The ‘split’ agency model ain’t broken, it’s merely cracked

For the past six months there has been debate about the return to “the good old days” of full-service agencies. This might, in some cases, be driven by the relative anonymity and daily grind of being a local agency within a global agency group where decisions (and often creative work) come from elsewhere. It might be due to the jealousy a creative agency chief feels after catching sight of the media agency’s margins, which are usually more than twice as high. Less cynically, it may be that interest in this issue is being fuelled by a profound belief that work produced for clients would be much better if creative and media agencies were re-integrated. But whatever the reason, these views are wistful – and wrong.

It’s telling that you never hear media agencies making the same case. Logic apart, there are emotional reasons why they’re not interested: most of the chiefs of the big media agencies now dominating the market came out of full-service agencies, and they remember well how they were treated. The status of media departments was very low, “next to the accounts department”. Salaries were markedly lower than those of account men and creatives; direct contact with the client was not only discouraged, but in some cases actually banned. This was reflected in the amount ad agencies invested in their media function.

The Institute of Practitioners in Advertising’s own confidential analysis of its agencies’ costs showed that only 8% of their income was going into media. Bearing in mind that this was the era of 15% commission, in effect only 1.25% was going into their media function. Even in a period of relatively straightforward media, this was appalling under-investment and it was a statistic kept well away from clients. The stream of breakaways by media talent in the 1970s and 1980s to form their own “media independents” was a direct result of this.

So what is likely to happen in the future? After all, just about everyone seems to agree that the agency model is broken.

For a start, the agency model isn’t broken: no model that is broken could produce the string of uninterrupted profit increases that Omnicom and WPP Group deliver. More tellingly, Interpublic Group has endured several years of well-documented, serious failings, but its revenues have hardly moved. If it is so obvious that the current model is broken, IPG would have sunk some time ago. The point is that the agency model is a financial model and, patently, it works for this market. But since so many people are whinging about it – clients and agency personnel alike – something must be wrong. I believe the agency model is cracked, not broken. So what might happen? 

Consultants, new to the marketing industry, regard the agency sector as undifferentiated and commoditised, and the high influence of procurement in the industry suggests this is true. Normally, consolidation happens in an industry where such conditions apply. So despite the consolidation into major groups that we have already seen, this trend is going to continue, but this time among the small to medium-sized companies, and out of necessity rather than choice.

There are no signs that the declining status of agencies with their clients will reverse. Agencies don’t understand or get involved sufficiently in their clients’ business, so they don’t share enough of their clients’ trials and tribulations. This is as much a question of attitude and interest as it is of aptitude. But just as agencies don’t think “sales”, marketing departments don’t think “profits”, so they too have a status issue, but one with their boards rather than their clients.

This will increasingly let in the management consultants and big four accountancy firms. They tend to be very credible in areas of analysis and modelling, which is highly attractive in an era of increased accountability and scrutiny. These companies already earn huge fees from client companies for work that should have been gathered by the agency groups.

In the West, there are almost no medium-sized companies left in marketing services. As soon as companies get to that size they are gobbled up by one of the big agency groups (hence I describe it as a financial model.) With digital developments creating more uncertainty about “the old ways”, I envisage there being a higher proportion of medium-sized agencies independent of the big groups.

The high-priced sale of 49% of CHI to WPP is a small sign of the future. We will see more of these “almost full-service” agencies. It is far easier to mould together different skill sets if you don’t have the bag and baggage of old structures – and the attitudes that go with it. However, these offerings should be compared with retro cars. BMW’s retro Mini is a great success, but it isn’t going to change the market.

The digital revolution is both a huge opportunity and a huge threat to the industry. It is certainly sucking money out of that part of marketing budgets conventionally “owned” by the agency world.

Which brings me to my next article, where I’ll be making some predictions about the effect of digital developments on the sector, plus speculating on what is next for media agencies, the only major players showing real signs of thriving in this brave new world.

Chris Ingram is chairman of brand-building consultancy Ingram 

Chris Ingram’s next piece will appear in the July 5 issue of Marketing Week