Is the big agency model broken?

Do the latest billings figures really suggest the UK's traditional ad agencies are facing death at the hands of the digital kings? John Tylee reports.

If billings figures are a relevant and credible indication of an agency's seaworthiness, then an alarming number of Britain's biggest shops are holed beneath the waterline and sinking fast.

The industry is awash with doom-mongers who will see the latest above-the-line spend going through the major agencies as more evidence of a traditional model beyond repair.

The time has come, they argue, to scuttle these nervous wrecks and open up the oceans to newer, smaller and more manoeuvrable craft. But before anybody thinks of manning the lifeboats, it's worth remembering that the ability of billings tables to provide an accurate reflection of adland's well-being has long been in question.

For one thing, they are a throwback to a commission system that has all but disappeared. For another, they may bear little relation to a network agency's true financial health, which has become even harder to determine in the wake of the Sarbanes-Oxley rules on corporate governance in the US.

Steve Gatfield, the Lowe Worldwide chief executive and the vice-president of global operations at Interpublic, says: "Progressively, billings figures have been a less important way of keeping score."

Hamish McLennan, the global chief executive of WPP's Young & Rubicam Advertising, agrees. "Billings are wholly immaterial these days," he declares.

So should anybody be bothered that more than half of the UK's top agencies recorded drops in billings last year? Or that the £4.5 billion total billings figure of the top 30 is 4 per cent down on 2005? After all, the billings slump at Lowe London is clearly the result of its Tesco loss. And even though JWT saw a modest 3.7 per cent lift in billings, the figure does not take into account its most recent losses such as Vodafone and Reckitt Benckiser, two of its biggest spending clients.

The answer is yes, according to Michael Baulk, the former chairman of Abbott Mead Vickers BBDO, the UK's largest agency. "Beneath the numbers lies the fact that there is relentless downward pressure on agency income," he warns. "The network agencies that dominate the top 30 are not in very good shape."

Equally worrying is that the economic climate will discourage mainstream shops from investing to help clients wanting to move into other forms of communication, notably digital.

By general consensus, the agency establishment has procrastinated over digital. "It's taken us much too long to pick up on it and to realise that our entire business is having to be rethought," McLennan acknowledges.

The regional boss of a major network is even more forthright. "We've been pathetic," he argues. "After the dotcom collapse of 2000, we all breathed a sigh of relief and thought it had all gone away. It didn't. The collapse just delayed things. We were slow to see what was going on. Now we recognise digital will be a significant revenue stream. But we also know we've a lot of catching up to do."

Judging the state of readiness (or lack of it) among traditional agencies to meet the new communication challenges is not easy.

"My belief is that a lot of agencies are very concerned about the fall away in revenue from traditional advertising," Bob Willott, the editor of Marketing Services Financial Intelligence, says. "The pace of change is a lot faster than it was even a year ago."

But while traditional agencies undertake a painful period of reinvention, the UK industry as a whole is riding a new wave of optimism. Marketing budgets for 2007 and 2008 are the most buoyant for seven years; the number of people working in IPA agencies (more than 17,000) is the highest in almost four decades.

The trouble is that the good fortune is not being equally shared. "It's actually a very dynamic market if you're a start-up, a digital agency or a DM specialist," a senior executive of an industry trade body points out. "However, big pieces of business are not necessarily going into networks any more. The tectonic plates are shifting."

The most ironic and perplexing part of this shift, as far as big agencies are concerned, is that the wheel has gone full circle. Rewind 25 years and it was not uncommon for a group of senior executives closely involved with a substantial piece of business to do a start-up and for that account to follow them within days.

The demise of the "account baron" and more stringent employment contracts largely put a stop to that. Now the practice is resuming. This is partly because a start-up can be launched on a shoestring ("All you need is a mobile phone and a laptop," a former senior agency manager remarks). But mainly because clients are more willing than ever to venture beyond the big agency comfort zone. Witness Mother's capture of the £14 million Yell account and the assigning of the £12 million Department of Health anti-smoking brief to Miles Calcraft Briginshaw Duffy. "Big agencies have had a hard time with medium-sized independents taking substantial pieces of business from them," David Wethey, the chairman of Agency Assessments International, reports.

Moreover, the newer boys reassure would-be clients with high degrees of professionalism. "Clemmow Hornby Inge doesn't take a client without making sure it understands that client's culture," an industry source says. "The Red Brick Road has very strong account management. There are pretty compelling offerings."

Some link network offices' failure to keep pace with a risk-averse culture. "They've regressed to a situation where everything is done by the book," an industry commentator observes. "Network holding companies have to manage City expectations and the City doesn't like surprises. If you're running an agency with a salary package worth £500,000, you're not likely to rock the boat."

Meanwhile, the rise of the micronetwork highlights the structural problems of the traditional ones, particularly when it comes to manpower issues. A senior adman in frequent contact with agency people working in some of the smaller European markets sums up the problem.

"The deal between the network and the client is done in New York, London or Chicago, where it may look perfectly OK," he explains. "But not if you're having to run the business in the Czech Republic for almost no money. The service is terrible, the client complains to network headquarters and demands more people on the business. But the deal doesn't allow for it."

