Storm Shelter

Mark Shapiro stayed two years longer than his friends expected. He had a three-year earn-out when he sold Louis London to Interpublic Group of Cos. in 1998, but Shapiro loved the work and liked his clients, so he stayed on as CEO of Momentum North America, the Interpublic division that swallowed Louis London. It was frustrating, though, butting heads with his colleagues at ad shop McCann-Erickson WorldGroup — Momentum’s official big sister, which was squelching his shop’s own ad capabilities. Shapiro proposed a network split in April, then three weeks later was shown the door. “I stayed until I couldn’t practice the business the way I wanted to,” says Shapiro, who’s now setting up his own shop again — this time with private funding. Over the next five years, if current trends hold, Big Networks will segue to more privately funded small and mid-sized shops as promotion execs, disenchanted with corporate parents, stage buy backs or strike out on their own — some for the second or third time. “Networks are at a point where they’re vulnerable,” says Jay Farrell, 141 Worldwide regional director-North America, Chicago. “They become more and more vulnerable to small, entrepreneurial agencies, staffed with senior people who are willing to wear many hats.”

Farrell and others expect a boon in mid-tier agencies over the next three years as principals reach their earn-outs, or persuade debt-heavy holding companies to sell back their shops. Startups may be accompanied by a slew of lawsuits as holding companies block principals from starting competing businesses. And a spate of divestitures could morph the matchmaker consultants who engineered acquisitions into divorce lawyers refereeing divestitures.

Three converging factors are forcing the issue: Agency networks are battling debt (triggered by a glut of ambitious acquisitions), a poor economy and the worst-ever drought in ad spending. “Business sucks, so marketing spending sucks, so it’s hard to attract good talent, so the quality of work sucks,” says one agency president.

Two examples are indicative of the larger scenario. In the first, finances and client losses forced Cordiant Communications Group onto the block in May (to be bought by WPP Group after contentious bidding with Publicis Groupe). In the second example, financial restatements for 1997 through June 2002 at Interpublic prompted a Securities & Exchange Commission investigation and three class-action lawsuits charging Interpublic with defrauding investors. One federal suit and two state suits, filed by current and former Interpublic execs, continue in Illinois, Delaware and New York courts. The federal suit alleges that Interpublic issued misleading financial statements (based on questionable accounting practices at McCann-Erickson), then restated 1997-2001 performance six times since August 2002, all the while assuring investors that each restatement was the last. New York City-based Interpublic has said in statements that it will vigorously defend against the suits. The SEC formalized in January its investigation into accounting irregularities that misstated $181 million in revenues.

“Once money got tight, the microscope got very sharp,” says Source Marketing CEO Howard Steinberg. “Holding companies’ moves must be rationalized at a much higher level than when money was cheap.”

Financial pressure on a publicly held company is especially destructive to a service-driven business whose quarterly production can’t be neatly mapped. “Wall Street investors love a predictable cash flow business,” Steinberg says. “It’s very hard to make promotions that kind of business. You can’t predict how much clients will spend, or how much of it they’ll spend with you.”

Farrell adds, “Clients and agencies have been under so much stress to save money. You can give clients all the efficiencies and save them all the money you want, but if the work isn’t good, you won’t do well.”

Three years of hard-core financial pressure have taken their toll on the quality of work, and a lot of agency staffers are fed up. Factor in the slew of earn-outs now coming due from the 1997-2001 acquisition frenzy, the insiders say, and the industry can expect enough disgruntled entrepreneurs-cum-free agents to lead a slow revolution in promotion agency structure. As old pros open new shops — or buy back their agencies from debt-laden parents — then good talent will migrate to these start-ups, making networks even more vulnerable to a downward spiral.

“There’s a surge of interest on the [private] investment and people sides of the business,” Shapiro says. “Clients want agencies that are less bureaucratic, more efficient, and more intimate.”

