Pintarget Posts

You can’t reinvent the future

By April 18, 2018 No Comments

I remember being in the Carpenters’ Arms in the mid 80’s, which then was the Saatchi’s pub. Someone said that Martin Sorrell, who’d recently left as the much-feared Finance Director, had bought Wire & Plastic Products PLC. At that point Saatchi was the UK’s biggest agency, built on an enviable new business record, but growing primarily through incredibly aggressive acquisition of other agencies.

My memory is hazy, I guess we were a bit dismissive (because we were preternaturally arrogant 80’s yuppies) and intrigued. I remember discussing whether we should buy shares, we foolishly didn’t and instead invested in another round of Swan Lager, which was the beer du jour of the media department.

Saatchi’s continued to grow rapidly, largely by debt fuelled acquisition and in the late 80’s they launched Zenith, as a mechanism to match media buying volume against a monopolistic TV industry. This was probably the first time that the advertising industry organised itself on along the lines of modern business practices (although this clarity of purpose fell apart when the Saatchi’s tried to buy the Midland Bank, which heralded the demise of the management team.) In the mid-90’s, Charles Saatchi left the business, following the recent ousting of his brother. He resigned because his position had become ‘intolerable,’ as the board were investigating a series of expense issues. This putsch was aggressively lead by David G. Herro from Harris Associates, who controlled ten percent of the stock (Herro is also involved in WPP, albeit a supporter of SMS.) Seems an element of history repeating itself.

The early ‘90’s was a miserable time in advertising, the louche days of the 80’s suddenly hit the buffers, advertising spend collapsed, targets were missed and businesses funded on high debt levels were in jeopardy. This not only applied to Saatchi’s, WPP that had recently acquired JWT and O&M, looked precarious but survived by a fag paper.

The rest is history, but WPP’s growth replicated what the Saatchi’s achieved but on a far grander scale, including launching Group M with similar ambition to Zenith. Massive international expansion was cleverly leveraged, so now there are 400 plus businesses. WPP created a business model that we lesser ad folk religiously followed; we left well paid jobs in big agencies, started agencies and somewhat arrogantly named them after ourselves and aggressively grew them, so we could flog them to one of the big holding companies. People whose day jobs focussed on cost per thousands and pantone colors, started discussing multiples of earnings, EBITDA and earn outs. It made a lot of people a lot of money.

One could argue that the main purpose of the holding companies was to acquire businesses, if they managed to buy the businesses at multiples less than their own, they could demonstrate growth. However, the real complexity wasn’t the mechanics of acquisition, that was relatively straightforward (as sellers were, unsurprisingly, usually pretty willing,) it was how to integrate seemingly disparate businesses into a centrally imposed culture.

This was exacerbated by businesses with wildly different commercial objectives, people obsessed about hitting profit targets to trigger their earn out, central management taking management fees out of local agencies revenues. Most holding companies exist to manage internal conflict, I’d argue that joint ownership rarely equates to common purpose and often creates greater division.

This is not to say that some very smart people have not spent a lot of time and resource trying to fix how to make disparate businesses function together, and with some success, but there is often tension and initial fault lines between cultures and disciplines don’t easily disappear. The glue (or common culture) that holds disparate groups together is often the personality and presence of an inspiring leader.

The departure of Sir Martin Sorrell seems very similar to that of Charles Saatchi. Two phenomenal talents, both with very forceful personalities with huge ambition who had driven growth by clarity of purpose and using investors funds to achieve this. This is a hugely successful model in periods of growth, but very difficult when budgets are declining. There is a belief that the growth of the digital duopoly of Google and Facebook is somehow unique, it’s not. Agency structures have always had to evolve to match client needs and technology, whether the launch of TV in the fifties to the growth of data processing to the digital economy. We rarely learn lessons from the past.

So what of the future? I don’t think there is any doubt that the model of vast, debt fuelled holding companies is creaking. Consumerism is changing and the stalwart of the ad business, namely grocery brands, are under massive pressure. Also, over the last decade the groups have had a cavalier approach spending their clients’ money.

To win pitches (mainly media) agencies have agreed to take on clients at non-commercial terms below breakeven hoping they could make up margin through non-transparent business practises. Most clients probably knew this was occurring in some form; but accepted it if headline costs reduced. However, most remuneration were tied to some form of commission on media spend, meaning agencies are incentivised to drive spend. Bizarrely, volume of spend matters, it’s used as a financial metric of success both externally and within the industry. However, it’s increasingly irrelevant and drives poor decision making, volume of spend doesn’t equate to volume of input required to deliver a brief or performance.

Will the business change? Most forecasters predict pretty steady worldwide advertising growth of around 3.5% a year, the issue is how much of this goes through agencies and holding companies? Successful advertising is still vitally important in driving business growth and major brands need to spend to acquire and retain customers, however the new media landscape means they are looking at a host of different models, where brands can transact directly with Google and Facebook. There is no consensus except agreement the current model really serves anyone’s interests well.

Advertising constantly evolves and there has never been one prevailing model, so it will change. Transparency will return in a big way and may even be legislated. This will require new contracts based on input and value added rather than a proportion of billing. I think this will encourage agencies to behave more like consultants and charge on a cost-plus basis. The business will become increasingly automated as this reduces costs and adds transparency. Clients will probably work with a range of suppliers, some who use world wide volume to drive value with international media owners, some who are local experts.

What I do hope is that this doesn’t remove the attraction of the business for driven and obsessive who want to make a difference. Part of the attraction of this business is the mavericks, I hope there is a younger generation of visionaries who are prepared to take risks to change the world. Mavericks, almost by definition, are unique and can’t be replaced, they are what makes this business great.

 

Charlie Mankin – Managing director of Pintarget 

Find the article published on LinkedIn

Pintarget

Author Pintarget

More posts by Pintarget