Will advertising agencies survive? | Analysis

Scott Galloway tells a story to demonstrate the declining importance of advertising executives in the world of business. More than 20 years ago, Levi Strauss & Co asked three people to sit in on its board meetings: Galloway, a brand strategist; Lee Clow, at the time the chief creative officer at Chiat\Day; and Sir (then just Mr) Nigel Bogle, co-founder of Bartle Bogle Hegarty. 

 

According to Galloway’s 2020 book, Post Corona: From Crisis to Opportunity, the New York University Stern School of Business professor has attended more than 150 board meetings since then and can’t remember a company director ever asking what the business’ advertising agency thought of anything.

 

Caroline Johnson, co-founder of The Business Model Company, is pretty clear about the reason behind this. “What we’re selling is less and less relevant,” she says, passionately. “And we’re stuck with a costing model that means we are obsessed with the effort that we put in rather than the value we create.”

 

In April 2023 The Business Model Company completed a global transformation programme with the Interpublic digital agency Huge. Over a period of 18 months, Huge, led by chief executive Mat Baxter, switched from a traditional model of charging for its staff’s time to developing a suite of products to sell to brands in the manner of a consultancy. Strategy consultant Michael Farmer has written a book, Madison Avenue Makeover, recording the process. 

 

“We were so lucky that we got Mat Baxter,” Johnson says. “The industry needs more of these maverick, entrepreneurial, completely driven people.”

 

In April 2022 Accenture Interactive merged the majority of its communications businesses to create Accenture Song. David Droga, the chief executive of Accenture Song and founder of Droga5, which continues as a standalone brand, is confident the way Song works and where it sits, inside a consulting giant, means its work for clients is getting more relevant rather than less. 

 

“Success is not nostalgic,” Droga says. “What made you successful, that counts for very little as you show up and be relevant today. The essence of what agencies were before was their thinking. They were creators. They were strategists. They were trying to create attention and memorability. And a lot of time that was enough. 

 

“The world has moved on. What constitutes building a brand has taken on so many tentacles. We’re not held hostage by a media model. If the right solution is traditional brand, we can do that. If it’s a combination between brand and new innovative products, digital products, we can do that as well. We have a legitimate ecosystem.

 

Neal Arthur, the global chief executive of Wieden & Kennedy, says what brands now want from their creative partners has played to the independent network’s strengths. Known for its long-term relationships with the likes of Nike, the shop has always focused on work that will “create a fire of some kind”, he says.

 

“We are an agency that’s built on passion and ownership,” Arthur explains. “We’ve had that for a long time; that sort of mindset. But it’s more useful than ever before, because a modern brand is built every day and consistently over time, not just in the windows where you have marketing dollars.

 

“Before you would have a fixed marketing calendar and product cycle and then you were creating an advertising sort of layer, a wrapper on top of that. Now, as a creative company, we are partners who are bringing an outside and creative perspective on what their business can be. Not just in their advertising.”

 

WPP has restructured many of its agencies in a bid – presumably – to deliver products and services that marketers value. In 2020, after a bit of confusion, the London-based holding company confirmed Grey and AKQA would sit as sister shops under the AKQA Group rather than fully merging like Wunderman and J Walter Thompson (now Wunderman Thompson) and VML and Y&R (now VMLY&R) had before them.

 

Return to “the early dot com days” 

 

Laura Maness, who joined Grey as its global chief executive from Havas New York, where she was chief executive, in September 2022, likens the environment in which advertising agencies find themselves to the “early dot com days” when the possibilities of digital technologies were only just starting to emerge. And she’s far from worried.

 

“I think the ability for creators to truly harness what’s possible from a data and technology perspective with the level of taste that it requires to curate from a plethora of ideas that are continuously generated over time is going to unlock a higher order superpower,” Maness says. “We are only just beginning to see what’s possible. The only thing at threat is complacency.”

 

On the experience of running an ad shop aligned with a digital specialist (AKQA, the digital shop WPP bought a majority stake in 11 years ago), Maness says to “truly match strength intentionally through co-creation, not integration has been incredible”. The agencies are seeing the “impact and benefits of those combined strengths on our largest and most important relationships” such as Volvo and The Coca-Cola Company, she says.

 

“It’s been really encouraging to not just have the rhetoric around the potential but actually see and feel the evidence of that impact every day,” Maness continues. “Much credit to Ajaz [Ahmed the chief executive of AKQA Group and founder of AKQA] for having that vision. We’re collectively excited about our combined capabilities when it comes to modern storytelling on modern platforms.”

 

Two years before the coming together of Grey and AKQA, one of Mark Read’s first big announcements after permanently taking over the role of chief executive of WPP was the merger of digital agency VML with the Y&R ad network. VMLY&R has grown every year since then, including during the pandemic, according to global chief executive Jon Cook.

 

“The thing that we’ve done the best, that’s continued our growth these last several years, is we’ve really been designed to be prepared for the future,” Cook says. “It has been rough for agencies that haven’t evolved. But the two things that are our secrets of success, are investing big in customer experience and in commerce. We’ve been able to go world class. True global scale on commerce and customer experience without losing our edge or credential on brand experience and advertising work.”

