Holding companies versus Independents: David versus Goliath redux? 

By Darryl Sparey (Chart.PR), MD Hard Numbers, and Co-founder of The Family.

Like most people, I’ve had rather a lot of time on my hands over the course of the past 18 months. Being stuck at home through three national lockdowns, and being based in Bournemouth rather than Central London, has given me time to make a dent in the reading pile that I’ve built up over the last few years.

A highlight of which was Malcolm Gladwell’s David and Goliath: Underdogs, Misfits, and the Art of Battling Giants. In it he repeats that rather Gladwellian (is that a word? It is now!) trick of telling you something you’ve heard many times before – the story of David and Goliath – but doing it in a way that’s fresh, engaging and sheds new light on it, and helps you find a new perspective.

It got me thinking about the PR and wider marketing services industry, and the relative performance of independent agencies versus the large, market-backed holding companies; Omnicom, IPG, WPP, Publicis in particular, often referred to as “the Big Four”.

Research by PRovoke in its annual review of the PR market has shown that independent agencies have outperformed holding companies over the course of the past 18 months. This is also the continuation of a trend which has been happening for some time.

In 2020, in the context of an industry that saw its revenues decrease by 4.2%, independent PR firms saw their fee income increase 1.4% to $6.8bn. For the first time in the decade that PRovoke has been collating this data, independent agency income drew level with the publicly-traded PR firms. The market-backed groups also saw a fee income of $6.8bn, but this represented a 5.8% decline on the previous year.

One reading of this data would be that the holding company model is fundamentally broken, and not fit for purpose in the lightning-quick world of the 2020s.

They are too big, too slow and too inflexible.

They are the Goliaths to the Independent sector’s David. Many might already be writing the obituaries of a business model that is not able to respond to the changing patterns of media consumption or survive a digital advertising market, where over 90% of all new budget created goes directly to Google or Facebook. Some might contend that they are too encumbered by financial and technical debt. Debt from acquisitions and investments made over many years to address markets that have fundamentally and irreversibly changed, particularly following a seismic event like a pandemic.

That is definitely one reading of the data.

It is worth remembering this, however: PR fee income from the Big Four holding companies was down just 2.2%, narrowing the gap on their independent rivals somewhat. The Big Four still account for around 30% of the overall global PR market at $4.6bn, and all publicly-held firms account for around 42% of this overall market.

There is a reason that Goliath was the most feted Philistine combatant. There are some clear benefits to being big.

In the case of holding companies, they are naturally “hedged” against changing preferences for where marketing dollars are going to be spent. Secondly, they are able to offer a “full stack” of marketing services to businesses that need them – across paid, earned, shared and owned channels – and therefore capture a greater share of overall customer spend than independents who may be more specialist. Finally, they have the capital, both human and financial, to scale-up to meet the demands of the largest accounts globally.

To expand on the consideration of the human and financial capital point, this is one area to further examine the strengths and weaknesses of the holding company model.

The benefits of the holding company model is that they have the free cash flow and reserves to deploy towards investing to grow businesses. Too often, however, holding companies don’t make long term bets on talent within their business. As the holding groups are backed by the public markets, they are beholden to quarterly reporting of their performance. The demand is for them to demonstrate return on capital and return on equity that quarter, not in two, three, four or more years’ time. The experience of working within a holding company structure, where you are one of many, many thousand people, can be a little bit daunting too.

Independent agencies are able to make longer-term investments, because they don’t have the same short term market pressures. However, they are often limited by the “bandwidth” of their founders. A founder or founding team can only focus on so many things at once. The benefit of closer involvement in the day-to-day business of the founding team naturally brings a greater level of engagement from the team. Providing the founders aren’t tyrants, and there are sadly still a fair few of those scattered across the PR industry…

So, what if there was a different approach to the holding company model? What if David didn’t have to fight Goliath at all?

That’s something we’re trying out. Last week we launched The Family, the new name for the parent company of performance-driven communications consultancy Hard Numbers, and youth marketing agency Hype Collective.

It’s a new approach to the holding company model, where rather than growing by large scale acquisition, we want primarily to organically grow a family of companies who can share tools, services and expertise with themselves and with clients. We also want to identify, invest in and work with micro-agencies with a headcount of 1-5 which have potential for expansion if the management were able to focus on growth, rather than the minutiae of running the business day-to-day. The brand name and positioning reflects The Family’s vision to act as a supportive, helpful partner to enable those looking to start or accelerate the growth of agencies with a range of services and support.

We’re launching our first new business in the next few months, and we have a pipeline of two more businesses that we want to launch before the end of 2022. We want to hear from anyone who wants to start their own agency business, or those with an existing agency, a headcount of 1-5 people, and a desire to scale.

Time will tell if this approach is successful or not, and time will tell if the independents will continue to see the performance they’ve delivered in the last 18 months. Or will the holding companies roar back as the economy inevitably starts growing again, once the pandemic is in our collective rear-view mirror? For The Family, we want to combine the fleet-footed, quick-thinking approach of David, with the benefits of the size and scale of Goliath. However, ultimately, we don’t want to think in these zero-sum terms. We’re not really ones for military metaphors either, because PR isn’t life or death. We don’t want to be on the battlefield, we want to be building a mutually supportive, founder-friendly environment where everyone is given the tools, technology and time to achieve their potential.

That’s what family is for.

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