Ad agencies opt for economies of scale

Received wisdom tells us that the middle ground is a dangerous place to be. Whether it is in football, politics, the grocery business or the advertising world, the theory goes that you are vulnerable to being squeezed at both ends. At one end you have the large multinationals and at the other the small specialists.

Now speculation that another mid-size agency name is about to disappear from the UK has again raised the issue of how mid-sized agencies can survive in an increasingly concentrated market. Is the only way to survive to sell?

Both Butterfield Day Devito Hockney, the rumoured target, and GGT, the suggested suitor, deny they are in talks. But it is symptomatic of the market that the speculation has resurrected an issue that for many medium-sized independent agencies is never far from the surface. How do you achieve substantial growth while retaining independence and distinct positioning in a market where size does matter, especially to clients.

The theory goes that to compete for clients, and for talented people, you have to be able to invest and to do that you have to be either big or distinctive – and you struggle to achieve that positioning in the middle. The other benefit of size should be financial security and international opportunities – but you do not have to look far to realise that is not always true.

In this definition, the middle is occupied by those agencies with billings of between 10m and 30m. In an over-supplied market, the middle ground is a swamp-like place where it can be easy to get trapped.

“There is a tendency for some of the mid-sized agencies to contemplate whether or not they can survive as independents,” says Bob Willott, partner at accountancy firm Willott Kingston Smith, which advises several agencies.

“Mid-sized agencies, doing strong creative work with a solid client base, have more options than merger or takeover. The problems arise for those agencies which cannot attract those clients quickly enough. Some of those who are weak have already gone.”

The biggest casualty so far this year has been Woollams Moira Gaskin O’Malley which disappeared into receivership having spoken to 19 agency suitors in its final desperate months. But it is not the only agency name to disappear since January.

Laing Henry folded into Saatchi & Saatchi in April, having never set the world alight, Burkitt Weinreich Bryant – so heavily dependent on its IDV business – was wed to Edwards Martin Thornton to create Burkitt Edwards Thornton. The Kevin Morley name, if not the man himself, disappeared into the Lintas empire with the Rover account.

Bartle Bogle Hegarty – the independent most cited as a role model – and HHCL & Partners are also constantly rumoured to be doing a deal with somebody. But both have proved that it is not inevitable that mid-sized agencies have to do a deal to grow and attract bigger clients.

The results of Willott Kingston Smith’s annual health check on the ad industry will be published next month. It reveals healthy growth among the mid-sized agencies.

“Agencies making profits of about 500,000 have seen substantial improvements in the past 12 months. Several have doubled profitability, which suggests that if you are good then you can make progress. Those with clear client profiles are growing significantly,” says Willott.

Simons Palmer Denton Clemmow & Johnson, Duckworth Finn Grubb Waters and Butterfield Day are among those agencies occupying the middle ground. They also share a common ambition to be in the top 20 within two years.

Later today (Wednesday) the management at Simons Palmer will sit down to discuss a new three-year plan. Central to that is the objective of securing 100m-plus billings within three years. Its 1994 billings were 25m (Register-MEAL). Chairman Paul Simons readily admits that size is something which the agency has had to consider – it has spoken to other agencies about possible mergers in the past 18 months.

“We are typical of a handful of agencies,” says Simons. “We have achieved what we set out to do – develop brand values of creative excellence and distinctiveness. We are doing well.

“But you reach a point where you ask where is all this going longer term? Do we want to grow? Do we want to retain our independence or do the shareholders want to take some cash out of the business in return for their effort? Any independent has to look at these questions.

“There is a big difference between an agency that is mid-size by default and one that chooses a particular positioning. Our preferred route is organic growth – to retain our independence but work on a bigger canvas.”

Simons Palmer won the 20m Sony PlayStation account earlier this year, which has given the agency a massive boost. Simons hopes for further similar-sized business in the coming year. Duckworth Finn has also made a quantum leap this year, picking up the likes of the Korean car maker Daewoo and Abbey National General Insurance, while also getting on to the Royal Mail pitch list.

“Being in the middle per se is not a problem, but staying in the middle without any distinct positioning is,” says managing director Mick Finn. “You have to go through a step jump in the middle ground – you cannot grow gradually. You are neither big, nor new, nor international and behind you are a whole band of other younger agencies snapping at your heels. Being mid-sized is not a positioning. Being new can be, but the moment soon passes.”

Apart from BBH, there is no other independent agency in the top 20. The other agencies in that bracket have grown through merger or takeover, underlining just how difficult it is for those in the middle to move up organically.

But that will not prevent them from trying.