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Thursday, August 27, 2015

Cutting Expenses at Advertising Agencies

It is no surprise to many of us that most new businesses fail. Many blame the economy, changing consumer tastes, brutal competition, too much government regulation and a host of other issues. In conversation recently with someone whom I respect, another variable came up and we hashed it out rather thoroughly. One of the reasons so many businesses, particularly smaller ad agencies and marketing firms are failing or struggling is simply failing to control expenses properly.

We shared some war stories about how we witnessed waste over the years both in places we worked, visited, or where we knew many insiders. On balance, my friend stated that he felt that many smaller to mid-sized ad agencies have the equivalent of an account that bills $2-4 million dollars in paid media if they simply had a better handle on expenses. Here are a few things that popped up plus some comments that a few agency principals shared with us:

1) Some CEO’s say the best way to cut expenses is to always cut staff. When you package up benefits on top of salaries, the savings are clearcut and take effect quickly after severance is paid. This is hard to argue with except that when times get tough, top management often seems to terminate some high level and highly paid employees that can be the glue that is holding the shop together. They can get to a desired number quickly that way. Over the last few years, several old pros have told me that they are down to a few senior staffers and a bunch of low paid kids. They have no bench anymore and everyone is overworked and clients suffer as they continually cut corners on both service and analysis.
2) One CEO says that he has painted himself in a corner regarding expenses. “Nowadays, I almost always cut staff when things get tight. What I learned is that if I give up a perk to the team, it is permanent. If someone gets a car allowance (increasingly rare) or the whole team is off an extra week at Christmas, it is impossible to rescind it without really bad feelings emerging. I try to be more careful about travel and entertainment but I know we waste money there. When it was back to the wall time in 2008-2009, we did some short term belt tightening and everyone understood as they were really scared, but as soon as we picked up a new account things got a bit sloppy again.”
3) A creative head put it this way--“Look, we could save some money by nickel and diming things to death. But part of the charm of working at an ad agency is that things are looser than a bank or an insurance company. We don’t look at the small expenses all that much.” My friend just shook his head and wanted to bet me $1000 that this firm would go under in five years. Time will tell but the creative director seems to be in la-la land.
4) I once suggested to a CEO that waste was rampant. He smiled and said, “I could really put the hammer down if I wanted in this office but I won’t do it unless things get desperate. Don’t you like nice meals when traveling? I know you use your frequent flier miles for your kids.” He then admitted that he was going to let a few quality people go in the next few weeks. Clearly, it was his bat and ball, not mine, but I was amazed.
5) Also, word gets out among the staff about what they can get away with regarding expenses. Once, when reviewing an expense report, I saw magazines, a bottle of aspirin and airport VIP parking on a trip a team member took. When I redlined the items, she said, “The people in production do this on shoots, why can’t I?” My friend said that you just have to be reasonable about travel expenses and be consistent. Everyone can only rent certain types of vehicles, and stay at certain hotels was ground zero. From there, put some reasonable guidelines in place. The $200 bottles of wine should show up only at large client request--most of them do not have that refined a palate.
6) A #2 at a mid-sized agency weighed in as follows--“My boss once told me to always book first class travel; I was told that I was entitled to it. I responded that I was upgraded to first 95% of the time because I am a frequent flyer (platinum status). Why pay for it? Over the course of the year, I could save the company thousands. If you did the same thing with a few other people, you could save a job or two, hire someone you need or pay us all a larger bonus at year end. He was not buying. Finally, when things got tight after a client loss, all of us were flying coach. As it happened, I, the “road king”, was upgraded to first class on a new business trip and no one else was. I looked my fearless leader in the face and said, “Let’s trade seats. I do not need the legroom you do.” He was genuinely grateful and accepted both my seat and my savings argument. A year later he told me we had saved nearly a quarter of a million dollars by buying coach tickets for senior management. I  personally delivered the biggest savings and I still almost always had a first class or business class upgrade.”
7) Finally, an agency president whom I have never met but who comments frequently on Media Realism had a sports analogy which was interesting. “When I was in high school, I played on the basketball team. I was not very good and neither was our team. Our coach had us do endless defensive drills. We probably spent 80% of practice working on our defense. Years later, at a reunion, I asked him why he did that. He told me that there were nights when we would shoot 60+% from the floor and others when we hit 30% of the time. He could not control that. If we played good defense every night, we would win some games and keep others close. I take the same approach to my business. When the economy sours, we lose some business. Or, a client gets bought or a new Chief Marketing Officer comes in and we lose an account. I am powerless over that. What I can do, day in and day out, is control my expenses. So, I key on that and it has helped us through some bad times and made the good times even better.”

Are you exhibiting tight cost controls? Unless faced with bankruptcy, the changes do not have to be draconian. Warren Buffett calls his corporate jet, “The Indefensible.” America’s favorite folksy billionaire is a tightwad when it comes to business expenses. Perhaps we should all listen to him a bit more.

