The Rundown: The decline and fall of the agency model

Holding companies like to point to decreasing client spend as a reason for poor performance. Indeed, the fact that WPP had its worst year for revenue growth since 2009 last year — with creative agencies down 4 percent in 2017 — was a factor many pointed to in the ouster of longtime chief Martin Sorrell. (WPP pushed Sorrell to resign after an outside firm hired by its board finished investigating financial misconduct. The company said the amounts in question were not material.)

But for many in the industry, Sorrell’s departure is emblematic of the continued decline in relevance of holding companies in general. Former and current WPP employees say misconduct was a convenient excuse to get rid of Sorrell, who earned about $91 million a year in 2015. A shareholder revolt resulted in that compensation being cut to $62 million last year.

“This financial stuff, it was a pretense the board needed,” said Pivotal analyst Brian Wieser of Sorrell’s departure. “There were people on the board frustrated by the stock and the business performance, and yes, for those looking at it, his pay. If they were doing great, this wouldn’t have happened.”

It’s not just a WPP problem. Growth across other holding companies is bad. Omnicom, which reported its first-quarter earnings this week, had flat North America revenue growth in the quarter. The market is “rapidly adjusting,” said CEO John Wren, who specifically talked about media agency OMD’s slow growth being influenced by how clients are transacting — shifting from a bundled way of spending money to an unbundled method that has an impact, he said, on reported revenue. CFO Phil Angelastro said reduced client spend was responsible for the drop in revenue, but look closer, and the numbers point to client losses — not client ad spend — as the driving cause.

Advertising typically tracks the economy, and advertising spend is increasing. Meanwhile, gross domestic product globally is growing, and consumer demand is up. All forecasters — Zenith, Magna and GroupM — predict that everything from television to digital to even out of home will see growth this year.

So what gives?

“It’s not that clients aren’t spending — it’s that they’re spending without us,” said one media buyer.

Brands that are digitally mature and have plenty of first-party data are increasingly doing their buying and marketing in-house. From Chobani to Pepsi to, there are marketers beyond the Procter & Gambles of the world investing in their own capabilities. And even at those consumer packaged goods companies, marketers are spending less on so-called ineffective ads. Just look at P&G, which redirected $200 million in spending to premium creativity — just not with agencies. CMO Marc Pritchard, speaking to Digiday at the end of last year, said he hopes that he’ll find more efficiencies this year, cutting down on the number of agencies P&G uses.

Google and Facebook, of which Sorrell was a vocal critic, also control the vast majority of online ad spend, with marketers going to them directly. There’s always competition from publishers building agency capabilities, and for media, the fact that consultancies like Accenture are trying to own more of the strategy and planning aspect means that execution — which pays way less — is all that’s left for agencies to mop up.

Things are about to get more interesting. 2015’s Mediapalooza, where about $25 billion in billings went under review, created serious issues for agency performance. But 2018 is expected to have even more movement, according to some estimates, with high-profile accounts from Adidas, Mars, McDonald’s and others already under review. Pitch activity is generally expensive for agencies, and given the current pressures, will hurt more. It’s not going to be pretty.

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