Are Holding Companies Obsolete?

The original model is largely dead. A new one may rest on integrationIt took David Bell less than a month to realize that his new job as CEO of Interpublic Group would entail more than the formidable task of righting a ship listing from accounting irregularities and debt difficulties. After getting feedback from employees, he understood that he would also have to defend the very agency holding-company model. In a March 28 memo to all staff, he wrote, "Again and again, I've been asked: 'Does the holding-company model make sense anymore?' " His answer was predictable. "I emphatically believe that it does," he wrote, pointing to the "huge potential value to be realized from being part of a major global group—if all the parties involved bring to the table [a] spirit of accountability and [a] commitment to collaboration." Bell reiterated the point at IPG's annual shareholders meeting last month. But many who are asking the question disagree. "If you were starting from scratch today, it wouldn't be the model you'd be building," says the CEO of a major holding-company-owned agency, who says he's seen little of the efficiencies—or the resources—the model was intended to deliver. Naturally, Bell's holding-company peers agree with him. Still, they sound uncharacteristically unsure about the state of the model today. "I do think it's in a period of examining itself and re-examining itself," says Bob Schmetterer, CEO of Euro RSCG Worldwide and president and COO of its parent, Havas. Adds Martin Sorrell, CEO of WPP Group, "It goes back to the issues [WPP] faced in the early 1990s. I think we had a good hard look at 'What was this all about?' " Is the next inevitable step divestment? Most think not. IPG's May sale of NFO WorldGroup to Taylor Nelson Sofres is the only major move in that direction in recent history. Maybe the better question is whether the agency holding company, in its current form, is obsolete. To that, many agency executives say yes.Things have certainly changed since Marion Harper set out his vision for IPG in 1960. He understood that once an agency reached a certain size, account conflicts hindered growth. His solution was to create an umbrella organization that would own individual agencies that could handle competing brands. As described in an unauthorized biography of Harper written by one of his former employees: "The Interpublic concept was described as a group of agencies, under one ownership, in which each was free and independent." Though that definition still holds true by and large, the concept has taken a beating. Last September, for example, Omnicom Group and IPG, not their agencies, received the RFPs in Bank of America's $170 million review. The client's rationale? That one account team from various shops under one holding company would best serve its needs. Also, the model hasn't completely solved the problem of conflicts. Witness the $650 million fallout (not counting legal fees) from IPG's 2001 acquisition of True North. Or General Motors' displeasure with Paris-based Publicis Groupe over its hire last month of a GM exec to work on Toyota at Saatchi & Saatchi. Nor has the growth of holding companies been without problems. Below-the-line acquisitions haven't necessarily made the business recession-proof. WPP, for example, showed a 2.8 percent revenue decline in 2002. And many say the businesses have grown too unwieldy to manage—charges that stung IPG in the wake of accounting problems in Europe (and, to a lesser extent, Omnicom, which last year endured questions about its own numbers). But the biggest challenge for holding companies may be that there's not much left to buy, a fact that is shifting the focus to organic growth. WPP, Publicis and Grey are all swarming around Cordiant Communications Group, the hobbled London-based owner of Bates Worldwide, but most industry execs expect future holding-company acquisitions to be tactical, in burgeoning areas such as healthcare and database management. "There's not a lot left to purchase, so what's the plan now?" asks Tom Nelson, an Ammirati Puris Lintas refugee who has been operating the small-scale Gardner-Nelson Project since early 1999. Those leading huge holding companies say the plan is to leverage their assets to make the whole worth more than the sum of the sometimes hastily acquired parts—by providing integrated services to meet clients' increased demand for holistic marketing. Or, as the just-released WPP annual report puts it, by offering "the best ideas, in the best coordinated or integrated way, at the lowest price." While managing conflicts will always be part of their mandate, the call for integration means holding companies may be in a constant cycle of putting up some walls while at the same time tearing down others. By that measure, the model envisioned by Harper isn't just obsolete—it's long dead. The problem is that it's anyone's guess whether integration will result in solid organic growth and clear differentiation between holding-company brands. The bet is that the company that integrates best will win. "We would argue that when you buy Grey, you're buying an organization where the parts fit together well," says chairman, CEO and president Ed Meyer. But it's one thing for Grey to say that—it has stuck to a Spartan one-unit-per-discipline diet for decades. What if you're Omnicom, holding together 1,500 companies? Despite Grey's assertion that the best way to eat someone's lunch is to have a smaller appetite, there's not much proof at this point that your model