Rough road to Integration

Bates Dorland’s attempt to reinvent itself as an “integrated communications agency” has been a costly exercise so far, and the move is still only one week old.

It has led to the resignation of two top executives from the advertising agency, and others are understood to have deep reservations about the strategy being pursued by group chairman Graham Hinton.

It sounded so simple in theory. By buying direct marketing agency Blue Skies and putting its boss Graham Green in charge of Bates’ below-the-line operations, Bates Dorland could relaunch as an “integrated” shop under the new name Bates UK, as revealed in Marketing Week last week. But it has prompted resignations from directors of Bates’ existing below-the-line agencies, who were incandescent over the fact that Green had been brought in over their heads.

The new direction Hinton is taking also raises questions about the integrated approach that many ad agencies have been trumpeting for over a decade.

Was Bates driven by a desire to offer “media neutral” advice to clients rather than just churning out TV ads, or was this simply a way of bolstering the troubled ad agency by bringing the more profitable direct marketing businesses into the fold?

Last week, Ogilvy & Mather announced that its direct arm, Ogilvy One, was to move its 250 staff into the agency’s Canary Wharf headquarters. O&M also claims it is adopting an integrated approach, known at the agency as “360-degree branding”. But some sceptics suspect these troubled ad giants are just paying lip-service to integration – finding cheaper alternatives to TV advertising by bringing in skills honed by proponents of direct mail – in response to clients’ displeasure at the inflated prices they are required to pay for TV advertising.

Hinton’s rationale for adopting the integrated approach follows well-trodden ground. A host of complex developments, such as database and customer relationship marketing, not to mention media fragmentation (enshrined in the arrival of digital TV), are undermining mass marketing, and with it the traditional rationale of the 30-second TV spot. So a more cost-effective means of reaching a fragmenting audience has become a pressing requirement.

At the back of Hinton’s mind will also have been the advantages of suppressing the devitalising squabbling between the different Bates divisions over client revenue and, no doubt, the possibility of eliminating some expensive duplication in creative and account management teams. The implication is stark: change or die.

Hinton has set an appropriate date for integration to take place: July 14, Bastille Day. And he is aware of the cost of change. He stated last week: “I would be very surprised if we didn’t lose people. If the change is not radical, nothing will happen. We can’t be fair to everybody.” Bates Communications chairman Marcus Evans has already walked out and planning director Jeremy Hall is leaving. More defections are expected to take place later this week after personal bonuses fall due on Thursday.

As a result of Hinton’s changes, the Dorland name has been swept away, along with the separate boards and bottom lines for each of the agency’s three below-the-line companies – Bates Communications, 141, and Bates Interactive.

Bates UK will be run as one company, with one board and one bottom line. The three subsidiaries retain separate names, but their individual boards have been disbanded in favour of key members sitting on one management team which feeds into the executive committee.

But Hinton’s coup de main is the hiring of a man he has been courting for ten months, direct marketing veteran Graham Green. His appointment has meant the passing over of senior members of Bates’ own below-the-line companies – Bates Communications chairman Marcus Evans and 141 chairman Peter Crossing. “It will be very, very unpleasant,” one source says. “Graham Green is hated even before he’s got there. People are spitting blood.”

The choice of Green is also being questioned: “He is old school and a has-been. I would want a young person who is making waves,” says one source in sales promotion.

But Hinton points to Green’s wide industry knowledge, media-neutral consultancy experience and entrepreneurial flair.

The changes at Bates UK appear to go against the plans of Bates Worldwide, and global chief Michael Bungey, to integrate all below-the-line agencies under the 141 Worldwide brand, led by Worldwide account director Colin Hearn. The UK’s three below-the-line agencies were due to be integrated into the 141 network on May 1. But now 141 in London, the largest of 141 Worldwide’s 42 offices, is called 141 Blue Skies.

It is unclear why London has been allowed to deviate from Bates Worldwide’s plans. One insider says: “It has been appallingly managed. It goes against Bungey’s statements about 141 and is clearly a cynical raid on the profits of the below-the-line agencies.”

Although Hinton employs a raft of lofty philosophical ideals to justify Bates’ sea-change, observers say the impetus for it is financial rather than philosophical. They believe the high-margin, profitable below-the-line operations are being used to bolster the above-the-line agency. Forty per cent of the ad agency’s clients use one or more of the below-the-line companies. And one source claims Bates Communications ex-ceeded its profit target by 160 per cent last year.

Bates Dorland is certainly under pressure. The annual results of its publicly-quoted parent company, Cordiant Communications Group, revealed UK revenues increased three per cent on operating margins down to 11.3 per cent, from 16.2 per cent the previous year. Operating profits plunged from 6.3m to 4.5m.

Account loses – including much of the Heinz business, Compaq’s 33m account, Texaco, P&O and Nicorette – have squeezed the ad agency’s profits. Directors’ bonuses were frozen as a result (MW April 1). “The changes have been made for purely financial reasons. It makes the balance sheet look a lot better,” says one observer.

