Holding companies: Size is not a strategy

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The mega-mergers in the advertising agency business in recent years may well rank among the worst strategic errors in its century-plus history. To paraphrase Albert Einstein, the ideal size for an idea is "small and simple as possible." The advertising industry's behavior seems to offer this rebuke to the physics genius: We aim to be as large and complex as possible.

With all due respect to the heads of the big holding companies, Prof. Einstein's point well serves the agency business. My 24 years at Young & Rubicam (as CEO of Wunderman Cato Johnson; president-chief operating officer of Y&R Advertising; and worldwide chairman of client services) led me to one undeniable conclusion. It is that agencies prosper when their strategic initiatives are client-focused, and agencies fail when their tactical actions are internally or shareholder motivated.

The holding company, though seemingly successful-at least financially-for the last two decades, is no longer an ideal structure for servicing clients in the 21st century. Size and complexity mitigate against the simple truth that people, not organizations, solve marketing problems.

In the pre-holding company era, agencies used their excess cash flow to expand geographically or to acquire additional communications services to address clients' growing needs. The holding companies' voracious appetite for mid- and large-sized agencies, however, too often added neither new geography nor new capabilities to their coverage. Rather, these acquisitions added essentially redundant capabilities, acquired for their size and their potential to service competing clients. The result is a misalignment between clients' needs and holding company behavior.

Then consider what I call the "partnership paradox." While ad agency chiefs lust for relationships where their shops are viewed as full partners with their clients, holding company CEOs conduct their financial strategies as if they were independent contractors, seeking to "supply" multiple competitors. In one recent tally, Interpublic Group of Cos. had 20 advertising agencies and seven health care agencies! And in an economic climate indicating annual organic growth likely will be below 5% for the foreseeable future, it is not difficult to imagine that this inexorable acquisition binge will continue in an attempt to support stock valuations that demand double-digit growth.


Compounding this problem, the holding companies are using their own brand names for operating purposes; i.e., the holding company has become the entity that pitches and services the clients. For example, it's evident that the agency for DaimlerChrysler and PepsiCo is Omnicom Group; that Ford Motor Co.'s agency is WPP Group; and that the agency for Coca-Cola Co. and General Motors Corp. is Interpublic, etc. So the notion of a holding company serving as an independent financial umbrella is no longer an accurate reflection of today's practices.

Look at the most recent shot across the bow in the cola wars to see just how much the clients view holding companies as their advertising providers. Interpublic was unable to persuade PepsiCo that "walls" could be constructed in such a way to ensure there would be no leaks of confidential PepsiCo information between Interpublic's PepsiCo agency (Foote, Cone & Belding Worldwide) and Interpub- lic's Coca-Cola Co. agencies (principally McCann-Erickson World- wide and Lowe Lintas & Partners Worldwide). In the end, PepsiCo could not see a difference between the Interpublic shops.

Equally frustrating for the holding companies, their aggressive attempts to provide multiple services to clients continue to be cumbersome and riddled with internal politics and low margins.

Buying redundant capabilities is the major strategic impetus behind companies in commodity industries (witness the great consolidations in steel, oil, paper and, recently, in consumer long distance services). These are businesses that have no product differentiation. Commodity businesses like these seek scale, wherein the lowest cost suppliers emerge as the winners.

However, advertising and marketing services are businesses based upon intellectual capital, not cost of capital. Intellectual capital, by and large, is not scaleable. Thus size is, in fact, an encumbrance to a non-scaleable business. Media buying, the commodity component of the ad business, is actually the exception that proves this rule.

Perhaps the next wave of economic growth will see a transformation back to the future-back to a business of ideas, inspiring creativity and great brand-building; a business where the client is the No. 1 focus, and profits are an earned byproduct of successfully building clients' brands. Capital can then be used to acquire expertise and capabilities that increase the ability to better deliver results for clients.

True client-agency partnerships are rooted in trust, unique consumer knowledge, a passion for inspired creative ideas and an unwavering loyalty to the client's success. Agency leaders have an opportunity in today's depressed business climate to re-instill the noble notion of client service-not with financial engineering but with human re-engineering.

Perhaps the inevitable result will be divesting much of the acquired excesses to return to a size and scale that would bring agencies closer to rewarding client partnerships ... and just maybe help confirm Prof. Einstein's legacy.

Mr. Kurz is chairman, Kurz & Friends, Norwalk, Conn., a consulting company dedicated to improving professional services in both the for-profit and not-for-profit arenas ([email protected]).

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