Wednesday, August 19, 2015

Advertising Agency Holding Companies

For some time, several readers from a number of companies have asked me to comment on Advertising Agency Holding Companies. I put people off as this blog focused more on issues facing the mid-sized and smaller shops and how they are dealing (or not) with the rapid changes in the media landscape. Yet the requests kept coming and a number of people wrote or talked with me about how their world had changed since they went to work for a holding company agency or were principals in a fair sized shop that was bought out by one of them. As you might expect, some loved it (usually due to the big financial payout) but others hated their diminished role and total loss of control.

Today, four major holding companies control the majority of advertising and soon perhaps marketing activity globally. They are Omnicom, WPP, Publicas and Interpublic. Each owns dozens of agencies and they operate in many of the 200+ countries around the world and all are publicly traded. They grew by buying up other agencies and getting economies of scale in media and finance. Also, they could often handle conflicting businesses as the agency partners in their groups operated fairly autonomously.

So, here is an update. I caution readers to note that my cross section of observers is not  necessarily a well drawn sample. All, however, have lived it or are still involved with a holding company.

A management rep who has worked at two holding companies had this to say--“People can complain all day and will. What the holding companies bring to the party is financial sophistication and muscle. I worked at a company with offices in nearly a hundred countries. They were foreign currency experts, great hedgers, and they had a global outlook. Intuitive marketers, no way! Yet one of the firms that I worked with reminded me of Nestle or Exxon Mobil. They could thrive in any environment given their deep diversification.”

A friend who is a creative chief but sharp eyed observer of the industry says: “From a mid-sized agency standpoint, when we have a pitch against a big agency, they have a capacity to throw fifty teams at a project when I have one or two. But that isn't as much about a holding company as it is just big agencies. Are there any big agencies that aren't part of a holding company?”

“The money comment is dead on. They can pretty much make or break an agency if they want to. Once you are owned by one and have to meet their numbers, it certainly changes how you do anything at the end of the year because you have to do work that produces. In that way, the holding companies are a bit ahead of the game when it comes to doing what's next, because they are solely focused on the profit of the business”.

“So when I see a holding company being experimental with something (like they were with digital agencies about 15 years ago) then I get interested. They certainly have a great perspective on the business because they can see what all of their clients are doing, where they are spending their money, and whether something is turning into a solid business practice or if it's just a trend that will fade. They also have the money to play in a lot of different arenas where smaller places have to really focus on one or two core practices or they will spread themselves too thin”.

A deeply experienced agency owner who worked for a few holding companies weighed is as follows: “Most small shops that sold were for CEO’s and cronies to get a guaranteed pay day--then they realize what was said in the brochures ain’t quite what they expected so they walk away or grumble away their contract time and then leave unhappy staffers who came with them looking for other jobs.” He also added that you need to “hire an agency you think can move faster than you and will fill you with thinking that is better than yours.”

A man in his 80’s who sold his shop nearly 25 years ago said, “I was just lucky. We got out when I had a health scare. I was able to get thousands of thousands of shares of a publicly traded shop that is now part of a holding company. Today my dividends alone cover my needs and guarantee my grandchildren’s future. But, I was not treated well after the takeover. No one wanted the advice of a hick.”

From the midwestern U.S., a friend writes: “Every agency that I have ever worked at had a distinct culture. Some were unpleasant, a few were wonderful. When you become part of a holding company, much of the charm goes away. You have to drop the platinum bars off in New York or London or Paris each quarter. Nothing else matters.”

An agency owner who would like to retire or sell his shop says: “I was born maybe 20 years too late (laughs). Back in the day, I would have sold to DDB or Ogilvy in a heartbeat. Today, the mega-shops do not want or need agencies of my size. And, they can buy speciality companies. If someone makes a breakthrough in mobile or some other emerging medium, one of the holding companies can scoop them up with an irresistible offer. Then they are #1 or #2 in that arena. You have been honest in your blog the last few years about we mid-sized players faking it. In truth, we can compete with ideas and energy and fast turnaround but NOT in technology.”

A few people mentioned that companies often choose a mega-shop as they want to be perceived as a global company. Once, I pitched to hold a piece of business with a few colleagues against a mega-shop. We fought like hell for it. Our holding company competition arrived with a map of the world stuck with flags in it. The pitchman said they were the biggest and the best. We lost the business, as the main client, an international player, loved the identification with the giant. Years later, after a punishing trip, I was stalking through the Atlanta airport eager to get to my car. I was stopped by a man who looked vaguely familiar. “Are you Don Cole,” he asked. He introduced himself and said he was in the room the day we lost our account. His boss was eager to deal with the global giants. He then said they never saw the slick pitchman again and he would not return phone calls. Off the record, he said even his boss said he had made a terrible mistake. I am not sure if nearly as much of this goes on as in the past but they can promise one stop shopping across emerging media types that smaller guys cannot match. And, they do have people on the ground all over the place so you are less likely to stumble and use wrong verbiage, colors or even packaging when operating abroad.

