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March 16 2004 Home

Trade Event Report
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The Problem With Ad Agencies - Merrill Lynch Seventh Annual Advertising/Marketing, Education & Information Conference, + + + + +
By Al Berrios (contact Al Berrios)

These sort of responses came with such regularity, that I was beginning to fear the mentality: "Our management team is in their 50s and more than capable of managing the business". Continuing my tradition of visiting analyst conferences hosted by the major investment banks, this Merrill conference was my first opportunity to hear the CEOs of the major advertising holding companies explain their financials and business strategy.

The Venue

Hosted at the New York Palace on 50th and Madison Avenue in New York on Tuesday and Wednesday, March 2nd and 3rd, I was genuinely impressed by the hotel. The ball room where the conference occurred was trimmed in a beautiful royal blue and gold. It was very cozy. The seats were plush and comfortable, yet conservative in appearance and ideal for this sort of event. The walls were decorated with gorgeous murals of 19th century activities (I think) and the atmosphere was generally lush. Even the place mats on the tables were luxurious leather.

If that weren't enough, the food was absolutely delicious. On Tuesday, they served some thai chicken salad with minced crab, brownie and chips. I still get flashbacks and my mouth begins to water. I'm sure Merrill spent a mint for such accommodations, but I wasn't surprised as I've recently been reading about the sort of white-glove service research departments are offering their institutional investors to compensate for their diminished coverage because of the legal settlement by Mr. Spitzer.

The Issues of Managing Major Marketing Communications Companies

Anyway, I was beginning to think that investors didn't have faith in the experience of these ad holding companies execs. It frightened me to think that 30-something portfolio managers were questioning the ability of entrepreneurs such as these, that put their 4 companies together from scratch, and control hundreds of billions in global advertising communications. If anyone is entitled to certain leeway, it's the folks who founded the companies. To alleviate my concerns, I asked two portfolio managers next to me their thoughts. Turns out, experience wasn't the issue at all - succession planning was. Of course! Thanks to Citi, AIG, Disney, Viacom, Martha and others, investors are genuinely concerned about the future of their investments should their leaders be indicted, jailed, or just die from natural causes. Being in their 50's is considered optimal. Having served at a company for 10+ years is also a good thing. And having your wealth tied up with the success of the company is also a good thing.

In addition to succession planning, professional development and employee retention were top priorities. Don't be surprised - marketing communications is a service business. The merchandise goes home to their families every night. And if they're not happy, neither are the clients that pay the bills. So, offering them educational assistance and support, benefits, and other developmental programs are important management issues.

Nevertheless, in my experience with agency folks, loyalty to agency is practically nil. Agency folks are notorious for their creative egos and whoring for clients. The agency business model is traditionally set up to employ on a per-project basis. And because barriers to entry into this business are so low and so many agencies exist, clients rightly believe they shouldn't be committed to any one agency, often exercising their rights at an agency's expense. As a result, when a client leaves a firm, the agency will expectedly and without hesitation let go many staffers previously working on that client account. Those who remain believe themselves invulnerable (very likely because of their relationship to other clients). Those who depart become loyal to clients first, agencies never. It is in this context that I skeptically believe that all these professional development programs at agencies are poorly organized, deployed, and tracked. And that means a poor ROI for investors.

To put it differently, who cares about professional development if I can't pay my bills? Rather than position as investments the agency makes in staffers so staffers can invest in the agency, agencies should recognize the reality of these programs - training staffers to work at other companies, because as soon as the client stops paying, you're going to need those skills... to continue to pay your bills. This reality is perfectly acceptable and even appreciated in this economy and particularly, in the marketing communications field. In fact, if staffers had a clearer picture of the road ahead, they'd plan their careers better. You don't need research telling you this makes sense. (But if you did, al berrios & co. has it.) This lack of transparency in an organizational structure is so complicated, it takes 20 powerpoint slides to explain. (This is the core of the al berrios & co. governance strategy approach)

Interestingly, Publicis Groupe should be cited as an example of transparent management. It's CEO, Maurice Levy doesn't believe he has to pay extra to keep staffers, as is the case in other holding companies. If he already agreed to pay you to do a job, what right do you have to ask for more aside from your periodic raises to do the same job? (It's an open secret that "invulnerable" agency execs sell their client relationships to the highest bidder.) Monsieur Levy's management style appears to be European-influenced and not-altogether absurd. He understands that his people don't all work for money and anyone that demands extortionary salaries wouldn't work out in his firm. With this belief, he claims to have kept top talent, key clients, and valuable relationships in place after several large-scale acquisition integrations.

Overall, this event deserves 5 pluses (+ + + + +).

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