Internal Agencies And Sobering Implications In The Nuclear Winter On Madison Avenue

The traditional agency model is an anachronism, ill-equipped to deal with the turmoil in the ecosystem. Marketing has become more complex, and CMOs are asked to do more with less. However, the agency workings have stagnated. It is as if Don Draper has never left the building, and agencies are stuck in the 1950s or 1960s. They are overwhelmed by layers of management and bureaucracies that impede innovation and agility.

For these reasons, I have decided to steer clear of the usual suspects when selecting my 2018 Agency of the Year.  Winning a big account, or a nice Super Bowl spot doesn’t seem like an appropriate criterion to reflect the Zeitgeist on Madison Avenue.

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Over the last generation, Madison Avenue has been consolidated through a steady stream of acquisitions. In the 1980s, McCann was the biggest agency, with a 2% market share. Now, over 70% of business is concentrated in the hands of five holding companies. This created unmanageable, awkward companies. WPP ballooned to 170,000 employees and now desperately tries to streamline.

Another problem for agencies has been their steadily retreat from being in the high-margin ideation and strategy business, conceding it to the management consultants. Agencies margins are razor-thin, and they often resort to price competition to win business which has led to further margin erosion. This has had an adverse impact on their ability to attract quality talent, and so, they started to play a diminished role in the clients’ business, shifting from partnership to vendors. Clients are not sympathetic to the agencies’ plight. They want to see results.

Earlier this year, at the ANA Media conference, P&G’s Chief Branding Officer Marc Pritchard put agencies on notice. Pritchard stated, "We'll pay for what creates value for consumers, and discern what work should be done by P&G people versus agency people. Media, data and analytics are enabling us to bring more media planning in-house, replacing multiple layers. When it comes to buying, our purchasing people can negotiate with the best of them, so we're doing more private marketplace deals in-house.”

Pritchard is not entirely alone being dissatisfied with the legacy creative agencies. Even Mark Read, the new CEO of WPP, publicly criticized the underperformance of his creative shops Y&R, Grey, Ogilvy and JWT and had the august Y&R and JWT all but taken over and absorbed by his digital shops. The legacy creative agencies are out of step and throwing down the towel.

The most influential force on Madison Avenue this year wasn't a holding company or a big network or an independent agency. In fact, it wasn't even on Madison Avenue. As agencies and holding companies are losing clout, we start seeing the emergence of the in-house agency as a legitimate influence. As clients slash ad budgets, many CMOs have moved some activity internally for cost effectiveness, control over customer data, and transparency. According to a recent survey by the ANA, 78% of its members reported having some form of an in-house agency in 2018, almost double the 42% that they had one a decade ago.

The trend toward in-house agencies was the most significant event in advertising this year, and that's why I select them as my Agency of the Year.
Beyond growing in popularity, internal agencies also appear to be growing in size, getting bigger and expanding their capabilities. They are now handling a broader range of work than they have in the past. It's still a lot of collateral and point-of-purchase, but strategy work is increasing and some of media planning and buying, especially programmatic, digital, social, mobile and production.
The rise of in-house agencies isn't driven just by CMOs alone. Procurement execs, with greater sway over marketing operations, often influence moving of business from an established external agency to an in-house one.

Madison Avenue is still reeling from the bombshell report by the ANA, which found, essentially, that ad agencies were buying ad space for their clients, and not being transparent about what they were spending and how much money they were making. And, since no names were mentioned, this effectively made everyone a suspect. That mistrust led to an aggressive evaluation of in-house options.

However, in-house agencies still come short in one key area:...

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