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Advertising Agencies

Does Agency Size Benefit Advertisers?

By Advertisers, Advertising Agencies No Comments

ad agency sizeIn the wake of the announced “merger of equals” between Publicis Groupe and Omnicom much has been made of the clout which the combined organizations will yield in the advertising marketplace.  The question to be asked is; “Who benefits from that clout?” 

The merged entity will generate revenue of $23 billion and will yield efficiencies ranging from the elimination of redundant resources, real estate commitments and headcount.  To this end, management has already indicated that their union would generate “$500 million in efficiencies.”  Certainly the investors in both companies stand to gain from any post-merger enterprise expense reduction initiative.  And while it is anticipated that there will be some client fall-out due to account conflicts, revenues will still be significant.

Conceptually, in a blending of agency holding companies clients could benefit from having expanded access to a range of resources and competencies spanning multiple geographies and marketing disciplines.  However, blending the cultures, systems and processes of the various agency brands which will comprise the merged entity will require a significant investment of time and money and realistically could be years in the making.  

On the financial front, it is conceivable that clients could see a reduction in overhead rates and potentially a reduction in agency labor expense as the two firms balance salary levels across the organization… conceivable, not probable.  Further, some in the industry would like to believe that the combined media spending clout represented by the merged companies will yield media rate efficiencies for their clients.  Beyond this, it would appear as though there is little in the way of direct financial benefit to the client.  

Further, on the media rate front there is little in the way of hard evidence to support the notion that as media agencies have grown in size that they have leveraged their combined clout to drive savings for their clients.  A quick comparison of media inflation rates to the Producer Price Index would indicate that there are forces at work beyond media agency clout (i.e. supply and demand) which are driving media costs: 

       Year                PPI*               Media Inflation*              Variance 

       2012                 1.3%                       3.9%                             2.6%

       2011                 4.7%                      10.5%                             5.8%

       2010                 3.8%                       6.5%                              2.7%

*Source: Annual Producers Price Index for Finished Goods and Media Inflation Watch (MIW) 

As with previous agency holding company mergers and acquisitions, the near-term impact of the Publicis Groupe merger with Omnicom is not likely to benefit their clients in a material way.  Rather, clients will be asked to be patient and supportive through what will be a confusing and potentially frustrating transition period as the firms integrate systems, processes, personnel and cultures.   

Experience would suggest that agency size and certainly the size of an agency holding company to the extent that it impacts their ability to amass the requisite resources and attract talent may have some impact on advertiser success.  However, it is important to note that there are numerous examples of advertiser/ small agency collaborations that have resulted in demonstrable benefits to the advertiser which reminds us that size in and of itself is not a precursor to success.