When times are bad, a big agency’s middle management — the front line on client service — is the first to go, either through layoffs or attrition. “They don’t have the golden parachutes of upper management, or they get disillusioned and go,” says an agency veteran who has watched mid-level colleagues depart. “They’re the main client contacts, so service drops off very quickly.”

Then there’s the pressure that many promo shops feel to carry sister ad agencies through soft years — an outgrowth of Wall Street pressure that earlier this year led the big four holding companies (Interpublic, Omnicom Group, WPP and Grey Advertising) to order their divisions to withhold revenue data, citing the Sarbanes-Oxley Act.

“It’s a two-sided sword: When things go well, everyone does well. When things are bad, you need to support [sister agencies] and know they’re there to support you,” Farrell says.

Some parents have pressed their promo shops to raise margins beyond the standard 12% to 15%. Some shops refuse: Those who don’t often feel compromised, and worry about gouging clients. Promotion execs might have foreseen the pressure to boost margins, since holding companies courted them in the first place for the relatively high margins on below-the-line work to compensate for shrinking margins at traditional ad agencies. (It’s ironic, then, that marketers distinguish less and less between disciplines, and margins have reached parity.)

Still, being part of a network has its advantages. “It has opened our minds to see work internationally, and helped give us a sense of our own intellectual, creative worth,” Farrell says. “It helped us grow up.”

Even Shapiro acknowledges it: “It was an incredible education. You never know what would have happened if we didn’t join a network.”

Big shops shudder

Nevertheless, many promo agency execs say privately that they didn’t get the benefits they expected when they joined a network. “Holding companies should be about helping the agency brands they own to survive,” says one president whose agency is owned by a Big Four network. “That means not homogenizing the agencies, but fostering training and cross-pollination, picking good management, and making sure each agency has a brand message. The holding company should be the rising tide that raises all boats.”

Unfortunately, the opposite became true for the first-ever global promotions network, 141 Worldwide. Parent Cordiant Communications Group’s financial instability drove several clients away, shaking the faith of its biggest clients, including Allied Domecq, and worsening Cordiant’s debt-driven woes.

The tailspin of London-based Cordiant is especially bitter for 141, which took the lead on all marketing, including advertising, for AD’s Malibu Rum business and the firm was worldwide promotions AOR for AD’s eight other core brands (May PROMO). It was an enviable spot for any promo shop. “The idea that the brand essence can come from anywhere brought a lot of energy to us,” Farrell says. “It made advertising a practice, not the be-all and end-all, and it gave credibility to our strategic planning people as more than tacticians.”

While 141 could get a fresh start under new owner WPP when the purchase of Cordiant is completed this month, 141 still loses Allied Domecq in October. AD announced in April it will shift to Publicis when its contract with 141 expires this fall.

Cordiant’s sale has had other bitter repercussions. It’s last global client, British American Tobacco, reportedly didn’t want to move to Publicis, which has rival tobacco firm Philip Morris on its roster (at Leo Burnett). Cordiant staffers were glum and sometimes nasty as they angled to keep their jobs; meanwhile, AD has made clear that it wants to bring key 141 staffers along when its business shifts to Publicis.

Through the turmoil, 141 North America rallies around its mission as a marketing services network-within-a-network whose offices share their geographic specialties: sports marketing in Pittsburgh and Honolulu, direct marketing and events in New York City, interactive in New York and Chicago, promotions in Chicago and Toronto. “I still think a worldwide marketing services group could work,” Farrell says. “It brings something very different than integrated agencies that started with advertising.”

Interpublic has attempted a working model of just that goal. The firm’s new CEO David Bell has encouraged collaboration since taking the helm this spring. And Interpublic’s shop Draft, Chicago, is using its five-month-old alliance with sib Lowe & Partners (dubbed Lowe Plus Draft) to test a new approach to integration: Brand category and strategy determines which shop takes the lead.

