adland, but there is a firm business logic to this trend. In a world of big globalised brands, what clients are interested in above all is strategy and solutions to problems of branding and communicating with those brands’ audiences.
This is high-margin, profitable work – in contrast to 'old-style' creative execution, which is becoming commoditised, especially in the increasingly important digital space. This is of course of interest to management consultancies that have built their empires on providing strategic advice to their clients.
Interestingly, Jon Wilkins, Karmarama's executive chairman who will be taking an additional leadership role within Accenture Interactive, told Business Insider yesterday he never wanted to sell the business to a "classic" advertising holding company where "all the benefits of independence could be stifled".
In fact, he described Accenture Interactive as one of the most "entrepreneurially minded businesses" he had come across – which is a clear sign that adland’s attitudes to the consulting giants may be changing.
Brian Whipple, the global head of Accenture Interactive, has said that although it is part of a consulting firm, it is not a consultancy itself – neither culturally nor in the way it does business. And looking from the outside, as well as having been in its offices, that does appear to be the case.
The issue for the marketing industry is that it is changing, and swiftly. Technological change is outpacing its ability to cope with that change, and the change is structural. Increasingly, chief marketing officers are having to justify to their boards the budgets they are given; not only do they have to demonstrate ROI on campaigns, but they are also having to justify the very existence of marketing.
The obvious example is the rise of ad-blockers and non-linear TV viewing. Consumers, irritated by constant marketing noise, choose to block it out altogether by fast-forwarding through the ad breaks or by downloading an ad-blocking app. This makes it more difficult for brands to get messages across and connect with people. This problem can of course be solved (at least in part) by giving the consumer something in return for their time and attention – in, say, the form of a reward or by creating something entertaining, useful and informative – but the problems go deeper than that.
What’s required is a huge rethink – something along the lines of Lou Gerstner’s repositioning of IBM as a high-margin tech-focused consultancy, rather than a loss-making computer manufacturer; or Apple as a consumer electronics company rather than a computer maker.
Consultants are often pretty good at this long-term big-picture thinking and their ability to think and plan strategically, along with good data analysis and quality creative insights, may help address the marcomms industry’s structural issues and help brands connect with users more effectively.
And with this deal, it seems to me that Karmarama may have decided much the same. Independence is a quality that agency staff value extremely highly. It also has many business advantages and is often valued by clients too. But scale is important as well: ambitious indie agencies want to work for blue-chip brands and to have their work seen by as many people as possible; while big clients want synergies, cost-savings and the ability to deliver.
The classic method for ambitious independents to achieve scale is to join the holding company fold, gaining access to big clients and resources in the process. Unless post-acquisition integration is managed properly, this can sometimes result in a loss of cultural identity and an increase in process (as opposed to output).
It is in this context that Wilkins and his team's choice to go with Accenture Interactive rather than a traditional marketing group starts to make sense. Wilkins has said that Accenture Interactive’s "entrepreneurial spirit" was one of the things that attracted the agency and Accenture’s track record (ie leaving the agencies it has acquired over the past couple of years to get on with the job while providing them with the resources to do so) suggests he might be right. Despite the dismayed reaction from some quarters, there seems to be a good fit.
In addition, a company like Accenture will have the one thing aside from resource that all indie agency chiefs (and many holding group senior managers) crave – access to chief executives, chief marketing officers and other decision makers. There’s an allusion to this in an interview with the key players in this story published by The Drum yesterday.
It’s too early to say how this deal will pan out or what it means for the industry, but I suspect that we’ll look back on this buyout as the most significant deal of 2016.
First of all, Karmarama was one of the very few independents of any size left in the UK; secondly, it gives Accenture a lead over its rivals; thirdly, it may signal a change in the way that agencies approach clients; and finally, it will surely make the likes of Sir Martin Sorrell, Maurice Lévy and John Wren sit up and take notice. They’re no longer the only game in town, and the price of a good independent agency may rise as competition heats up.
We’ve been banging on for years about how management consultancies will move further and further into marcomms, and this deal cements that hypothesis entirely.
Tony Walford is a partner at Green Square, corporate finance advisors to the media and marketing sector