 

While Omnicom shops have not yet been through the global restructures at WPP’s agency brands, TBWA decided seven or eight years  ago to “drop the name network” from its

mindset, according to its global chief executive, Troy Ruhanen. 

 

“How do you create glue and chemistry and a sort of collective agenda?” Ruhanen asks. “We use the word collective as the way in which we describe ourselves, because we like to think of ourselves as 11,000 creative minds. I don’t even know the number of offices I have because I don’t think that way. It’s so much more about people, talent hubs, centres of excellence.

 

“When I think about the future of advertising agencies, I think they should reclassify themselves. I don’t want to be called an advertising agency at all. You won’t find a person who loves advertising more than me. It’s all I ever wanted to be since I was  14. So, it’s not a case of that. It’s just that we do much more than that. And we undersell ourselves when we call ourselves advertising agencies.”

 

Ruhanen, who was executive vice-president at Omnicom and chairman and chief executive of BBDO in the Americas before joining TBWA in his current role in 2014, adds: “We undersell the business problems that we’ve been able to solve a million times over [by calling ourselves advertising agencies].

 

“It’s really important that we think about how brands are built. We are a partner to the most successful brand in the world in Apple. Apple isn’t built on advertising alone. So why do we think advertising is the answer to everything? 

 

“We have to worry about the total brand experience. And then how do you really apply our creative minds against either those problems or opportunities or experiences where the brand could really make a positive impact on people’s lives.”

 

It appears to have been a solid call. TBWA recorded its highest- and second-highest-ever revenue in 2021 and 2022 respectively and is now the largest global business-formerly-known-as-an-advertising-network at Omnicom. 

 

Charging points

 

When it comes to the ways agencies charge for their services, no global shop has yet followed in Huge’s wake. Johnson says the biggest hurdle she faces is the industry’s collective belief system: agency leaders do not trust they can transform the way they work with and bill their clients. Leaders regularly tell Johnson marketers won’t let them change the way they charge; procurement says it is not allowed; other agencies will agree to charge by time and take the business. 

 

“It is such a passive, dangerous assumption,” Johnson says, derisively. “It’s never about clients. It’s never about procurement. It’s about taking responsibility for establishing and defending a proper commercial model and a viable commercial stance.”

 

Farmer agrees that the need for wholesale change is urgent: “When AI does a large part of the work that agencies are doing today, what’s left for the agencies? Unless they change the way they price their services. AI is gasoline on a fire that has been smouldering for 18 years.”

 

Cook says that although VMLY&R’s relationships are still “predominantly” hours-based, increasing numbers of clients have included an element of value-based pricing and/or performance-based pricing for a percentage of the overall fee over the last five years. He hopes that’s a “predictor of a future” where those types of deals start to make up a higher percentage of contracts.

 

Accenture Song tries not to “just do an hourly rate thing” or an FTE (full-time equivalent) thing, Droga says. “We’re not the cheapest and we don’t give stuff away,” he continues. “But we’re willing to invest in or bet on ourselves. Clients are looking for more than just one dimension, which is probably why we’ve grown to ahead of the market. Our output and impact speaks for itself.”

 

Song’s revenues rose 14% to $18bn in the 12 months to 31 August 2023, according to Accenture’s full year results. 

 

“If your intention is to preserve the business model, you’re a fool because you’ll just be standing on a shrinking iceberg,” Droga says. “If your intention is to preserve our impact and our relevance, we have reason to be optimistic. The need for us and what we can shapeshift into is greater than it’s ever been. 

 

“You’re seeing creativity being commodified, which I’m not against. We pretend in our industry that the majority of it is excellent. It’s not. The majority of our industry is bullshit. That’s why people invented technology to try and either block it, or do it in a better version. So, I’m not opposed to technology that can do a better version of it. Or can get rid of the messy and mediocre middle.”

 

After a generally healthy 2022, the big six holding companies delivered mixed results in the first half of 2023, with revenues at many of the groups hit by cuts at tech clients. Publicis Groupe, the owner of Saatchi & Saatchi and Leo Burnett, was by far the star performer, reporting organic growth of 7.1% led by its media business. Publicis Groupe’s creative business grew by low single digits. 

 

​​In July, Publicis Groupe chief executive Arthur Sadoun told Campaign that although creative was not “accretive to growth” in the first half of 2023, it was still essential to its growth. “The reason why we are outperforming the market today is because we are able to connect data with creativity, media and technology in a unique way. So, creativity is still at the centre of our business model,” he said.

 

The future for a creative agency that simply creates advertising for brands looks to be increasingly challenged. There are also evidently real improvements to be made to the way ad shops are managed as businesses if they are to exist in their own right, as opposed to being run as a shop front to enable the sale of more profitable services. If they can aim higher than comms and find a sustainable way to sell the work of their talented and brilliant people, directors on company boards would be foolhardy not to seek their counsel once again. 

 

As Droga says: “There’s still a need for excellence and originality. Ask ChatGPT what a great Led Zeppelin song makes it feel. Or what it inspires it to do.”