Holding Companies at the Tipping Point

Limitations of the Holding Company StructureHolding companies have not been structured as operating companies per seamp160 They are collections of independently managed agencies and companiesamp160 WPP lists 363 separate companies in its portfolio and many of these companies like Ogilvy are themselves made up of independently run offices 132 for Ogilvy for example each with independently run clientsamp160 Holding companies are highly fragmented and overly decentralized Managing them from the center is like herding catsamp160 Certain past strategies were successful in generating growth and improved margins but these strategies cannot be relied on in the futureSqueezing Holding companies squeezed improved performance out of their many businesses by imposing quotstretchquot annual budgets This effort did not require a sophisticated topdown effort by holding company CEOs or CFOs These executives could negotiate aggressive budgets with each operating company and the companies could respond typically by downsizing and juniorizing The quotsqueezingquot strategy drove out surplus costs and widened holding company margins but it was clear that at some point this game would be played outOrchestrating integration When digital and social marketing came into play around 2005 holding companies could orchestrate ad hoc combinations of agency resources to serve the increased needs of clients This effort too did not require a sophisticated topdown effort Agencies were not required to integrate or change As WPP reported in its 2003 Annual Report quotWPP the parent company encourages and enables operating companies of different disciplines to work together for the benefit of clients and our peoplequotamp160The End of the Line Has Been ReachedBy 2017 holding company agencies had downsized themselves to dangerously low levels of staffing stretching their toofew people to handle bloated client Scopes of Workamp160 Furthermore as Goldman Sachs reported in June 2018 quotWPP and Publicis have the lowest staff costs per employee at 75000 and 85000 respectively compared to IPG at 110000 and OMC at 145000amp160 We believe WPP39s lower unit cost amp8230 will likely limit the scope for meaningful cost reduction going forwardquotAcquire squeeze and orchestrate can no longer deliver improved results for shareholders or create value for clientsamp160 Agencies have cut very deep into their capabilities and run out of room to cut costsamp160 New strategies are requiredHere are my predictionsElimination of portfolio fragmentation and excessive decentralizationamp160 Mark Read of WPP and Arthur Sadoun of Publicis Groupe will take further steps to reduce the number of branded companies in their portfolios either through divestiture or mergeramp160 Inevitably they will reduce portfolio fragmentation and complexity increase genuine integration and move the center of power upwards allowing them to actively manage their companiesTransformation of their holding companies into integrated problemsolving companiesamp160amp160Arthur Sadoun has already articulated this through his quotPower of Onequot concept which deemphasizes the role of each branded agency and upgrades the role of Publicis Groupe as the key clientfacing entityamp160 Both Arthur Sadoun and Mark Read have stated their goals to transform their companies into quotcreative problemsolving consultanciesquot much like the highly paid consulting firms who now compete with themamp160 These CEOs will make major investments in talent and capabilities to bring this aboutFocus on price not costsamp160 The holding companies will reorient their priorities from cost management to fee enhancement upgrading their fee negotiation processes to ensure that they are paid fairly for all the work they do In the past their agencies accepted declining clientimposed fees for random and unplanned Scopes of Work Holding companies will initiate new Scope of Work SOW management practices amp160long overdue amp160that their agencies refused to implement in the past Holding companies will seek to rebalance the power in their relationships with clients seeking partnerships rather than vendorshipsBuy time through financial engineeringamp160 Holding companies will establish cost and restructuring reserves to give them the financial flexibility to make the necessary investmentsamp160 Wall Street will applaud rather than punish these initiatives I hopeamp160 The tyranny of quarterly earnings needs to be blunted while strategic investments are madeTransforming fragmented holding companies into vigorous fully integrated operational problemsolving companies is the required new path WPP and Publicis Groupe are on this path with their relatively new CEOsamp160 Higher cost IPG and OMC may follow once they39ve exhausted their costreduction possibilities but they may need new leaders who see the holding company challenges with fresh eyesWill investors give holding companies the time and opportunity to succeed in these complicated makeoversamp160 Will WPP and Publicis Groupe succeed in these CEOled initiatives or is it too lateWe39ll soon find outPhoto creditamp160 David CloudeUnsplashClick the social buttons above or below to share this story with your friends and colleaguesThe opinions and points of view expressed in this content are exclusively the views of the author andor subjects and do not necessarily represent the views of MediaVillagecomMyersBizNet Inc management or associated writers amp160amp160

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Holding Companies at the Tipping Point

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Michael Farmer

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