CMOs, Take Advantage In The Opportunity That Exist In Agency Consolidation

By: Avi Dan

Published: March 14, 2011

How A Redefined Client-Agency Relationship Must Spur Change Within Client Organizations

Capitulation came down with a thud last Wednesday morning at the 4A’s annual conference in Austin. Perhaps missing the irony, the CEOs of the biggest advertising holding companies pointed to fiercely independent micro-network Wieden + Kennedy as the agency they admire most. Thus, and possibly unwittingly, they foretold how the world of Advertising would reset in the next few years. The financial squeeze that agencies experience will prompt a significant restructuring of the global advertising agency model. And this, in turn, will require global CMOs and marketers to review their strategic alliances with communication partners.

 The heart of the matter is that in a digitized world the traditional, multi-national agency model is unsustainable and inefficient. By and large, legacy agencies have not caught up with technology and their business model is not substantially different than NW Ayer’s, the first agency in the US, established almost 150 years ago in 1869. One notable exception being the globalization of their business model.

 Before the Digital Age and the Internet, having one hundred or two hundreds international offices made sense. You needed local offices to insure proper local service.  But what was once a way to localize service to clients has evolved into inefficient duplication, especially as markets started to mature. Agency teams in hundreds of offices engage in essentially the same activity, resulting in significant waste and unnecessary cost to the clients. Adding to agency woes is declining profitability: operating margins of agencies that work for the top-100 Advertisers declined rapidly and now stand at about 10%, whereas a couple of years ago they stood at 12.5%, according to Advertising Age. Clearly something has got to give. With clients taking a harder line on subsidizing agency operational inefficiency and waste, and with agency fees declining, the global agency model is not sustainable. It will likely be replaced by a leaner, a more nimble model, and still capable giving clients outstanding business solutions but at significantly more efficient manner.

Agencies are entities of “magic and logic”, to borrow an old phrase. “Magic” stands for ideas; “logic” is the supply chain. Over time, legacy multi-office global agencies evolved into organizations of  “logic”, distribution platforms. But as the world got flat with technology, distribution can be streamlined and  “magic” does not need 150 or 200 offices. Two of the most creative agencies of the last 25 years, Wieden + Kennedy and London-based BBH, were able to build mini networks with less than 10 international offices for their global clients.  So have Strawberry Frog, Taxi, Fallon, Crispin, 72 and Sunny, R/GA, AKQA and Mother.

Engaging in central campaign management, replacing duplication in managing disparate media and markets locally, enables the mini-networks. This approach, known as de-coupling, is the practice of separating creation from implementation -- and centrally applies translation, adaptation, and localization of Advertising. De-coupling is a proven way for delivering efficiency, transparency and speed through digitized workflow platforms, savings clients millions and giving them more flexibility of implementation. The approach is already highly popular in Europe and regionally with the top 200 global Advertisers.  De-coupling means that clients can avoid the need for local implementation through local agencies, while maintaining the integrity of the creative idea.

 The new multi-hub agency model will confront CMOs and marketers with significant challenges. For starters, they will need to streamline their client-agency relationships. Many have multiple creative agencies, multiple media agencies, and the number of marketing services agencies can be in the hundreds, with each market hiring its own. Clearly this is an inefficient way of doing business and rosters need to be reviewed and consolidated. But when it comes to roster consolidations, most marketers go about it the wrong way – using a standard approach, with little regard to special requirements. Instead, roster consolidation should be custom-tailored and strategic. The needs of the Advertiser should be evaluated, capabilities assessed, and goals established. The consolidation process is an opportunity for the CMO to identify the right strategic partner, one that is aligned with the company’s objectives and strategies.

 As rosters get streamlined, it will become even more important to put together a protocol for collaboration between different communication assets, especially as Advertisers will be called to do more with less. With the proliferation and fragmentation of media, building an effective architecture of multi-disciplinary collaboration globally will be indispensable.

The new streamlined marketing world will also require improving the way that marketing and procurement work together. Much of the tension between marketing, procurement, and agencies, can be alleviated with greater alignment of functional objectives, communication, cross-functional education, and upstream approach to collaboration. Procurement needs to be brought up in the mix earlier to be responsible for supplier engagement from a cost assessment and benchmarking point of view, the “logic”, leaving the marketing team to deal with the “magic”, focusing on the creative campaigns with their agency partners. 

The process of redefining the client-agency relationship will also require changing the dynamics of marketing within companies. It will require mastering technology capable of accelerating accuracy and speed to market, as marketing becomes personal, interactive, and mobile. Technology and analytics experts will become integral part of the marketing team to allow for real-time marketing.

The new agency model will result in significant savings by shifting to a pared-down hub model, avoiding duplication, and streamlining the cost of localization. In the next 5 years agencies will undergo more change than in all of the last 150 years combined as they are confronted with a  “show me the money” moment.