CEO Howard Draft suggests that a general agency should lead for packaged goods, fast food and home improvement; below-the-line shops should lead for wireless, computers and airlines; and full-integration agencies would best lead for financial services and automakers. “Perhaps we should all quit thinking we can work together the same way every time with every client,” he said in a June speech at the 2003 International Advertising Festival in Cannes, France. Lowe Plus Draft first collaborated on a U.K. campaign for Saab. “What makes the alliance work is clear leadership, respect, and an understanding of everyone’s discipline,” he told the Cannes crowd. Draft called the partnership a work-in-progress.

The biggest complaint of in-network execs is that the promise of shared work hasn’t paid off (see sidebar). “A lot of agencies were duped by networks overpaying and over-promising, and agencies thought they’d never have to make another sales call,” says GMR Marketing CEO Gary Reynolds, who sold to Omnicom in 1997.

“People expected to get leads,” Shapiro says. “Well, guess what: It didn’t turn out that way.”

Shops get territorial about clients, and don’t want to risk their relationships to introduce an unknown sib shop. One independent agency exec tells of network colleagues complaining, “We would have won that pitch if we didn’t have to bring our sister agency with us.” A network refugee says that twice he had to fire an outside agency and give the work to a less-qualified sister shop. “I paid the agencies anyway. I didn’t want to ruin my own reputation,” he says.

Of all the Big Four networks, Omnicom may be the best at integration. Promo execs admire how GMR’s Reynolds has made Omnicom ownership pay off. A large share of credit goes to the network’s three-year-old Radiate division, which pools the event and promotions expertise of its 23 agencies — led by charter shop GMR. Radiate’s eight VPs of new business draw on all Omnicom shops to assemble teams to handle integrated campaigns for brands. Clients’ needs dictate the makeup of each team. “They’re better at cross-solving than cross-selling,” says Radiate President Steve Groth.

Radiate’s billings are about $450 million, and could double in three years. Omnicom started Boca Raton, FL-based Radiate as a holding company with GMR, then began buying event and marketing service shops in the U.S. — including Portland, ME-based Pierce Promotion & Event Management in a deal that closed in June 2003 (see p. 16) — and Europe, begun in 2002; Latin America, as of late 2002; and now Asia. Many of the agencies had shunned other offers. “They had heard lots of horror stories about networks,” Groth says. But Radiate shops keep their name and management, and agency execs are encouraged “to be brutally honest with the integration team about what work they can handle and whether it’s worth their time,” Groth says. “They don’t have to participate in every integrated pitch.”

When they do, they mind their manners. “Our agencies are happy with the business they get [even if they feel they could handle more] because they’re happy to be at the table,” he says. “If you try a land-grab by offering your secondary competencies, you won’t be invited back to the table.”

GMR still works with agencies outside Omnicom, too. “Networks are not a barrier for us, because clients want to work with best-in-class agencies,” Reynolds says.

Despite that, many ad pros still look down on their promo colleagues. “141 has been called the jewel of Cordiant, but it wasn’t always seen that way inside Cordiant,” Farrell says. “In a network, marketing services still tend to be seen as the poor cousin by advertising colleagues.”

That kind of rivalry cost Shapiro his job. When strained relations between Momentum and McCann — and Momentum’s own New York City office — made it tough to keep Momentum staff happy, Shapiro proposed a split: Form a new business group to handle promotions and advertising (image and promotional ads) and report to McCann-Erickson’s regional director for North America Mark Gault, while Momentum kept some sales promotion, events, presence, sponsorship, and retail consulting (some via sister Interpublic agencies) and reported to Momentum Worldwide Chairman-CEO Chris Weil.

But McCann Chairman-CEO John Dooner didn’t buy the idea. Dooner dismissed Shapiro and Momentum North America CFO Jerry Best three weeks after Shapiro outlined the plan. There’s “no direct correlation between his making a suggestion and being let go,” says McCann spokesperson Susan Irwin, who cites restructuring to give each office more autonomy. (A third management post, regional director for Europe, was also eliminated.) Shapiro’s and Best’s duties fell to Weil and Momentum Worldwide President Bill Kolb.

