"Acquire and squeeze," the principal strategy used by holding companies to grow and prosper during the past 30 years, has reached the end of the line. Investors are worried about the future, and they're downgrading holding company shares. New holding company strategies are required. What are they? What should holding companies' CEOs do?
Limitations of the Holding Company Structure
Holding companies have not been structured as operating companies, per se. They are collections of independently managed agencies and companies. 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 clients. Holding companies are highly fragmented and overly decentralized. Managing them from the center is like herding cats. Certain past strategies were successful in generating growth and improved margins, but these strategies cannot be relied on in the future.
The End of the Line Has Been Reached
By 2017, holding company agencies had downsized themselves to dangerously low levels of staffing, stretching their too-few people to handle bloated client Scopes of Work. Furthermore, as Goldman Sachs reported in June 2018, "WPP and Publicis have the lowest staff costs per employee at $75,000 and $85,000, respectively, compared to IPG at $110,000 and OMC at $145,000. We believe WPP's lower unit cost … will likely limit the scope for meaningful cost reduction going forward."
Acquire, squeeze and orchestratecan no longer deliver improved results for shareholders or create value for clients. Agencies have cut very deep into their capabilities and run out of room to cut costs. New strategies are required.
Here are my predictions:
Transforming fragmented holding companies into vigorous, fully integrated operational problem-solving companies is the required new path. WPP and Publicis Groupe are on this path with their relatively new CEOs. Higher cost IPG and OMC may follow once they've exhausted their cost-reduction possibilities, but they may need new leaders who see the holding company challenges with fresh eyes.
Will investors give holding companies the time and opportunity to succeed in these complicated makeovers? Will WPP and Publicis Groupe succeed in these CEO-led initiatives -- or is it too late?
We'll soon find out.
Photo credit: David Cloude/Unsplash
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