Hinton admits that the ad agency, which accounts for half the group’s revenue, can no longer be allowed to dominate the business. “This is a commercial imperative, but it will deliver service to clients.” But sources within the below-the-line agencies fear that their financial contribution will be ignored in the integrated structure.

However, Hinton wants to tackle “prejudice” within the group; as separate entities with separate bottom lines, the Bates companies protected their vested interests when talking to clients. “In the new group it doesn’t matter where we generate money from clients. It will mean the same for every discipline,” he says.

The upheaval needed to revolutionise the culture of what one ex-employee describes as a “large and arthritic” agency is considerable. One source close to the company says: “Integration should be an ego-free zone, but there is a hierarchy driven by Bates Dorland.”

Hinton says to execute his plan “I might be Pol Pottish about it and send people out to the rice fields”. Ad agency account directors and planners will be trained in below-the-line disciplines to make them “multi-disciplinary and broader in perspective”. But one observer says: “Bates is just tinkering with an outdated irrelevance. What the agency needs is a major shake-up of the top management, but Michael Bungey would be loathe to do that as it would signal major problems to the stock market.”

Graham Green says he does not think the situation could have been handled differently: “The view among the executive board was ‘do it, get on with it and handle the flack’. They were prepared to go through the pain because they knew it was the right thing to do.”

Bates UK has announced what it wants to be but has not said how it intends to get there. Green says: “We know where we want to go and we’ll work backwards from there.”

Conceptually, observers think Hinton has the right idea but has executed his plan in such a clumsy way that his agency will resist change all the more.

The pressure on advertising agencies to offer more comprehensive marketing services is immense. But not everyone is as enthused with the idea of integration as Hinton. Lisa Thomas, who has just taken up the position of chief executive at M&C Saatchi’s new, as yet unnamed, direct marketing operation (MW April 22), says: “There is no question of the new agency merging with M&C. I am a great believer in keeping the two disciplines separate, although bringing them together under one roof is a good idea because it promotes dialogue. But the skills are quite different.”

Thomas joins M&C from direct marketing agency Craik Jones, which was acquired by Abbott Mead Vickers.BBDO 18 months ago. She says: “When Craik Jones was taken over, nothing really changed. AMV recognises that complete integration is not the best policy and prefers to assemble a group of agencies that are strong in their fields.”

While many clients are sceptical of one-stop shops, reasoning that it is hard to be a jack of all trades, a big barrier to integration is the ingrained cultural differences between ad agencies and other communications businesses.

Tim Lewis, marketing director for credit cards at Royal Bank of Scotland, says: “An integrated agency doesn’t appeal to me. I’d look for genuine passion and experience rather than some ad agency which is paying lip-service to below-the-line activities. “I’ve worked for companies which have put above- and below-the-line agencies together on projects and they disliked each other on principle. They speak different languages and deliberately try to wind each other up,” Lewis adds.

OgilvyOne chairman Nigel Howlett says it has taken a long time to persuade Ogilvy & Mather to take OgilvyOne seriously as a strategic entity and to approach joint campaigns from a media-neutral perspective.

But despite OgilvyOne’s undoubted progress towards achieving a level footing with O&M, and despite being a similar size, industry observers believe the advertising agency still takes the lead.

Simon Lapthorne, media analyst at Granville investment bank, says: “I’m not sure it’s possible to merge above-the-line and below-the-line agencies into a single entity. The disciplines and cultures are too different. But that doesn’t mean they can’t work together on an integrated campaign and no advertising agency should be too snooty. After all, if direct marketing is good enough for AMV, it’s good enough for anybody.” Lapthorne advocates creating a new layer of creatives and managers to work with the client on strategy and co-ordinate the marketing agencies.

Joshua was formed last year by the merger of Grey Integrated and Grey Direct, but it only has six above-the-line staff, out of 220 in the UK. Managing director Nick Spindler agrees a true merger of above- and below-the-line agencies is unlikely to work.

“If a traditional ad agency acquired a traditional dm agency there would be a culture clash. But Joshua is different because we have been multidisciplinary from the outset,” he says. Spindler acknowledges that the real test will be how the group operates with an enlarged above-the-line capability.

HHCL & Partners, seen by one industry observer as the only truly integrated agency, has already achieved Joshua’s ambition. HHCL account director Sue Harrison says: “We started 12 years ago, as a media neutral operation that didn’t champion a particular cause. And it has worked. We’ve done highly successful integrated campaigns for high-profile clients, such as Go.”

As the first example of a full-scale merger between TV advertising and direct marketing, Bates Dorland is a pioneer in this field. But, as is the way with many pioneers, they end up losing their scalps.

Bates has done to its brand what it would never advise its clients to do – announce a big sea-change without any evidence of how it will be brought about. It has until Bastille Day to come up with a plan.

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