Meanwhile, Shapiro hopes to open shop by November, with his multi-discipline model and private-investor backing.

Private investment could play a major role in fostering a new crop of agencies. It suits DVC Worldwide — PROMO’s 2003 Agency of the Year and No. 1 on the PROMO 100 — just fine. DVC struggled with debt from its own acquisitions of Muffin-Head and Visient until venture-capital group Lake Capital bought DVC in 2000 (June PROMO). “When we were acquired by Lake Capital that [debt] sort of was all gone and there’s actually a lovely pool of money to do things with,” says DVC President-COO Sue Furlong. DVC is building account-specific and direct-marketing divisions to complement its promotion, healthcare and event-marketing arms.

GEM Group, owned by public U.K. firm CSS Stellar Group, also will focus on organic growth after a three-year buying spree (including five mergers). “We were anxious to quickly establish a footprint, [so we] acquired entities to fill out practice areas, such as brand consulting, package design, p.r. and sports marketing,” says GEM CEO Keith McCracken. “Now we’ll cross-train, and populate all our offices with all disciplines.” GEM added a Hong Kong office (its 10th) this year and plans to grow its European business as well. Since much of GEM’s stock is held by employees, “there’s a real impact on culture, and a sense of commitment,” McCracken says.

Source Marketing’s Steinberg chose public Canadian firm Maxxcom over a bigger holding company in order to keep his autonomy and to be Maxxcom’s only U.S. promo entity. “I wasn’t looking to integrate Source into someone else’s vision,” he says. (See commentary by Steinberg on p. 105)

Boutiques bloom

A handful of agency veterans sick of big-agency bureaucracy have hung their own shingles, opening boutique shops with conservative plans for growth. John Kocis (formerly Tracy Locke managing partner) and Bill McBrayer (formerly Ryan Partnership chief creative officer) started Concept One in November 2001 in order to shed management tasks and work directly on campaigns. “We don’t have to go to all the right lunches anymore. It’s very refreshing,” says Kocis, who’s president of the Westport, CT-based shop. Eleven staffers and a slate of contractors create multi-discipline campaigns for Hallmark, Procter & Gamble, REI and Rockport, sometimes working with other agencies for execution. The two principals pitch marketers on “angles to move their business forward that no one else is presenting to them,” says Chief Creative Officer McBrayer.

With fees at least 10% below big-agency standards and senior staff working on campaigns beginning to end, Concept One claims it can give clients top-quality creative for less, faster. “We’re all rowing the boat in the same direction,” McBrayer says. “You just can’t do that at a big agency.”

A handful of Alcone Marketing alums joined forces early this year, merging startups Workshop Design and Advertising with Cabo Knowledge Marketing to form The Knowledge Marketing Workshop, Irvine, CA. Workshop partners Dave Lugin and Paul Lucker (creative) and Cabo President Don Reddin (account management) spent six years together at Alcone handling Burger King’s U.S. and European work. Now they work with Coca-Cola’s foodservice group, Wolfgang Puck Express restaurants, Accutrac Software, the San Diego Zoo and DaimlerChrysler, handling everything from ads and promotion to technology and research. “You have so much more flexibility and entrepreneurship, which creates a whole different energy,” Reddin says.

Pitching multi-discipline projects within Omnicom (Alcone’s parent) usually meant elements were farmed out to other agencies based on specialty. “There was a very strong drive within Omnicom to partner with [siblings]. The philosophy is wonderful, but execution is difficult because everyone wants the billings,” he says.

Boutiques also can take advantage of the growing pool of free agents — experienced former execs who choose freelance (instead of 60-hour work weeks) to suit their lifestyle. That’s likely to increase, making it easier for agencies to staff against project work. Knowledge Marketing Workshop recently tapped a work-from-home research pro for a segmentation study. “We don’t need to have a research department; we just have to know what the client needs,” Reddin says.

