4 solutions for struggling agencies and holding companies

Across the agency landscape, earnings are down and concerns are up. Hundreds of smart people are stymied.

Surely this isn’t rocket science.

Let’s dig into the challenges and examine why some of the world’s most creative minds are struggling to build the next-gen agency—and what to do about it.

1. Embrace strategic consolidation across the industry

Like death and taxes, the third inevitability of capitalism hit agencies years ago.

Market saturation led to constant price pressure led to Post-it thin margins. Every pitch saw agencies desperately working for less (or for free).

The Super Bowl still mattered, the Olympics still mattered and the emotional connection that film delivers still mattered. But brands needed to employ an ever-expanding set of tactics to build human relationships. Agencies were slow to meet these needs and new shops sprung up, ready, willing and able.

The solve here is tough: Some agencies must die, others must merge.

What if a "creative" shop and a "media" shop were put back together?

What if, taking a lesson from Bob Iger, old and new entities were merged, with the upstart leaders taking the helms of still-healthy, but stalled, legacy shops?

More strategic and urgent actions are required to euthanize and unite agencies, while viable limbs are still intact.

2. Overcome hourly rate hell with empowering new ways to make money

When over-saturation and commoditization happen, companies have three choices: Go all-in on quality, like Apple or Disney; go all-in on volume and efficiency, like Walmart and Amazon, or transform the business and find new ways to make money, like IBM and Netflix.

Most agencies have taken the second approach. They’ve consolidated into holding companies and tried to be as efficient as possible. The problem is, 95% of their money is made by selling hourly rates.

When there’s too much supply, agencies relying on hourly wages are forced to lower fees to keep the lights on.

But agencies’ creativity can also be applied to different ways of making money and building client businesses. For example, many agencies have the ability, with very few additions, to grow their practice, their people, and their bottom line with licensing—helping brands extend to new products and services.

It’s been done before. Vick’s VapoRub was facing a stagnant business. A product that once sat in every medicine cabinet was hidden in the shadows as stores stocked an ever-growing array of elixirs.

Vicks and their agency partners used licensing to extend the brand into vaporizers. After all, much of Vick’s product usage was paired with these cold cure-alls. This logical brand extension and brilliant marketing idea worked. Packaging became in-store billboards, quadrupling shelf space, catapulting the misting machines to number one, and driving newfound VapoRub growth.

Would an ad campaign have driven the same results? Unlikely. Would more spots bring in new, high-margin, annuity revenue for both the client and the agency? Absolutely not.

3. Share, and ultimately strengthen, client relationships with new partnerships

After assuming an agency leadership role, I met with each CMO we worked with. Most were candid. One especially so.

She told me that my team was amazing and that she was forced to look elsewhere for many tactics. The agency was too slow and too expensive to deliver content, she said, so she brought it in-house.

Why couldn’t we convert an incredibly strong relationship into new work?

Ultimately, we lacked the self-awareness and humility to see this coming – to invite in different experts, relinquish enough control, and trust others with pieces of revered relationships.

Agencies must loosen their grip on legacy partners and process, making room for new, complementary communities and ways of working.

There must be a balance of always-needed fundamentals (brand strategy, big ideas) and new points of connection (content, data). The combination of veteran leaders, still valued and essential, with new, bridge-building leaders, expands the agency and integrates tactics. Together, they create new life. Alone they shrink.

4. Enable leaders to unleash innovation and transformation

One of the reasons holding companies exist is to create economies of scale. Not all agencies need all back-office capabilities. Holding companies can consolidate functions and improve service. In the end, everyone wins.

What holding companies view as necessary controls in a commodity economy, however, often feel like suffocating micromanagement to the agencies.

Holding companies could add tremendous value if they operated more like venture capitalists, both by: enabling and developing leaders to seize new opportunities; and by mercifully killing race-to-the-bottom, milk-the-past business models.

If leaders had failed to actively and courageously enable Xerox and IBM to transform, they would have gone the way of Blockbuster and Sears. Similar leadership is urgently needed in ad land.

The bottom line

While it may not be rocket science, the transformation required of agencies is more akin to brain surgery and heart surgery combined. Agencies must change enough minds to build bridges, and move enough hearts to welcome co-conspirators. And, they must do so before the patient stops breathing.

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Patrick Lafferty is partner at Lafferty Partners.