Midsized Agencies On The Decline

Room for Outside Shops, Startups Increases as Mainstream Shrinks
BOSTON-Although the economy has improved through the 1990s, the advertising agency market in New England has contracted. The result: Two large, general-purpose players-Arnold Communications and Hill, Holliday, Connors, Cosmopulos-sit atop a field of smaller, specialty shops while the number of successful midsized agencies declines.
“There’s a market void” for clients in the $3-4 million range looking for a multiservice regional shop where their business will not get lost, said Paul Allen, president of Allen & Gerritsen, a high-tech shop in Watertown, Mass.
“What you’ll see,” said Jack Rossin, a former agency principal who now heads up consulting firm Rossin & Murphy in Newton, Mass., “is outside agencies [coming] in more and more,” poaching midsized accounts.
“If you pick a category or service niche” such as high technology, medical or direct marketing, “you’re fine,” said Skip Pile, president of consultancy Pile and Co. in Boston. But for mainstream shops, “advertising is an awful business right now. It’s worse than at any other time in history,” he said.
The midsized ranks have been decimated in recent months, with several successful shops founded in the 1980s going belly-up or hitting hard times.
The most dramatic example is Houston Herstek Favat. Founded in 1987, the Boston agency pitched and won several national accounts and raked in prestigious awards for creativity. Executive defections, internal scandals and client losses, however, drove the shop into a tailspin before it was finally bought out by crosstown rival Arnold, which itself is on the selling block.
Losing a player of Houston Herstek’s stature weakens the region in the eyes of the national ad community, Pile said. While the buyout may have saved the jobs of the 50 or so Houston Herstek employees, there is no guarantee those positions will be secure in the long term, especially if Arnold is sold “to a conglomerate in Europe or New York,” Pile said.
North Castle Partners in Stamford, Conn., lost both Ocean Spray Cranberries and Days Inn in the past year and has not won any significant new business recently.
Pagano Schenck & Kay in Boston and Leonard/Monahan in Providence, R.I., once boasted reputations that stretched beyond New England. Today, both agencies scramble for accounts in the $1-5 million range. In addition, Bob Pagano’s departure for Mullen in Wenham, Mass., leaves the future of PS&K in question.
“We are surprised that . . . the vacuum was not filled by more aggressive, successful startups,” said Pile. Entrepreneurs are hard to find, and the reasons why may help to explain the problems inherent in keeping midsized shops afloat.
“There are too many [agency] choices, and margins are too low,” Pile said. Clients can pick services from specialty shops or freelancers, often at lower cost, and are less restricted by regional considerations.
High salaries propelled by a healthy economy pose problems of some complexity for ad agencies. At large shops, creative and account talent command six-figure salaries, providing would-be entrepreneurs with a comfort level difficult to discard. “If you’re making $200,000 at a Hill, Holliday or an Arnold, why start your own shop . . . with all the headaches when you may not even be able to turn a profit?” Rossin asked.
High salaries effectively price small- and medium-sized agencies out of the talent pool. When Hill, Holliday hired award-winning creative team Marty Donohue and Tim Foley from Greenberg Seronick O’Leary & Partners, where Rossin was once president, “they probably got double, if not triple, what we could pay them,” he said.
Ironically, an economic downtown may actually spur agency growth. If layoffs ensue, some staffers may start their own shops and the midsized ranks might swell once again, executives said. “I just hope there are some young people buried in the creative departments that have the courage to strike out on their own,” said Pile.