The end of the dogfight

Frustrated at having his growth restricted by the industry norm that an advertising agency couldn’t service competing clients, McCann-Erickson chief executive Marion Harper created a loophole by acquiring the Marshalk Company advertising firm in New York. Rather than meld the organisations together, he maintained them as separate competing businesses, feeding into an overarching company called Interpublic Group. Thus, the first holding company was formed in 1956.

Harper’s objective was to emulate the model of General Motors, which consisted of autonomous competing divisions serving the overarching parent company. While at first criticised by the marcomms industry, the Interpublic Group model served as the template upon which WPP, Omnicom and Publicis were built. Over the decades that followed, the holding companies snapped up the biggest names in advertising and pitted them against each other. WPP chief executive Martin Sorrell has been quoted saying that advertising is a dogfight and he only hopes that one of his dogs is last one standing at the end. 

This is, of course, a fabricated form of competition, an illusion which both advertisers and clients have bought into to give them peace of mind. Every so often we’re reminded of the existence of this illusion, as was the case last year when Countdown’s creative business moved from Ogilvy & Mather to Y&R, both WPP-owned companies. It was simply a case of the holding company moving the pellets from one dog kennel to another.

DDB chief executive Justin Mowday says all the holding company model does is create a degree of separation that’s acceptable for clients.

“We can have 2degrees here at DDB and Colenso BBDO can have Spark, and because there’s physical separation and because we compete, clients feel no conflict of interest even though we’re ultimately both owned by Omnicom,” Mowday says.

“It’s comforting for clients, but I think it’s old-fashioned.”

He argues that you don’t see this level of category separation in other industries, which also deal with highly confidential information.

“When I look at management consultancies, there are examples of three fast-food brands under one roof. One company might work with McDonald’s, Yum Group and Chipotle. And the way they do it is that they’re really up front and clear. They actually say there’s a benefit to it. They say ‘this work here is relevant to the category and we’re going to share that with everyone’.

“The client gets access to category- level information at a better rate because the other guys are buying it as well. Then they go for the bespoke stuff that’s unique to your business, and this is delivered through a separate team that’s secure, locked off. There’s no duplication of people or resource. They’re really proper about it.” 

The Japanese way

Even in advertising there is an example of the client per category rule not applying. While almost all countries abided by the rules set up in the US and UK, professor Brian Moeran explains in ‘Advertising an Advertising Agency: Tales from Japan’ (a paper written for Copenhagen Business School) that the Japanese developed an alternative system, preferring to split accounts by product, media, or a combination of product and media.

“As a result, they do not object in principle to the same agency handling a number of competing accounts,” Moeran explains.

Rather than leading to mistrust and instability due to conflicts of interest, Moeran argues that the system has in fact delivered a number of advantages for both agencies and advertisers.

“Precisely because the overall advertising appropriation is divided, accounts in Japan are not nearly as large as they are elsewhere. This is to an agency’s financial advantage when it loses an account since the sheer number of accounts in circulation means that it can usually make up the financial shortfall and is not obliged, as it might be in the United States or Europe, to lay off staff. In this respect, the split account system contributes to the overall stability of the advertising agency, and of the industry of which it is a part.”

It would be a huge ask and logistical challenge for the local agency landscape to reshape in this way, but it helps to show that advertising agencies are capable of managing multiple competing accounts in a single building. Like many oft-repeated truisms in the industry, the rationale of protecting trade secrets by having only one client per category doesn’t quite stand up to scrutiny. And fittingly, the ingrained rules that previously defined the right way to manage an advertising business are evolving. 

Antiquated nonsense

Speaking to NZ Marketing, the always- fiery professor Mark Ritson calls the application of a traditional approach to conflicts of interest antiquated nonsense in the modern context. He points to the example of Google and Facebook, approaching competing clients across every category and collecting data wherever they go.

“There are service companies now that literally know more about your customers and your business than you do,” Ritson says. “And if you don’t work with them, they could quite legitimately share the information with your competitors anyway.”

To the major tech, accounting and management consultant firms, it’s not a case of the rules being relaxed. It’s that they literally don’t exist. And by maintaining a set of arbitrary rules established decades ago, agencies are essentially playing with a self-imposed handicap at a time when these big firms are making a clear push into the advertising space. In competing with a single powerful entity like Google or Accenture, Ritson says it no longer makes sense for holding companies to function as 25 different businesses that have been programmed to detest each other.

“To have these tribes of competing agencies is very bad marketing practice,” Ritson says. “In an era where everyone from Coca-Cola to Apple has moved more toward a single-brand focus, it’s funny to see agencies that are meant to be marketing and branding experts be so outdated in their structures.”

This doesn’t necessarily imply an obliteration of the individual agencies within the group, but Ritson does anticipate a period of consolidation that will strengthen the major brands within the various networks (think Ogilvy, DDB, FCB and Colenso BBDO). There is already enormous financial pressure on the agencies in the middle and it’s only so long before it’s no longer viable to keep those shops open as separate entities. 

A pack of dogs

There also seems to be a growing appreciation of this among the holding companies, which are now finding ways to get their dogs to work as a pack rather than individual fighters.

WPP AUNZ business director Mark Jenner says Sorrell has “gone 180” on the strategy of having the agencies fight against each other.

