Commercial Interruption

Concerns about the ad agency model continue to plague the sector, creating challenges for the holding companies in charge.

One of the narrative through lines of “Mad Men,” the hit cable show about the advertising industry, is the financial viability of the agency model. The battle for new business, the need for scale, and the emergence of new competitors constantly throw the fortunes of Don Draper’s agency into doubt. Draper could make advertising sexy and cool, but not always financially stable.

Turns out, those same concerns from a show taking place decades ago are still out there today around the agency model— where distinct creative brands and media buying firms are housed under one common parent company but kept separate. “A lot of these organizations’ structures are still not ideal for the integration necessary to support clients’ changing needs,” says Caren Fleit, managing director with Korn Ferry’s Global Marketing Officers practice. “Clients most often need their agency partners to work seamlessly together.”

To be sure, financial results as of late have mixed. For its fourth quarter earnings last week, Omnicom credited its “flexible and integrated agency model” with helping it notch new business wins and grow organic earnings 3.2%. But for the year, its revenue grew just 0.1% over the prior fiscal year. For its part, Publicis, which recently reorganized its many agencies to a more streamlined structure dubbed the “Power of One,” saw organic earnings decline in the fourth quarter by 0.3%.

Such structures are helping. But Capital Markets analyst Daniel Salmon wrote in a recent note to investors that “caution is still warranted for the 2019 advertising outlook.”

Not unlike its media and entertainment peers, advertising holding companies are still adjusting to the new digital world. Changing consumer habits, such as the mass transition to mostly commercial-free video streaming or the increase in time spent on social media, has upended the industry’s financial dynamics. At the same time, boutique independent agencies are taking market share and major brands are increasingly bringing creative and marketing services in-house, creating content and social media teams to interact directly with customers. Those moves not only lower costs, but also give brands the ability to work across functions on a global basis. In effect, they are breaking down the silos that ad agencies haven’t.

“They have to figure out how to sell the internet,” says Craig Rowley, a senior client partner with Korn Ferry who specializes in retail, referring to the fact that things like programmatic advertising and behavioral targeting haven’t lived up to their potential.

In recent years, agencies have tried to adapt to the new advertising paradigm through an old method: acquisitions. They have bought up firms specializing in social media and data analytics, for instance, and beefed up hiring of talent with those skills. They have also eliminated agencies or merged them together in a bid to streamline operations. They’ve even banded together to lobby Facebook and Google, which together control more than two-thirds of the online advertising market, to share more user data to better target clients’ customers with unique personalized brand experiences that can get the right message to the right person at the right place in real time.

Rowley notes that as retailers and other brands move to more one-to-one relationships with customers they won’t need huge campaigns as much. That means ad agencies will need to continue to show agility with services and pricing models to keep winning business.