CLOSE-UP: LIVE ISSUE/FRAGMENTATION - Are there too many advertising agencies around?

The fight for new business escalates as ad agencies proliferate.

More than 150 ad agencies made inquiries about a recent account that came into review. You'd be forgiven for thinking that it was of a Levi's or Sony PlayStation calibre. But, no, it was the unassuming VisitScotland that prompted the avalanche of interest.

The story highlights a now-prominent feature of today's ad industry: there are too many agencies vying for not enough business.

As more clients align their business into agency networks, and as agency services become more sophisticated fewer clients are moving their business.

Michael Baulk, the group chairman of Abbott Mead Vickers BBDO, reckons that advertising is now one of the most fragmented industries in the world.

During the past decade, agencies have proliferated, mainly in response to growing client interest in different marketing disciplines.

"There's been a fragmentation of the marketing services business as a whole," Anne Franke, Boots' incoming director of strategic marketing and development, says. "A decade ago there wasn't nearly the fragmentation there is now."

Some of the established agencies, too focused on large, international accounts, were slow to respond to changing client requirements, inspiring a slew of entrepreneurs to set up shop. As Franke says: "The agencies are lying in beds they made."

One of the recent start-up Soul's founding partners, Seamus O'Farrell, believes that no matter how oversupplied the market is, there's always room for talent with energy, arguing that verve and enthusiasm will always attract a certain number and type of clients.

And good start-ups can also expect to enjoy success in a recession. As clients look to cut costs, the start-up option is attractive as it offers heavyweight, partner attention without some of the overheads carried by networks.

And because the barriers to entry in the advertising market are relatively low, there's no real disincentive to setting up stall. "Anyone can start up with sixpence and keep everyone on their toes," BMP DDB's chairman, Chris Powell, admits. "It keeps the industry lively and thinking fresh."

But start-up fever is not all good news for the industry, especially for the established agencies.

Martin Jones, the owner of the AAR, points out that big agencies are losing talent and work to the start-ups. "What new business and talent there is is being diluted among a greater number of agencies," he says.

"The fact the industry is oversupplied with agencies can lead to intense competition, especially in a zero-growth market," Baulk adds.

This intense competition can lead to business practices such as discounting, pressure on margins and client promiscuity. The pressure on resources also means agencies need to be more careful than ever only to invest resources in pitches that they have a very good chance of winning.

But competition can benefit agencies too, according to Baulk: "There's never a chance to develop a tired orthodoxy because agencies are constantly stretched and challenged."

For clients, the main benefits of fragmentation are pretty clear: competition has brought down the cost of advertising.

It also means greater choice for clients - not just to avoid conflict, but to have access to different skills and specialities. But there is such a thing as too much choice, tempting clients to spread their business across too many agencies, leaving them in danger of losing the bigger brand picture.

In other words, it's a buyer's market and agencies are expected to jump when a client says so. This was shown recently when Holsten visited a number shops, freely confessing that, although happy with its incumbent, TBWA/London, it was seeing what the market had to offer. Consequently, it stayed with TBWA, but such activity has become more common.

"Just because you're in a buyer's market doesn't mean you have to tout yourself around," one agency head complains. He argues that it doesn't create respect for a client and that it suggests they don't have the courage of their convictions.

While you'd expect agencies to think this new-found sense of power among clients shouldn't be abused, some clients are inclined to agree with them.

"With the proliferation of agencies, there's a risk for clients that shops will spend most of the time in the negotiation process and less on the more important task of building their business and brands," Franke says.

Baulk argues that clients need a talented, vibrant ad industry to build their brands, their prime assets in a cluttered world. "Too much pressure on margins and discounting from the client world puts that at risk, and that's not in their interest," he says.

Franke adds: "Ultimately, it's about the quality of the work. Getting a bargain-basement deal might be great, but if the work suffers you're no better off."

Evolution will doubtless have a part to play in curbing the number of agencies. But rather than closing, the weaker shops are facing acquisition or merger, as in the recent HHCL & Partners deal with Red Cell. As Jones concludes: "In the end, advertising is a meritocracy. There might be too many agencies, but if they're good, they'll survive."


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