Independents tough it out

Like boutiques, bigger independent shops are holding their own. Ten shops in PROMO 100’s Top 25 are indies, with PowerPact, Colangelo Synergy Marketing, Strottman International and The Marketing Store Worldwide in the Top 10. Independents say they have the luxury of long-term goals. “We can choose to invest in the business because we simply don’t have short-term financial restrictions and goals that publicly held companies face,” says Ryan Partnership Senior Managing Partner Christine Nardi. A stable independent shop can weather a billings drought, letting its margin even out over the year rather than answering for it each quarter.

But it’s tough for indies to compete with network agencies’ deep pockets and wide discipline resources. “In shoot outs, we can only talk about our capabilities and network agencies can talk about their sister agencies’ capabilities, even if they don’t work with them,” says Colangelo Synergy Marketing President Rob Colangelo.

“We don’t have the depth of resources, but what we do have, we dedicate to the business,” adds CSM Creative Director Bob Terry.

Ryan Partnership often pitches against network agencies — and often wins. “Once we can present our credentials in a strategic or creative shoot out, all is equal and fair,” Nardi says. “The company with the best ideas and personnel usually wins, despite its ownership or affiliation.”

Indies have more leeway to turn business down, or fire bad clients. “I resigned a piece of business because the client was treating my staff so badly,” Colangelo says. “My people are my only resource; if I don’t have them, I don’t have a business.” That thinking has attracted a handful of senior-level folks, many of whom left the politics of a network agency for CSM’s family environment, he says.

Nardi says senior staffers like Ryan’s independence, too, and give Ryan a competitive edge over “conglomerates that often service clients’ businesses with more junior people.” Nineteen-year-old Ryan turns away suitors every year, since clients prefer objective thinking over network cross-selling. “There will always be a place for independent agencies as long as there are clients who value the entrepreneurial, creative and senior-level strategic perspective that [independent] companies provide,” she says.

So what’s the lesson for all agencies? Those that focus on clients and staffers (and less on the bottom line) should weather the rest of the recession. Networks’ financial pressure should begin to ease up later this year as clients resume product development and restore marketing budgets.

“Clients’ needs have always been the driving force of the marketing services industry,” Nardi says. “They will continue to be.”

To keep holding company debt down, Steinberg suggests “a more selective acquisition process” by partnering with a likely shop, then building to full acquisition at a lower financial risk. It would ease an acquired shop into the network, letting principals adapt more slowly.

But network agencies want parents to give, not just take. “If a holding company could deliver best practices and collaboration, people would be happy,” says a network-agency president. “If it squeezes you for margin and injects more problems, they become the enemy. The loyalty you feel depends on what you get back.”

Holding companies that contribute to an agency’s daily business will keep good people who want to give back — if only to keep the parent’s resources coming. “In the end, it’s about where the talent lands,” one exec says.

SELLER’S REMORSE

Back in the mid and late 90s, a lot of agency execs thought their indy shops would fare better in a network where sister ad agencies opened clients’ doors. Besides, it was tough to turn down all that cash.

“Back then, we felt we had to join a network or die,” says Jay Farrell, who sold Davidson Marketing to Lighthouse Holding Corp. in 1999. (Cordiant bought Lighthouse in 2000.) “But the adage ‘Get big or die’ is no longer true: You can be small and do good work.”

“We were looking for a bigger playing field,” says Mark Shapiro, who sold Louis London to Interpublic in 1998. “Folks expected to walk into clients without investing lots of money, but the so-called ‘low-hanging fruit’ wasn’t there.”

“We originally joined IPG for the same reasons all agencies join big holding companies: ‘synergy,’ mutual benefit to the agencies and the clients,” says Jim Holbrook, who (with three partners) sold a minority ownership in Zipatoni to Interpublic in 1999, then full ownership in 2001. “We’ve largely missed any business benefits from being owned, and instead have maintained our own highly independent operating style. The lesson here is age-old: Be careful what you wish for.”