Business caution is as much about agency models as it is about economic concerns, lending credence to the notion of significant consolidation among holding group firms.
By ARUN SUDHAMAN, A dismal set of Q3 results from the major holding groups probably confirms what many in the industry had been contemplating for some time now, that the marketing communications industry is in the grip of its worst year since the global financial crisis took hold almost a decade ago. As usual, when it comes to the publicly-held agencies at least, the public relations discipline has demonstrated that none of its apparent intrinsic assets — channel neutrality, earned credibility, agility — are enough to mitigate decline during tough times. Then again, neither did they power heightened growth during the good times. From 2011 to 2016, the holding groups grew at a double-digit clip. For the most part during this period, PR and public affairs firms lagged their peers in other disciplines, including media investment, advertising, digital CRM and branding, helping to drag overall PR industry growth down to 7% last year. There are, of course, honourable exceptions — notably Interpublic PR agencies led by Weber Shandwick and WPP’s Cohn & Wolfe. But the broader narrative continues to pose a singular concern: Why are publicly-held PR firms finding growth so difficult? Proclamations from holding company chiefs do not, if we’re being honest, offer much insight. IPG CEO Michael Roth made the stunning admission that "PR was one of the primary drivers of weakness” at his CMG unit, blaming cutbacks in discretionary short-term client spend, particularly in terms of government and healthcare projects. Omnicom CEO John Wren, meanwhile, continued to troll his PR agency chiefs, following up on his earlier remark that more hunters were needed to replace farmers. Wren's latest pronouncement let us know that at least one of his PR firms still requires regime change (sources indicate a reference to Cone, which has eliminated its CEO role after merging with Porter Novelli). If not a vote of confidence, the comments at least appeared to place most of the blame on personnel rather than fundamental structural issues. Sorrell, as is his wont, cloaked his own observations in a veil of economic extrapolation. After proposing three possible reasons for WPP’s worst results since 2009, he largely discounted two of them — leaving intact the option that consumer packaged goods companies, in particular, are responding to the low growth environment and activist investors by slashing costs. The CPG agenda is hardly a surprise. Both Unilever and P&G have taken an axe to their agency rosters with noticeable effect. P&G chief brand building officer Marc Pritchard, furthermore, thinks digital needs to “grow up” and that agency complexity should not be his problem. Those do not sound like the words of a man who is rushing to invest in agency options, but neither can you blame Pritchard for his scepticism. My own conversations with network heads indicate that agency models themselves are under clear pressure, which is only exacerbated by a cyclical slowdown amid sustained political and economic uncertainty. It is telling, perhaps, that Sorrell does not single out the agency model as a factor in the downturn, even as he touts the benefits of ‘horizontality’. There is little question that holding groups have too many agencies in their respective stables, and clients are right to want more simplicity in a complex, integrated world. The PR agency model, as one network head pointed out to me, has not changed for decades, and clients are less likely than ever to encourage an hierarchy of hourly rates that supports some eye-watering senior staff costs. It is surely no coincidence that so many publicly-owned PR networks have been shedding senior resource in recent months, or that major agencies such as Ketchum and FleishmanHillard are seemingly content to continue life without filling their EMEA CEO positions. Meanwhile, communications budgets remain poorly defended within client-side companies, reaching a level of priority only when the bean counters are deciding which department should be slashed first. CMO spending, long touted as the saviour for savvy PR firms, has become markedly more efficiency-driven, exposing the PR industry’s own weaknesses in developing a robust evaluation model. And that is before considering the investment required to truly transform big corporate-focused firms into credible brand-building players. For many of the the larger networks, furthermore, geographic exposure appears to be more of a burden than a benefit. Regions like Africa and Latin America have not provided the expected boost to topline revenues that might compensate for lingering softness in Europe. Even Asia-Pacific, particularly China, is not delivering the eye-catching growth that many global agency CEOs had begun to take for granted in recent years. An over-reliance on North America as a growth engine carries obvious risks at a time like this. Not all is doom and gloom, though. Midsize and independent agencies (even accounting for noticeably slower expansion at Edelman) continue to post double-digit growth rates, benefiting from their ability to invest ahead of the curve and manage margins in favour of their clients, rather than shareholders. That is reassuring news for the industry as a whole. While the publicly-held agencies, starved of investment in their never-ending battle to preserve margins, only grew 5% last year, our research indicates that independents once again outstripped that expansion by a factor of almost two to one. And it is worth noting that independent firms now account for at least 60% of the global PR agency market, even if that proportion is somewhat distorted by the presence of Edelman. However, even the most bullish independent agency head would admit that market conditions are causing a rethink of their growth forecasts. While the overall US economy appears sound, there appears to be an unprecedented level of uncertainty regarding agency spending, with budgets refusing to grow even as costs increase. All of the signs, whether concerns about broader business spending or about the viability of a creaking network agency model, point to the very real possibility of further agency consolidation over the next couple of years. That is something the holding groups have only adopted on a relatively modest scale, to date — witness MSL's integration into Publicis Communications and Ogilvy's restructuring. Expect more, one senior holding group source tells me, especially in terms of PR firms joining forces with their peers from other disciplines. “We have too many agencies," says the CEO of one of the top independent PR firms. "There is not enough revenue to go around." That trend could well be accelerated by the management consultancies, which have been buying agencies up in droves. At the very least, it is encouraging to see that not everyone is quite so bearish on the marketing communications sector. Although, given their designs on bigger and bigger networks, that may not quite be the reassurance that holding group chiefs crave right now. Source: https://www.holmesreport.com/
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