is better if, say, you're a huge holding company vs. a midsize holding company vs. a small, publicly held marketing-services company. In the first quarter, Omnicom increased revenue by 12 percent, from $1.7 billion to $1.9 billion; Grey boosted revenue by 4 percent, from $286 million to $298 million. And yet Omnicom is arguably the least integrated of the holding companies, while Grey's size alone may make it the most. "That's sort of the $64,000 question: Do clients really prefer one-stop shopping?" notes Tim Fidler, director of research at Chicago-based Ariel Capital Management, which owns stakes in Omnicom, IPG and Grey. Many clients remain unconvinced. Adam Owett, svp of creative services at Sony Music, a participant in last year's $600 million Sony media review, recalls an attempt by Omnicom's OMD to skirt a conflict by setting up a special unit. Such efforts, he says, "feel superficial ... or you feel you're being pushed off to the side." Meanwhile, another key constituency—review consultants—isn't short on strong opinions about the holding-company model. "Unless the category is going to grow significantly, the giant holding companies are going to have to eat each other's lunch," predicts review consultant Dick Roth. Morgan Anderson Consulting's Arthur Anderson sees the need for integration but doesn't believe agencies have done enough. "They pretty much have the same business model as they did 20 years ago," he says. Holding-company execs attribute talk of obsolescence to the bad economy. They feel they are just getting started. "It hasn't been a model yet," says Sorrell. "It's in the process of formation." Perception may once again be lagging reality. Though their philosophies differ, the holding companies are showing they can sell integrated services. WPP has built a cottage industry around seeding its organization with knowledge-sharing opportunities, producing a raft of companywide publications (something IPG says is a goal of its own as well). The WPP Partnership Program, 7 years old, is focused on publishing cross-discipline case studies; the company has also developed a series of 10 "horizontals" in areas such as retail, where a unit called The Store pools knowledge of that discipline. And in roughly a dozen countries, WPP has appointed country managers to foster cooperation across WPP companies. The effort is overt enough that Sorrell prefers to term WPP a parent company—providing training, knowledge-sharing and coordination—rather than a holding company. IPG provides the best integration case study, even if it was spurred by a client's decision to integrate and streamline, not the holding company's. When IPG took on BofA's consolidated $170 million account last year, it became the model for how such a partnership should work, from the channel-neutral incentive structure to its appointment of a holding-company executive, Bruce Nelson, to manage the business. According to Cathy Bessant, chief marketing officer at BofA, "The strategy should drive the use of the channel, not the other way around." The relationship, now 7 months old, looks to be paying off. "We were committed a year ago," Bessant says, "and our experience is making us more committed." Omnicom, the biggest of the holding companies, still lets its units run freer than its competitors do. Officials there refused to comment for this story, but a company rep says the so-called keiretsu strategy (a Japanese expression describing interlocking operating relationships between companies) "has worked and is continuing to work." Still, one source admits there was angst after the BofA review over whether Omnicom, too, should have offered a top holding-company exec to shepherd the business. Will a better coordination of assets eventually create a new concept of the agency holding company? One key structural problem could put off a definitive answer for years: the separate P&L centers. According to Bell, this was the price of buying entrepreneurial firms. Potential acquisitions "clearly wanted their own profit center, and the only way you could get [them] was that way," he says. Sorrell, Bell and Schmetterer agree this can result in client need being trumped by the self-serving squabbles concerning individual units' bottom lines. Bell predicts an increase in what he calls "client P&Ls" that pit compensation against resources across the company. In fact, most of IPG's $181.3 million accounting imbalance had its roots in the separate P&L structure—with more than one office of McCann-Erickson claiming the same revenue. Of the major players, only Havas' Euro RSCG has largely abolished individual P&Ls, first in the U.S. (in May 2002), then in France, Spain, the U.K. and the Netherlands. Domestically, it replaced 11 separate P&Ls with two, for Euro RSCG MVBMS Partners and Euro RSCG Tatham Partners. In the early offing, the units are performing no better—or worse—than their competitors. MVBMS' revenue was down 4 percent in 2002; Tatham's was flat. The only definitive thing that can be said about the agency holding company is that it will persist in some form for years to come, weaving through conflicts, integration, and shareholder and client demands. Whatever it does become, the relatively neat world of Marion Harper is lost for good. There is no easy solution, says Sorrell. "I don't think the 21st century is for tidy minds." —with Andrew McMains

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Are Holding Companies Obsolete?

Catharine P. Taylor

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Catharine P. Taylor