With so many other distractions it may be little wonder that traditional agencies were blindsided by digital. As the dotcom collapse receded, many clients thought digital worth exploring but, because of its relative unimportance, left their junior marketing managers to learn its ways.

A lot of those juniors are now senior marketers who understand digital's potential, but despair at the lack of expertise their traditional agency offers.

Agencies defend themselves by citing the paucity of digital talent (the IPA estimates that 300 jobs in digital communications remained unfilled last year) and that any digital offering has to reflect client demand. "Financial services companies are well down the digital path, while packaged goods manufacturers have barely set out on it," Gatfield points out.

Playing catch-up has been made all the harder for classic agencies because of their natural conservatism. As one agency chief puts it: "We're seen as a bunch of Luddites who just don't get it. So we don't just have to prove ourselves once, but many times over."

But it would be wrong to dismiss traditional agencies as lost causes when it comes to digital. Not even the medium's specialists are doing that. Mark Collier, Dare's managing partner, comments: "I have no doubt that the best above-the-line agencies will crack it."

Some claim to have already done so. Andrew Robertson, the worldwide chief executive of Omnicom's BBDO network, says: "In the digital arena, I don't think the Omnicom offering is bettered by anybody."

For others, though, the transformation process may be both painful and costly. "Traditional agencies may have to accept that they will have to take the hit and that their revenue streams are going to be messed up for a few years," an industry observer suggests.

Enfeebled and disillusioned, the UK outposts of the major networks would seem to have few reasons to be cheerful. However, the business pendulum may be swinging London's way. Gary Leih, the Ogilvy UK group chairman, says: "In the old days, most worldwide accounts were run from New York. Now London is often the 'hub' for such business. London has learned to co-ordinate business better. It isn't as insular as it used to be."

At the same time, there is a growing feeling that the procurement threat is being seen off. "Two or three years ago client procurement teams were driving down the terms of business, but I think we're now better rewarded for the work we do," William Eccleshare, BBDO's chairman for Europe, the Middle East and Africa, claims. "We've become better negotiators and we're not losing our shirts any more."

Others say traditional agencies should play to their strengths and not trample over what they have always done well in the rush to embrace digital. "While more of our revenue is coming from other sources we shouldn't forget that a lot of money is still being spent on TV," Richard Hytner, the Saatchi & Saatchi Worldwide deputy chairman, points out. "This is still a major revenue stream for us."

Baulk counsels caution too. "Mourning the death of advertising is premature," he says. "MySpace and YouTube may be exciting opportunities, but no brand has ever been built using anything other than mainstream media."

Nevertheless, traditional agencies are getting better at tapping into alternative money flows and at marshalling their resources better. The emergence of the micronetwork is a direct result of this. One such network, Bartle Bogle Hegarty, already handles significant amounts of Unilever global business as well as British Airways.

Gatfield, going a similar route at Lowe, claims it is allowing better co-ordination of the creative product and eliminated the need for regional management, allowing the network to divert investment into priority areas.

But if mainstream advertising is in decline (it accounts for just under 50 per cent of the Ogilvy Group's business in the UK), where is the shortfall to be made up? Online activity may plug a substantial part of the gap (McLennan describes it as "the best opportunity for growth I've seen in 20 years") along with more strategic advice and consultancy work.

Leih, however, sees huge potential in PR and sales promotion at a time when consumers have more power than ever to shape the destiny of brands. "They can effect very rapid change and give clients much more control," he says.

Of course, all this begs the question of whether the agency structure as it currently exists is sufficiently strong to survive the catharsis. Robertson has no doubts. "The network model is strong enough as long as we remain good at what we do and remember that the way we do business is changing every day," he says.

Some suggest the transformation does not have to be prohibitively expensive. "Traditional agencies ought to be looking at hiring small numbers of bright new-media people as the seedcorn," Wethey suggests.

This, though, may not be as easy as it sounds. "The problem is that digital people are often mavericks who need to be tightly managed," a leading industry employment consultant says. "Also, they tend to want to move into other areas where there is more pay and more glamour."

Leih sees a time when big agencies do more of the "thinking" and less of the "doing". "We're going to be forming more strategic partnerships for some of the work," he predicts.

In the end, it may all depend on how well big agency mindsets can be changed. "Their people still have huge contributions to make, it's just that they need some retraining," Wethey adds. "What's happening is actually very healthy. The business has been stuck in the mud for too long."

TEN BIGGEST BILLINGS DROPS
1 Lowe London -42.32%
2 Euro RSCG London -21.83%
3 Ogilvy & Mather -21.01%
4 Saatchi & Saatchi -17.73%
5 Grey -16.25%
6 TBWA\London -15.54%
7 VCCP -15.28%
8 DDB London -14.10%
9 Publicis -12.35%
10 MCBD -11.10%

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1 Job description: Digital marketing executive

Digital marketing executives oversee the online marketing strategy for their organisation. They plan and execute digital (including email) marketing campaigns and design, maintain and supply content for the organisation's website(s).