Why the creative agency model is floundering

The ad industry is finally beginning to dig out from 2020’s implosion, but pandemic recovery is a stutter-start affair. Last year, holding companies cut headcount by more than 22,000 globally, and U.S agency revenue across the board dropped 6.8%, according to the Ad Age Datacenter. Disciplines like health care and digital are on the mend, but media and experiential still languish. Subscribe to Ad Age now for the latest industry news and analysis. The ways out and up, at least according to those with their hands on the purse strings, appear to be increased efficiencies, mergers, and doing more with less. And while that may placate shareholders, it does not bode well for the backbone of the industry—creative agencies. The pandemic has exacerbated trends that have pummeled agencies of late—in-housing by clients, the move away from agencies-of-record toward projects, the incursion of consultancies and the demand for client experience work among them—exposing the weaknesses of the creative agency. “The whole approach of clients to the agencies that they're hiring is changing rapidly,” says Avi Dan, founder and CEO of marketing consultancy Avidan Strategies. “The traditional agencies will tell you, ‘Oh yeah, we can do social. We can do digital. We can do technology. In reality, it's nonsense. What they want to do is a TV commercial. That's how their model is built. That's how they make money. That's where their margins are.” Mired in the model But that's not where the demand is. Increasingly, clients are shifting spend away from TV or are looking for offerings like social strategy, e-commerce or search bundled in with the stock 30-second spots. Brand budgets have been squeezed by the pandemic downturn, too, so clients want deals and don’t want to pay for staff that don’t directly contribute to the creative product they’re looking for. Traditional agency models are often bogged down with overhead, talent costs and time-based compensation models, so much so that one holding company exec confessed that some of its shops barely break even. In this landscape, the results will be brutal, Dan predicts. Agencies will “have to tear out the middle management level and shift the operation to a situation where more senior people handle the client businesses,” he says. “There's no question there's going to be consolidations at all levels and in all disciplines in the next two or three years. When the business is not growing, the only way to survive is getting rid of people.” Some agencies are better positioned to ride out the changes in client needs. Small, independent or niche shops are more insulated because they are typically specialized, whether by location, audience or discipline. Briefs change less for a social media agency with a headcount of 20, or a multicultural agency known for working with Latinx influencers, for example, because they still attract the same type of clients looking for the solutions they provide. Subscribe to Ad Age now for the latest industry news and analysis. Conversely, agencies—no matter their size or backing—that can’t or don’t differentiate themselves are setting themselves up to be swapped out for someone else, which partly explains the recent explosion in account reviews. “If there's nothing unique and special about [a particular creative agency], then they're going to be forced to just compete for everything,” says Deacon Webster, owner and chief creative officer at Walrus, a New York City shop with about 30 employees. “There's no client that they'll say no to, and they're going to have to compete on price. You know you're in big trouble if you're competing on price in this business.” Creating value So what's the way forward? Some holding companies, like WPP, have gone the merger route, stitching together creative shops with others in the network that have complementary disciplines. MDC has done so less formally, creating "constellations" or groups within its network of shops to round out their collective capabilities. Independent Droga5 sold to Accenture Interactive and gained CEO-level access, along with the parent company's deeper pockets, highly skilled technicians and next-generation consumer experience expertise. Others, like S4 Capital, are using a cash-and-equity merger model to encourage innovation and cooperation through a single P&L. Though pandemic-related job losses have been staggering, relatively few agencies actually shuttered for good. Instead, it has prompted holding companies to continue mergers. Sometimes it’s simply a cost savings, like when BBH merged its New York and Los Angeles offices. Other times it really does mean the death of a brand. J. Walter Thompson lives on in half a name only after WPP slipped it into Wunderman. WPP merged the 103-year-old Grey brand with AKQA to form AKQA Group late last year, an effort to bring the digital chops of AKQA to a legacy creative shop. Grey still exists as a separate entity within the group, albeit working very closely with AKQA. “We find our connections through creative projects, pitches and clients. It wasn’t just slammed together without considerations to creativity or creative people or the creative output,” says John Patroulis, Worldwide Chief Creative Officer at Grey Group. Patroulis thinks the handwringing over the future of creative agencies is overblown, as is the tendency to place the blame at the feet of clients. “It'd be like being a hamburger stand and making average to shitty hamburgers and wondering why people aren’t coming to you,” he says. “You’ve got to create the value and create the magnet. It's not on clients. It's really on the companies themselves and the agencies.” Treading water Droga5 and Accenture Interactive seem to have created a magnet together. The agency had come off a great 10-year run (it was named Ad Age’s Agency of the Decade in 2020), but clients were asking for more. “If you're trying to tread water, you're going to drown,” says Sean Lackey, chief marketing officer at Droga5. “And if you're not thinking how the landscape is changing—because consumer behavior and how people think and behave is always changing so rapidly—it's going to be hard. If you're not laser-focused and really having a sharp eye toward whether anyone is actually going to ever watch this or see this, then what's the point of doing it?" Its sale to the consultancy is now experiencing almost universal acclaim, despite industry rumblings and misgivings about the “death of creativity” in 2019. Droga5’s transition from successful independent agency to successful consultancy holding presents one path forward for other agencies, especially now that founder David Droga’s appointment as CEO of Accenture Interactive would appear to guarantee the autonomy of his eponymous shop within the organization. Accenture Interactive, for its part, concentrated on filling the gaps that Droga5, like any creative agency, had on the back end. “They sometimes may believe, ‘Oh, I can do everything because I’m a creative agency, but you can’t. The way to scale is not just to do more of the same,” says Jeannine Falcone, global lead of creative and marketing services at Accenture Interactive. “The way to scale is to combine that—and consultants are very good at this—with technology and process and governance and ways of working, all of that stuff that agencies are not very good at doing in a repeatable way.” Not everyone is on board the consultancy hype train. An agency “could join David Droga’s Accenture Interactive, along with 40 other companies and 16 brands,” says Martin Sorrell, S4 Capital executive chairman. “That might change. We'll see what happens. That's one option. You could get lost inside a holding company, just another vertical and more internal internecine strife between the different verticals. And you could look at some of the specialists that claim to be new models but really are mini holding companies.” Subscribe to Ad Age now for the latest industry news and analysis. S4 Capital has also been on an agency acquisition spree, merging Taco Bell’s culture agency of record Cashmere with Media.Monks earlier this month. It claims its network model is flatter and less hierarchical than at a traditional holding company or consultancy. Along with its single P&L model, most of the agencies within its network are inherently digital and data-focused, which Sorrell unceasingly touts as a competitive point of difference from legacy holding companies. Breeding ground for talent But whatever road forward a creative agency chooses—independence, acquisition, incremental change—the creative cohort isn’t going anywhere. Some may fail (and some may deserve to fail, whether due to a lack of vision or a lack of business fundamentals), but the alternative models are still built upon the infrastructure of an industry crowded with creative shops. Where else do holding companies and consultancies browse for deals? Where else are the junior creatives trained to be later poached by senior-talent-only shops or other industries? “Creative agencies are among the most intense and vibrant creative cultures that exist,” Patroulis says. “There's a reason that people get hired away from creative agencies. And I think when we continue to pursue the value of what that is and continue to grow that, continue to make that the center of the business, it’s always going to play an important role.”

Why the creative agency model is floundering

Featured Stories