“He now talks about horizontality, which basically means collaboration,” Jenner says.

“What you’re seeing in the market is clients needing many more disciplines and they’re looking for expertise across disciplines and they don’t really care for traditional agency models. They just want access to the right expertise.” With the growing complexity in the industry, Jenner explains that when a client of a WPP-owned agency needs activation expertise, the team should be able to tap into the broader group to find an agency—which may or may not work with a competing client— with that skillset.

“From a client perspective, they get access to the right talent and they also don’t have to rebrief [the other agency]. The burden lies with us to sort it out.”

Jenner says the function of the holding company should be to remove complexity for the client rather than create it. This rationale also underpins the growing trend among holding companies to create bespoke agency brands for particularly large clients.

He points to the example of Sibling in Australia, which was forged from the various skillsets within the WPP group for the specific purpose of servicing the Westfield/Scentre Group.

Omnicom has taken a similar approach in the US launching We Are Unlimited to address the myriad requirements that come with the McDonald’s account.

Harvard Business School professor Alvin Silk, who in his 2012 monograph ‘Conflict Policy and Agency-Client Relations’ discussed many of the early signs of the changing rules of engagement, tells NZ Marketing via email that when these bespoke agencies were first formed they were colloquially called ‘conflict shops’.

Silk says this dedicated agency approach is, in some ways, also a response to the growing tendency of bigger clients to protect their proprietary data by taking some of the work in-house.

“To counteract such internalisation, holding companies have turned to forming a distinct dedicated agency for major clients, staffed by agency personnel located in close geographic proximity to the clients’ operations.”

In doing this, the holding company remains valuable in connecting the client to the talent best suited to specific business problems. The bespoke agency almost becomes part of the marketing team, dedicating all its expertise to the objective of growing the business. And then, if the need arises, they can also tap into the skillsets of the broader group, once again giving the client access to capabilities that might otherwise have been restricted under a more traditional approach to conflicts of interest.

In the past year, we’ve also seen this trend take place in the local context with Dentsu-Aegis launching With Collective to manage the ASB account and FCB launching Jolt to look after Audi.

The FCB example is particularly interesting because the agency already works with VW, which in turn means that both clients were satisfied with sharing an agency. That said, it’s also something of an illusion within an illusion given that Audi is owned by the Volkswagen Group, so the money ends up in the same place in any case. Further to Mowday’s earlier point, the car brands might now also be able to pool some funds together to invest in category level research that could benefit both companies. However, this will require enormous trust from the clients in their agency partners.

As an agency that currently counts Westpac (media), ANZ (direct) and Latitude Financial Services (creative) as clients in the same building, FCB has become adept at creating an environment that competing clients feel comfortable with.

Asked in a previous edition of NZ Marketing to respond to the criticism that the agency couldn’t claim to have a single P&L and also guarantee independence for clients, FCB Media managing director Rufus Chuter said that transparency as well as a range of data security measures and processes ensure that all these relationships are managed accordingly. 

More than a friendly handshake

There remains a cynicism in the industry as to whether illusionary boundaries between agencies can really protect clients from gossip, pillow talk and casual conversations in the lunchroom. But Ritson argues that this is unfounded.

“A good non-disclosure agreement these days protects everyone. It’s just grown-up thinking,” he says.

“I’m not saying people aren’t stupid enough to do that, but if they do they’ll get hammered. If it’s possible for law firms, accountants and management consultants to handle much more sensitive information than agencies ever get their hands on, then these guys just have to get much more professional. And if they’re not more professional then they shouldn’t be working for an agency. If Google can manage it, if Accenture can manage it, then advertising agencies just need to get on with it and be professional.”

Mowday says there is a shift among clients in that they’re not as “precious” as they once were about conflicts of interest.

“Everyone is growing up a little bit,” he argues. “We don’t need the same degree of separation. What clients are more interested in is finding the best team in a holding company. If you’re disciplined and you follow through then there’s absolutely no reason why you can’t have multiple clients from the same category serviced by the same agency.”

Silk expands on this idea of growing up by saying that the industry is progressing from a casual business to something more formal.

“Recent history suggests that reliance on relational contracting, informal agreements sustained by the value of future relationships, is fading away,” he says.

“My hunch is that we will see more hybrid policies, a variety of split agency assignments bolstered by safeguards that are the outcome of negotiations conducted by professionals [possibly by procurement]and specified in formal contracts.”

Silk says he hopes agencies will challenge the nostalgia bias, which often manifests as rosy retrospection of the good old days “when agency-client relationships were long-lasting marriages, sustained regularly by lunches and handshakes between client and agency CEOs”. This, much like the idea that an agency should only have one client in a single vertical, is a myth, which needs to be challenged and treated with scepticism through eyes informed by the modern economic context. But, as Silk points out, what we think today might well turn into tomorrow’s illusions.

“If the barriers Harper set up now appear illusionary and less relevant or concrete, then I wonder what will be the fate of horizontality, and transparency in 50 years.”

No doubt there will be new illusions as convincing as these to take their place. Or perhaps, some older forgotten illusions will return with renewed conviction and we will look back on 2018 as the good old days. 

This story was originally published in the 2018 Agency issue of NZ Marketing. To subscribe, click here.

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