Consultants vs. Ad Agencies: Who Will Prevail?
In late February before the Coronavirus Pandemic caused America to socially distance themselves and before the economy stalled, I examined where things stood between advertising agencies and the big consultants in the world of advertising. It is now the latter part of March, the stock market has tanked, the economy is at a standstill, and we face going into recession or worse. Now more than ever for those involved in advertising and marketing, it is very important to determine who is likely to prevail when the economy comes back. Which entity will do the best job of building client relationships to help address the toughest marketing challenges? Will agencies or consultants offer those in the business of marketing and advertising, the brightest future and the best career path?
Comparing Financial Performance and Job Growth
It is an interesting exercise to read the annual reports of the leading publicly traded, multinational agency holding companies. Their commentary on who they are and what they are focusing on unfortunately makes them indistinguishable from one another.
If you go back ten years ago, they were all chasing growth by either pursuing digital services – the growth segment at the time, or by chasing the developing world which was also in growth mode. They also grew through the acquisition of up and coming agencies. Today there is very little significant organic growth left in the business and you can see the impact of this in the performance of agency stocks.
In February 2020, prior to the pandemic’s impact on the markets, the stock performance of WPP, Saatchi, Publicis, Omnicom, Dentsu, IPG, and MDC Partners was charted over the prior three years. Omnicom and IPG demonstrated the best performance in the segment, investors would have been near break-even to slightly down. For the other agencies, it was a bloodbath. This in a period when an investment in the S&P 500 index was up nearly 45%. For the leading ad agency holding companies, tens of billions of dollars in shareholder value was wiped out. Relative to the general market, the performance of the entire group was absolutely dismal. And, this was when the general economy was soaring.
In the same period of analysis, Accenture, the only publicly traded large consultancy, saw its stock gain nearly 70% in value. The other large consulting company giants were typically growing overall around 7%/year which is 500-600% more growth than agencies on much larger bases. For example, total ad agency employment in the U.S. is right around 200,000. Accenture, by itself, has nearly 500,000 employees around the world. Typically, the marketing practices at the largest consultants were growing at much faster rates than the overall company growth. For some, marketing services saw growth at 30%+/year.
In the last 10 years, the U.S. ad industry added roughly 10,000 jobs. This got the industry back to 2007 levels. During this same period, the large consultancies have built marketing practices that have added many times more jobs than the traditional ad industry.
AgencySpotter has a list of the top 50 largest marketing companies. They look at the individual companies themselves not the rolled up holding company. The first four places on the list are now occupied by: Accenture Interactive 18,000 employees, PwC 10,000+ employees, IBM iX 15,000 employees, and Deloitte Digital which has built a $2.6 billion dollar business in under 6-7 years.
Contrast this growth with WPP, the most actively traded agency holding company, which announced a 3-year cost-cutting reorganization move at the end of 2018 that would eliminate 3500 people from its ranks.
Based on business growth results, you have to say that the consultancies are getting it right, certainly time will tell. They are using their strategic leadership skills and access to the C-Suite to drive true digital transformation in their clients – radically driving improvements in customer experience and knitting together operational processes and marketing. Today’s very largest businesses who conduct their business over the web for example will usually not give their mission-critical website development to a traditional agency. The risks are too high, and the trust isn’t there. And, often rightly so, because their agencies typically don’t have the ability to marry the highly complex operational processes with web initiatives.
The Competitive Climate in Advertising is Fierce
While there are 14-15,000 ad agencies in the U.S., the top 5 mega-agency holding companies are responsible for 70%+ of global advertising spend. The industry is much more concentrated at the top than it was 15-20 years ago.
There is more competition than ever, especially when overall organic industry growth has just been 1-2% per year for the last three years. Digital typically accounts now for over half of the revenue in the large ad agency holding companies and no longer functions as the growth engine that it once was a decade ago.
There is more commodization than ever, much of it forced on agencies by large company procurement practices which pits all their agencies against each other to bid for services which has forced agencies to give back margins they once enjoyed. Further, more agency work is now done on a project basis (vs. ongoing retainers) which still requires staff, office space, and equipment to function but it comes without any compensation certainty.
Since real growth is so hard to come by, the industry is very focused on cost-tracking and cost -cutting. Neither activity will lead to any significant growth
With huge pressure to cut costs, agencies have decimated the ranks of older, more experienced leaders to save on salaries. The result is that clients are not getting the leadership they once enjoyed from people who could actually lead clients, grow their business, and grow the agency’s business in return.
Most agencies cannot invest in innovation, they can’t develop new service offerings that are unique because they don’t have deep pockets and can’t carry the expense of starting up new business offerings .
If you went back 10 years ago, ad agencies, pr firms, media agencies, digital agencies all had their own lanes, mostly. Today, everyone is looking to broaden their client relationships, and each firm type has moved into service adjacencies where the competitive crossover is daunting and confusing. Every type of firm wants to take the lead in branding and they all compete against each other for digital projects and traditional below the line services.
Further, every agency is focused on story-telling and helping their clients develop mission or purpose-based messaging platforms. Initially these approaches represented an opportunity, but this focus is no longer unique and has become table stakes in the business today.
Agencies also really struggle with developing unique positions for themselves. While small agencies can develop and attack with niche offerings, the big holding companies need massive scale to eke out even modest growth rates.
And now you have seen the meteoric rise of the traditional consultancies who have bought their way into the category and are now among the biggest ad agencies in the world with marketing services teams whose employee counts are in the tens of thousands.
The question is who can deliver the best value to clients. For the very largest companies, it is now the consultancies, leveraging their C-suite relationships, who have recast themselves with newly acquired marketing competencies who can provide the continuum of services these clients need. For smaller to mid-sized clients, the traditional ad agency model can still be effective but that will likely change radically over the next 10 years.
So Where Do You Go From Here
So a key question for those in the traditional agency business has to be where do you go from here in terms of your career path. If you are working in one of the big holding companies, you are likely to encounter a cost-cutting focus, decreasing margins, limited differentiation, limited innovation, heightened competition and increasing commoditization. Stock options won’t likely be of much value if you are lucky enough to be granted them, there won’t be much in the way of profits for profit sharing. Wage growth will be difficult to achieve unless you are a highly sought-after superstar. If you are working on major brands, that business will likely drift towards the large consulting companies. Stay the course and consider yourself warned.
The consulting companies won’t necessarily be a bed of roses either. Agency friends who are now working inside the consultancies report that the culture clashes are in fact very real. There will be bumps and stumbles. But, there are usually much greater opportunities when you are inside of a growth business versus one in decline.
I will discuss this topic and more on the Marketing Upheaval podcast hosted by Rudy Fernandez and produced by Susan Cooper which will be released April 1st. You can find it on any of the major podcast platforms.
What do you think? Please share your comments with all of us.
Principal, Silverman1 Consulting
Jeff Silverman is a marketing veteran with over 35 years of advertising agency experience. Today, he consults with agencies and directly with clients on a range of areas including: strategic planning, target audience and marketplace insights, marketing team formation, campaign development & oversight, effectiveness measurement and business development activities. Jeff’s account experience ranges from the Global 2000 to start-ups across a diverse range of private and public sector industries.