Limitations of the Holding Company Structure
Holding companies have not been structured as operating companies, per se. They are collections of independently managed agencies and companies. WPP lists 363 separate companies in its portfolio, and many of these companies, like Ogilvy, are themselves made up of independently run offices (132 for Ogilvy, for example), each with independently run clients. Holding companies are highly fragmented and overly decentralized. Managing them from the center is like herding cats. Certain past strategies were successful in generating growth and improved margins, but these strategies cannot be relied on in the future.
- Squeezing. Holding companies squeezed improved performance out of their many businesses by imposing "stretch" annual budgets. This effort did not require a sophisticated top-down effort by holding company CEOs or CFOs. These executives could negotiate aggressive budgets with each operating company, and the companies could respond, typically, by downsizing and juniorizing. The "squeezing" strategy drove out surplus costs and widened holding company margins, but it was clear that at some point this game would be played out.
- Orchestrating integration. When digital and social marketing came into play around 2005, holding companies could orchestrate ad hoc combinations of agency resources to serve the increased needs of clients. This effort, too, did not require a sophisticated top-down effort. Agencies were not required to integrate or change. As WPP reported in its 2003 Annual Report, "WPP, the parent company, encourages and enables operating companies of different disciplines to work together for the benefit of clients and our people."
The End of the Line Has Been Reached
By 2017, holding company agencies had downsized themselves to dangerously low levels of staffing, stretching their too-few people to handle bloated client Scopes of Work. Furthermore, as Goldman Sachs reported in June 2018, "WPP and Publicis have the lowest staff costs per employee at $75,000 and $85,000, respectively, compared to IPG at $110,000 and OMC at $145,000. We believe WPP's lower unit cost … will likely limit the scope for meaningful cost reduction going forward."
Acquire, squeeze and orchestrate can no longer deliver improved results for shareholders or create value for clients. Agencies have cut very deep into their capabilities and run out of room to cut costs. New strategies are required.
Here are my predictions:
- Elimination of portfolio fragmentation and excessive decentralization. Mark Read of WPP and Arthur Sadoun of Publicis Groupe will take further steps to reduce the number of branded companies in their portfolios, either through divestiture or merger. Inevitably, they will reduce portfolio fragmentation and complexity, increase genuine integration and move the center of power upwards, allowing them to actively manage their companies.
- Transformation of their holding companies into integrated problem-solving companies. Arthur Sadoun has already articulated this through his "Power of One" concept, which de-emphasizes the role of each branded agency and upgrades the role of Publicis Groupe as the key client-facing entity. Both Arthur Sadoun and Mark Read have stated their goals to transform their companies into "creative problem-solving consultancies," much like the highly paid consulting firms who now compete with them. These CEOs will make major investments in talent and capabilities to bring this about.
- Focus on price, not costs. The holding companies will reorient their priorities from cost management to fee enhancement, upgrading their fee negotiation processes to ensure that they are paid fairly for all the work they do. In the past, their agencies accepted declining client-imposed fees for random and unplanned Scopes of Work. Holding companies will initiate new Scope of Work (SOW) management practices -- long overdue -- that their agencies refused to implement in the past. Holding companies will seek to re-balance the power in their relationships with clients, seeking partnerships rather than vendorships.
- Buy time through financial engineering. Holding companies will establish cost and restructuring reserves to give them the financial flexibility to make the necessary investments. Wall Street will applaud rather than punish these initiatives, I hope. The tyranny of quarterly earnings needs to be blunted while strategic investments are made.
Transforming fragmented holding companies into vigorous, fully integrated operational problem-solving companies is the required new path. WPP and Publicis Groupe are on this path with their relatively new CEOs. Higher cost IPG and OMC may follow once they've exhausted their cost-reduction possibilities, but they may need new leaders who see the holding company challenges with fresh eyes.
Will investors give holding companies the time and opportunity to succeed in these complicated makeovers? Will WPP and Publicis Groupe succeed in these CEO-led initiatives -- or is it too late?
We'll soon find out.
Michael Farmer is the author of Madison Avenue Manslaughter: an inside view of fee-cutting clients, profit-hungry owners and declining ad agencies. An updated third edition will be published in February 2019. Farmer has an MBA from Harvard Business Scho... read more
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