5 Reasons Why the Holding Company Model is Not Broken

With WPP in the spotlight, what will become of agency holding companies? Here is a potential answer.

by Hervé de Clerck , AdForum

Only moments after Sir Martin Sorrell’s abrupt exit from WPP, we were inundated with articles, posts, thought leadership sound-bites and conference panel comments – all predicting the death of the holding company model. 

As the dust began to settle, WPP’s new Co-Chief Operating Officer, Mark Read, flew to New York to address the world’s leading agency search consultants at our AdForum Worldwide Summit. Read’s message about the holding company issue was this: ‘Clients need our offerings; there is no reason to break up WPP. Of course, we will look at resource allocation, but our priority is to focus on growth.’

After a week of private Summit meetings with the leaders of 23 advertising firms of all sizes and disciplines, it became clear that this question is now central to the industry. Many CEOs positioned their companies as direct answers to the threat of in-house agencies, consulting firms or their Google/Facebook ‘frenemies’.

Holding companies were renamed ‘partnership groups’; networks were branded ‘collectives’; legacy agencies touted creativity as their core reason for being; and the digital natives now proclaimed the breadth of their service and the depth of their involvement in client strategy and product development. At the same time, consulting firms are acquiring creative capabilities at high speed.

My own view is that the holding model will survive. Here is why:

Big is beautiful (again)

At the dawn of advertising, there were full service agencies: everything was done under the same roof. Then, fueled by the rise of independent media agencies like Carat, media buying was unbundled as networks created their own media buying subsidiaries. And in media buying, size mattered; hence the M&A frenzy we witnessed during the last few years of the 20th century. Skip forward to today, and we’re often told that in a world of surplus digital media supply, size is no longer a valid differentiator. That may be true for media, but what about data? Given the need to harvest, store, process and distribute, handling Big Data requires high investment. Only those with deep pockets can run in this race.

In the real world, Goliath wins

Currently, the average revenue of the 5 tech giants is USD 125 billion: that’s 10 times the average size of the 5 advertising giants, generating 15 times their average profit. Even if commercial communications represent only a fraction of tech giants’ investments, they are already Goliaths that agencies stand little chance of toppling. The likes of Amazon are busy taking ownership of the relationship with the consumer, so why shouldn’t they also conquer the hearts of advertisers? Agencies are therefore compelled to consolidate their investment capability in holding companies.

The surge of consultancies

The same people who proclaim holding companies are irrelevant are also predicting the domination of consulting firms – which are rapidly snapping up ad agencies. In Ad Age’s list of the world’s agencies, 2 consulting firms are now in the top ten. So why should holding companies break themselves up when their supposed archenemies are doing exactly the reverse?

In-cage agencies

The success stories of in-house agencies have yet to be heard. But from Dell to Ford, there have been quite a few failures. Too much complacency? Too ‘horizontal’? The truth is that communications requires flexibility and boldness. Not to mention fresh air. The average client-agency relationship may end after three years for good or bad reasons, but that figure is a reality and change is easier when alternatives are available. Those alternatives simply cannot be found in-house. Holding companies provide deeper, broader and more agile resources.

Left brain is more flexible than right brain

In the end, the central issue is not the holding company model, but the ability of all parties to adapt to a rapidly transforming industry landscape. Size will be even more important tomorrow. And integration a requisite. The fact is that Big Data has changed the nature and scope of commercial communications. Data fuels strategic planning, inspires creatives, allows laser-like media targeting, and measures efficiency. Tactics such as CRM, direct marketing or in-store promotion, once considered minor arts by creative agencies, are now central to our business.

This transformation requires a fusion of ‘math men and mad men’, as Sir Martin would put it. Various players are trying different approaches to that need. Maurice Levy of Publicis acquired Sapient and his successor Arthur Sadoun is leading its integration into a transformed business model and organizational structure. Omnicom’s John Wren and MDC’s Scott Kaufman have adopted the strategy of independent creative agencies serviced by a common data center. Havas’Yannick Bolloré is testing the synergies of entertainment and communications with Vivendi. Consultancies are acquiring creative and marketing services agencies so they can offer a full communications service in line with their strategic recommendations. The jury is still out on the best solution.

My bet is that the road ahead will be harder for consultancies, because innovation and creativity are the fuel of effective commercial communications. Yes, consulting firms are aware of this and are bolting on creative talent. But will they be able to adapt their organizations to the undisciplined nature of the creative game? Consultants are about analytics and process. They are great at identifying problems and recommending solutions based on historical and comparative data. But they lack the ‘out of the box’ mindset that breeds innovation. It’s the classic left and right brain conflict.

There is no doubt that holding companies are facing a big transformational challenge. Their profits come from execution and media placement while their real value is strategic and creative. But if they can resolve that conflict, they will win.