CLOSE-UP: ANALYSIS - SCOTTISH ADVERTISING. Can Scottish agencies make a killing in London? The Leith and Faulds have both made efforts to break into the UK

History has shown that regional agencies find it difficult to set up shop in London. But recently two Scottish agencies have done just that.

The Leith Agency opened a small office in London a couple of years ago and claims it is already in the black. Last month Faulds acquired the existing London agency Malcolm Moore Deakin Hutson, which had largely failed to take off since its launch in 2000. The shop will be rebranded as Faulds.

Is this new air of confidence misplaced? Or do the Scots have a secret weapon hidden inside their sporrans?

The nature of a traditional regional agency does not fit readily into the London mould. Over the years, regional clients have tended to spend less and to expect a multi-disciplined range of marketing services with all the attendant support costs involved. Often they have made greater demands on service than on creative standards. Lower staff and premises costs in the regions may have allowed that type of work to produce a respectable profit margin, but in London it's a different matter.

So what has prompted the latest Scottish invasion? First and foremost, both Faulds and The Leith say that the Scottish market is not big enough, and it's getting smaller. "Corporate Scotland is shrinking," Faulds' managing director, Dennis Chester, says, citing the way Bank of Scotland, Scottish Widows and Scottish Nuclear Fuels have moved their centres of corporate gravity to English cities.

Global businesses still see the UK as a single territory centred around London while, by contrast, Dublin is regarded as the centre of an entirely separate market.

Devolution also seems to have had a surprisingly harmful impact on Scottish corporate life. The Leith's chief executive, John Rowley, believes it has fuelled perceptions that Scotland is a remote place and agencies there won't understand the English market. Hopes that greater independence would unlock extra money for separate Scottish budgets have also proved unfounded.

"Devolution has not encouraged businesses to open offices in Scotland as some had expected, Chester adds.

Any agency that wants to be taken seriously needs a portfolio of top client names spanning most major products and services. It would be difficult to achieve this working in the Scottish market alone. Edinburgh is principally a financial centre and as such offers only one sizeable market sector to pitch for. Once an agency has acquired an insurance company and a bank, there's not much left. Worse still, with the exception of Royal Bank of Scotland, in recent years most traditional Scottish financial institutions have been taken over by foreign outfits.

An agency such as The Leith, of course, has not restricted its activities to the Scottish market. It picked up a share of the Honda business before opening the London office and also holds the UK business for Carling, Kwik-Fit and Auto Trader. "We always said we were a London agency that happened to be in Scotland, Rowley says.

Yet the logic of a move to the capital has become inescapable for both agencies. Scotland is still perceived as a small fringe market for the products of European and global groups.

That won't provide big budget creative opportunities, and clearly that is what The Leith and Faulds are craving. Faulds' research convinced its management that the Edinburgh agency was perceived to be too far away from the centre of marketing activity.

Attracting and keeping bright under-thirties on the payroll is also increasingly difficult without an expansive mood and big client challenges. In recent years, a steady stream of agency employees has headed north from London in search of a better work/life balance. However, agency executives still struggle to get the pick of adland's young turks. "To keep growing we must expand out of Scotland, Chester says. "Otherwise we shall keep hitting our heads on the underside of a market ceiling."

"Looking at agencies, those with a long lifecycle have made step-change moves, Rowley argues, while at the same time espousing the virtues of working in Scotland. "We absolutely love operating in the Scottish market. It's very friendly, very loyal and we get very close to clients there."

Rowley believes the Scottish way of working can teach London agencies a thing or two. He believes The Leith combines a "feet on the ground" attitude with an established reputation for creativity. "We don't tell clients what's wrong with their business without having any real experience of it."

Invading London is one thing, but making a profit from it is another.

Both agencies have proved that useful profit margins can be earned in Scotland. But, as Chester says, maximising margins is essential to survival on the smaller budgets available from Scottish clients.

When an agency has reached the limit of its growth potential in Scotland and the only way forward is to win the bigger budget business available in London, gross margins may be shaved back a little. And while labour costs and premises are more expensive in the south, Chester believes there is plenty of room for a healthy profit if a London client spends ten times as much as an Edinburgh one. In addition there is the attraction of being able to do more impressive creative work with the benefit of a bigger production budget.

Neither The Leith nor Faulds underestimate the scale of the challenge they have taken on. "London is the most competitive market in the world, Chester says. "We may be part of the Scottish establishment, but we've never had to prove ourselves down South until now. We have to be as creatively clever as London, but we may also benefit from clients' growing preoccupation with value for money. We have learned how to live leanly."

Does Faulds have a greater chance of success in London because it has bought an existing business there? Chester claims that the difference in cost between a start-up and the acquisition was "less than a six-figure sum". He recognises that success will depend on the sharing of a common philosophy and working hard to get the personal chemistry right. He reckons the MMDH team works well together, despite a client list that has failed to grow much beyond the British Bakeries, VH1 and MTV accounts.

Anna Hutson only joined the board in April this year and the co-founder Christopher Blazye left the company and sold his shareholding in July 2001.

At least Faulds is spared the trouble of finding accommodation and dealing with all the niggling infrastructure issues that face a start-up. But what about the name?

With signwriters putting "Faulds over the MMDH door, there is a risk that the Scottish roots will be overstated and fuel images of parochialism.

By contrast, The Leith has never been known by any other name in London and Rowley believes that opening the new office was "absolutely the right thing to do". The most important lesson he has learned is to do plenty of research.

It is too early to anticipate whether Faulds or The Leith will win enough top class business to become big London agencies. If they do succeed, will their ambitions stop there or will they want to play on the global field? Both agencies aspire to work with pan-European clients and Faulds is about to announce a win achieved in collaboration with Asatsu.

But will the Scottish clients feel they are less important now? "We have seen no sign of disaffection in Scotland because of our London operation, Rowley says.

However, evidence points to The Leith losing much of its momentum in Scotland while energies have been concentrated on bringing the London agency up to speed. The Honda business shrunk considerably last year, when the bulk of the account moved to Wieden & Kennedy, and the stream of pan-European business that the agency was bringing in seems to have dried somewhat.

Does the risk of stretching the agency's resources too thinly give Faulds' management food for thought? For Chester, who is an economist and marketing man by background, the biggest risk is the advertising recession and he justifies the timing of Faulds' current expansion as ideal preparation for the next upswing. "Every textbook says don't cut back your spend in a recession. Either the textbooks will be proved correct or to be a complete load of tosh."

- Bob Willott is editor of Marketing Services Financial Intelligence (www.fintellect.com) and a special professor at the University of Nottingham Business School.

THE LEITH AGENCY
Declared billings 2001               £27m
MMS                                  £40m
Declared income 2001                  £4m
The Leith Agency enjoyed a steady 2001 north of the border but the
London agency struggled for new business during its first full year. The
creative director, Paul Silburn, and the head of planning, Sarah Ryder,
both left after a difficult start. The London operation has had more
positive news of late, however, landing the Goodfellas Pizza account and
Unipath's Clearblue and Clearplan accounts. In March, The Leith picked
up the business for Henkel's toilet cleaner, Frish.

FAULDS Declared billings 2001 £61m MMS £31m Declared income 2001 £25m Faulds enjoyed a strong 2001 in Scotland and the rest of the UK. The agency regained its place on the COI Communications roster, retained its Scottish Executive business for a fifth term and held BBC Scotland after a pitch. The conclusion of a long-awaited management buyout, headed by Dennis Chester, freed the agency to focus on London. As well as buying Malcolm Moore Deakin Hutson, Faulds is in discussion with the Japanese network Asatsu about closer co-operation in the UK. ]]>

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