Forrester’s analysis of the current state and future prospects of the holding companies covers some interesting ground, but most of what we get isn’t exactly new insight. The industry has been talking about how to tackle many of the issues raised in the report for years - that agency groups need to break down silos, become more agile, respond to brands taking services in-house, and position themselves better for global clients. It’s hardly new news.
The report underestimates the changes the agency groups are already making to seriously address the issues that impact their survival, and Mark Read has rightly challenged this. But is also overestimates the advantages the consultancies hold. And it certainly doesn’t go far enough in terms of how the industry needs to change.
Much of the report focuses on the need for the large networks to remove the silos between their teams and operating units and we would agree this has become their single biggest challenge. But then again, they are already tackling this: Dentsu has operated with one P&L (by country) for many years now, specifically to enable multiple brands to work together more seamlessly. Meanwhile, WPP introduced its 'horizontality' approach and began to restructure, as seen with the merger of Wunderman, Possible and Salmon to create a global group bringing digital, data and ecommerce together.
The other holdcos are all going through similar restructuring. In fact, much of the recent turnover of senior individuals has been due to the restructuring to remove silos.
That said, it is absolutely true that the restructuring hasn’t gone far or fast enough. The old cliché about how long it takes to turn around a tanker is true. After all, how do you dismantle silos that have been built up over decades – especially when many remain protected by complex earnout arrangements and bonuses based on individual P&Ls?
The report also rightly mentions in-housing as a fundamental threat to the agencies. There has been a move to bring certain marketing roles in-house, typically because an in-house role can cost as little as half what you might pay an agency, but the biggest area of threat is probably the in-housing of media buying.
To date this has mainly translated as the very largest advertisers bringing programmatic media-buying in-house. But there is also an opportunity here if the agencies chose to take it: rather than think of it as a threat, they need to think about how they can help brands in-source programmatic and continue to support that function in the long term. The agencies have immeasurably more expertise to bring to bear in media than the consultancies.
And more importantly the agency groups should be focusing on how they can make brands comfortable enough that they don’t want to in-house in the first place. A key driver is to do with owning and protecting proprietary first party data; if agencies prove to brands that they can ring-fence this data and so re-build confidence, the need to in-house becomes less urgent.
The report further highlights two fundamental changes in the industry that have played into the hands of the consultancies. The first is the shift from a focus on “communications” to large digital transformation and customer experience projects across multiple touchpoints. The second is the requirement for agile teams across service lines and geographies working seamlessly for their clients.
We agree with this, however it’s hard to believe the consultancies are attracted by “lucrative agency business” as the report claims when the large agencies have roughly the same margins as the consultancies. In truth, they are attracted by the ability to deliver on end-to-end transformation and customer experience projects and expand their share of wallet, particularly as budgets move from traditional advertising to broader digital transformation projects.
The report also talks about the need to move to “outcomes based” compensation rather than time and materials. There is definitely a (slow) shift in this direction but the agencies probably have more experience of this than the consultancies, which are very much time and materials based in their billing.
We certainly don’t underestimate the impact of the consultancies on the market. We see it in their level of M&A activity and broader investment and commitment to the sector. Technology and the rise of the importance of customer experience has shifted the industry in their favour. But their advantage is not as cut and dried as the report makes out. They have a long way to go – and the agencies have a huge head start if they can address some of the challenges the report identifies.
So where else does the report fall short? Surprisingly it doesn’t spend much time on media, which is the largest part of the market, and where the large networks have historically made the greatest margins. At Results we can envisage a future where the planning and consultancy around media becomes completely separated from the trading of media – leading to much better transparency and avoiding the current potential for conflicts of interest.
The report also fails to talk about the growth of on-site (as opposed to in-house) which is currently one of the most talked about areas in the industry. There is a significant rise in agencies putting their employees on-site at the client brand – Oliver, Wunderman Inside, The&Partnership and others all have on-site offers. This is clearly something the consultancies have done for years, but the agency groups are now following suit.
Forrester has, to its credit, provided specific recommendations for each of the holding companies. However we’re curious as to how it reached its conclusions on where each of the holding groups stands in terms of transitioning to more competitive business models. The factors it drew out – new service layers, global practices, financial alignment and so on – all make sense on paper. But where is the evidence behind the assertion that WPP’s global footprint is lagging behind (or ‘developing’ as they put it) some of the other agency groups?
Predictions are a risky game and Forrester has had the confidence to make some pretty bold statements – the acquisition of WPP, or the imminent arrival of AT&T into the industry for example, which certainly make for dramatic headlines. My suspicion is that the changes in the industry will in fact be much more disruptive than Forrester predicts and we will look back in five years time and wonder, with the benefit of hindsight, why we couldn’t see it coming.
Julie Langley is a partner for Results International
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