A feisty buying service player says the big guys need to watch out with their programmatic buying. “If they are not transparent with how much they are making, it will come back and bite them. Arrogance generally does not work long term.”

A marketing chief writes, “I tell young people to go work at a holding company. They are an excellent training ground and have resources that are amazing. Then I suggest that they go client side or to a mid-sized agency that still does good work where they can make a difference and have a life.”

A tough minded realist who is a junior partner at a relatively large agency says: “These guys know that Integrated Marketing Communications is slowing taking hold. For some companies, advertising was 85% of marketing spend a decade ago. Now, it has shifted across the board into promotion, PR, mobile, online, etc. So, they buy companies across the marketing arena. As the advertising portion of the marketing pie shrinks, and, it will, they pick up revenue in all disciplines that are picking up the slack.”

From the West Coast, a financial analyst says, “The only thing that can stop these guys is if the Big Data players such as Google and a few others go directly to big clients and offer their services. Will that happen? I just don’t know.”

So, the future for the holding companies will be cyclical and tied to the vagaries of the global economy. They are here to stay. Something is lost when the bean-counters take over a creative industry. As we move to more mobile and abbreviated means of communication, it appears that classic creative will increasingly take a back seat to social media and other media yet to emerge. And, the big will likely get even larger.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Monday, August 10, 2015

The American Difference

Very recently, I have returned from a very pleasant vacation in Northern New England. One day, in the far north at a golf outing, I was paired up with an international business man. I assumed that with the 4 1/2 hours around the course and perhaps a beer afterwards, I would have a good discussion with the fellow about international business conditions.

It did not turn out that way. I threw him a softball on the 3rd tee about the future of the dollar. He exploded and I paraphrase, “Who cares. Both the dollar and America are finished. Kaput!” He then went on a vulgar rant about how more than half of Americans are on the dole and the few people like him who were holding things together were fed up. It was the Mitt Romney 47% statement from the 2012 Presidential campaign but wildly exaggerated and in really bad taste.

I gently brought him in to my world of demographics and refuted his inaccurate and reckless statements. He became quiet but I noticed with fiendish pleasure how his backswing was way too fast on the next several holes and he lost at least one ball on each hole in the woods or the water.

Finally, he seemed to calm down and asked me why America would survive. I agreed that we had problems, big problems, but not nearly as severe as he painted them. Also, compared to the rest of the world, we were in far better RELATIVE shape. I then talked briefly to him about one important aspect of the American culture--our entrepreneurs.

American business people are resilient. Most entrepreneurs fail before they hit a business idea that works. It is not unusual for a man or woman to fail 3-5 times before their ship comes in with a winner. Economist Fred Gotheil put it beautifully when he wrote--“Unfaltering persistence defines the entrepreneur no less than creative energy.” Compare that to other cultures. Japan has been on an economic decline for close to 25 years. Part of it is due to the refusal of the culture to accept failure. Many zombie companies still exist there year after year as the banks refuse to foreclose despite inarguable evidence of mal-investment that needs to be swept away permanently. They also have zombie employees especially at large companies. I vividly recall a WALL STREET JOURNAL article from several years back describing how some employees at Japanese firms spent up to 10 years virtually doing nothing prior to retirement. Some stayed in reading rooms all day. It was more important for management to save face and guarantee lifetime employment rather than do what was right for the long term interest of the company. Couple this cultural issue with a rapidly aging population and things look grim in the long haul for the original Asian Tiger.

A few weeks earlier, I had received an e-mail from a French communications executive who essentially told we Americans to count our blessings. With a few slight edits, he said--“You Americans are so funny to me. I love to speak with American business people but all of you complain about regulation in your country. My friend, you do not know what regulation really is. I have employees, Don, that you once described as “zombies.” It is almost impossible for me to make someone redundant. The government rules make it very hard to remove people. I have smug staffers who do little and know I am not going to do much about it. I am told, in America, you can tell an agency staffer
 ‘things are not working out’ and they are gone that day. Is that true? Amazing!”

In the U.S., 30% of new businesses fail within two years. In the first five years of an enterprise, the odds are 50% that it will fail. Yet, there are no shortage of entrepreneurs who are opening a new restaurant, service business or even an ad agency. Many, of course, have failed before but are giving their venture a renewed sense of dedication and energy.

After the financial crisis of 2008-2009, I was worried about this country. Former Federal Reserve Chairman’s comment that if “a financial institution was too big to fail, it was too big” still rings true to me.

Yet, the angry comments I heard on my vacation do not resonate with me at all. There are still millions of Americans (many fairly new immigrants) who have an entrepreneurial spirit that will not be snuffed out. To me, they remain our best hope for the future.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com