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Why management consultancies are eating agencies’ lunches
Blame transformation and an outdated business model
Last month, Meta — the newly named parent company of Facebook — chose Publicis-owned Spark Foundry as its global media agency of record. With Meta ringing in $701 million in global ad spend between July 2020 and June 2021, the review was billed as one of the year’s most significant. It was certainly a lengthy process — Meta put the account up for review in March — though it wasn’t quite as long as Coca Cola’s recent massive global media and creative review, which just wrapped up after nearly a year and left more questions than answers in its wake.
It’s hard for us not to see Publicis’ Facebook win as a Pyrrhic victory. Yes, Publicis won the account, but with all of Facebook’s meta problems — from the most recent whistleblower allegations through regulatory action — it may well have a talent retention problem on its hands if no one wants to work on the account. To win the pitch, we suspect that Publicis probably also had to cut so many profitability corners that it’s barely making money on such a marquee client.
This illustrates one aspect of the holding-company business dilemma: The agency media review process has become a strange race to the bottom, yet all the holding companies still participate because they see few other viable options.
What is more obvious is that in our still relatively young digital advertising industry, there isn’t much understanding of what makes a good consultant, partner, or advisor. Perhaps that’s because of a general reliance on agencies for hands on keyboards — people who are quite good at hyper-optimizing specific tools but who can't help brands connect those changes to top-line revenue and how these may affect organizational design or budgeting for individual lines of business. This frequently manifests as a perception that traditional management consultancies and systems integrators such as Accenture and Deloitte are eating the lunches of the big holding-company agencies, which have long been viewed as inefficient, bloated, difficult to navigate, and generally hard to work with.
A growing drumbeat
Why is this happening now? For starters, marketing and advertising have become a core corporate asset rather than a historic expense on the balance sheet that receives budget but can be owned and executed externally, as it was done in the Mad Men era of advertising. At the same time, the rise of digital channels has enabled much easier media buying with a built-in self-serve mindset. Traditional TV and print campaigns required a certain level of expertise that no one would dream of in-housing. Brands had little choice but to work with agencies for TV campaigns, for example, which provided campaign oversight and access to pre-purchased inventory at prices subject to their discretion. That's no longer the case.
Holding companies have also collided headfirst into the core challenge of their business model: They have difficulty making cross-account investments. Unless something is being billed directly to a client, it's not receiving the right amount of attention. If you’ve ever been on the vendor side selling into agencies, this is the “global MSA is a hunting license” stage: Even if you have been enthusiastically approved as a vendor, you still have to do a lot of legwork to sell into individual brand accounts supported by the agency. For myriad historical reasons, holding companies are quite siloed internally. The ability to capitalize on what they're learning across their various clients sounds great on paper but doesn’t match reality. Agencies are often not able to make investments into technology, for example, or in consolidating their tech stacks to the extent that, in theory, they should have been doing long ago, because that budget line item doesn’t readily exist in a time-and-materials world. Like general contractors in construction, your agencies will showcase prior projects and know where to point you to buy good materials for your budget, but they won’t have a model house you can live in to see how it all comes together and what you need to tweak to make it really work for you. For brands, this challenge often comes down to the need for deeper digital transformation (however tired that term is) and changing the entirety of how they do business (change management — another unsexy yet necessary concept). Brands are far less likely to turn to an advertising agency for a multi-year digital transformation project when they can work with a management consultancy stocked with people who are experienced in retooling processes and standing up entire new lines of business within their clients’ existing organizations.
It’s far easier to latch on functional experience than to innovate an entire business model. This is where management consultancies have an edge. Since transformation sits at the core of their expertise and what brands need, management consultancies can more easily bolt on other types of expertise that traditionally made advertising agencies attractive, such as a creative studio approach that can be gained through a creative agency acquisition, a la Accenture’s 2019 purchase of creative agency heavyweight Droga5. “From our perspective, this is what a consultancy has to do,” Forrester analyst Jay Pattisall said at the time about the Droga5 acquisition. “You either have to double down and really aggressively pursue these creative capabilities to really help your clients distinguish themselves in the marketplace, or you have to get out.”
What should holding-company agencies be doing?
HoldCos can likewise try to bolt on that management consultancy skill set. Instead, they seem to be trying to scoop up legacy data assets and last-gen companies in an attempt to better serve the industry’s marketing laggards. If they maintain this approach, they will continue tripping on their own business model, where unless a strategic investment is directly billable to a client, agencies won't have a budget line item for it and therefore don't know what to do with it.
This is not to say that management consultancies don’t face similar challenges. They're largely billing on time and materials, but because their work is perceived as more strategic vs. execution-oriented like advertising agencies, they're able to charge significantly higher margins because of the perception that they are providing more high value, high-impact services. As a result, there's more room on their balance sheets for investments that can be leveraged across multiple clients in a very streamlined and concentrated way. In comparison, holding-company agencies have been content to let brands buy their own technology, and they're basically just renting hands on keyboards back to the brand. In an era of everything going direct, why wouldn’t brands obviate this intermediary step?
And at some point, it will occur to the brand that if it’s just renting these agency folks, why shouldn’t it start building in-house some of these capabilities and expertise, specifically for media buying, certain types of planning, and some marketing and advertising operations? If an agency expects to capture 7-10% of your media budget, and said budget is in the hundreds of millions of dollars each year, aren’t you better off deploying that toward an in-house team?
Another interesting strategy is to look for opportune rollups of small to midsize specialists, which is the approach that Sir Martin Sorrell’s S4 Capital has taken. Following several marquee acquisitions, including MediaMonks and MightyHive, both in 2018, S4 continues to add smaller, usually regional specialist shops. Since 2018, S4 has had M&A deals with roughly 30 companies and more than a dozen firms this year alone. Just this week it merged with Maverick Digital, which not so coincidentally specializes in digital transformation strategy and Salesforce platform implementation and integration. If S4’s overall approach sounds a lot like a traditional HoldCo, what’s different here is that there is a common backbone across tech, services, and data. It plays directly against the organizational complexity of a traditional HoldCo. For a quick visual, take a peek at this global agency family tree that our friends at R3 put together.
Until HoldCos can figure out how to be thought of as a truly strategic and not just an execution partner, management consultancies will continue winning business. Ultimately, it’s a matter of trust and understanding who can deliver on a transformation mandate vs. who can continue to charge a percentage of media spend to deliver services that brands can increasingly do themselves.
Today, advertising’s ‘big six’ holding companies still dominate the industry, but how many will be operating in five to 10 years?
Thanks for reading,
Ana, Maja, and the Sparrow team
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Founded in 2015 by Ana and Maja Milicevic, principals & industry veterans who combined their product, strategy, sales, marketing, and company scaling chops and built the type of consultancy they wish existed when they were in operational roles at industry-leading adtech, martech, and software companies. Now a global team, Sparrow Advisers help solve the most pressing commercial challenges and connect all the necessary dots across people, process, and technology to simplify paths to revenue from strategic vision down to execution. We believe that expertise with fast-changing, emerging technologies at the crossroads of media, technology, creativity, innovation, and commerce are a differentiator and that every company should have access to wise Sherpas who’ve solved complex cross-sectional problems before. Contact us here.