ANALYSIS: Agency Restructuring - Havas changes reawaken agencyownership debate

In trying to cut costs and keep the business viable, Havas -

perhaps inadvertently - raised questions about PR agency ownership.

Eleanor Trickett looks for some of the answers.



"What does this actually mean?" was one response. "Diversified who?" was

another. And a third, quite resoundingly, was, "So what?"



While the question of PR agency ownership, holding company reporting

structures, and company alignment might not exactly be on the lips of

every jobbing PR person, like it or not these issues affect everyone

from the rottweiler at receptionist up to the pearly gates of the CEO's

office.



Last week's news from Havas, delivered in uncharacteristically wobbly

tones from the otherwise suavely Gallic chairman and CEO Alain de

Pouzilhac, signaled dramatic changes in the network. Due to a disastrous

advertising economy (which de Pouzilhac doesn't see improving until at

least 2003), Havas is streamlining - the most significant result of

which is that its four networks have been whittled to three.



The two ad agency brands, Arnold Worldwide Partners and Euro RSCG,

remain intact, as does the media planning and buying megalith that is

Media Planning Group. The casualty is the Diversified Agencies Group

(DAG), which housed, among many other firms, US PR agencies Magnet,

Abernathy MacGregor and Noonan Russo.



Compared to fellow holding companies, Havas' marketing services agencies

represent a comparatively small part of its total revenues - 27%

compared to Omnicom's 56%, for example. Its largest agency by some

stretch is the direct marketing giant Brann, which was acquired as part

of Snyder Communications in 2000. The deal was expensive - the $2.1 billion price tag staggered the industry, and many claimed that it

was up to $600 million too much.



While the deal brought Arnold on board, and thus a much-needed US

presence for the French network, it has not all been smooth sailing.

Just recently, for example, Brann was dealt a huge blow by IBM, which

yanked its $30 million DM business out of the worldwide agency,

and channeled it into WPP agencies.



More so than ever, then, DAG's agencies had little global glue. Some

shared clients with ad agencies within the rest of Havas, but as an

entity, it perhaps didn't make as much sense as groups like Omnicom,

with the agencies in its Diversified Agency Services group organized

globally.



All of this makes Havas' decision easier to understand. The final word

on what is the fate of DAG's agencies will come at the beginning of

November.



It's expected that 80% will join the remaining three divisions, while

the high-performing, profitable niche players will be allowed to stand

alone. Those that fall through the gaps will be shed altogether.



Dealing with the ad men



The upshot is that DAG's agencies will now have to adjust to a new

reporting structure. This will be particularly noticeable to Abernathy,

Magnet, and Noonan Russo, all recently acquired or formed, and all

having enjoyed a close relationship with Patrick Lemarchand, DAG's North

American chief until last week. Used to dealing with him from their

early days with Havas, it is uncertain now if these agencies will even

continue a relationship with Lemarchand's boss, Jean-Michel Carlo, as a

question mark hangs over his future.



Instead, these agencies will now report through the advertising

networks, and will deal with a very different type of boss: an ad man.

Bob Schmetterer in the case of Euro RSCG, Ed Eskandarian in the case of

Arnold.



Havas claims this is a celestial alignment; a homage to the strength of

the three brands. (It is also perhaps a tacit admission that as a brand,

DAG wasn't working.)



Others, however, say that de Pouzilhac's decision sets the reputation of

PR back by several years. Where an agency sits in its parent company can

make a difference in everything from the clients it can handle to the

overall culture of the agency. And if the PR heads don't have access to

the top decision-makers, then the whole discipline is undermined.



Ogilvy PR president Bob Seltzer - who, while working closely with Ogilvy

& Mather on some accounts, reports directly to WPP CEO Sir Martin

Sorrell - says, "To me, this basically says 'PR isn't doing well, and

I'm really pissed at them.' That is the worst positioning in the world.

You have to have the access for your ideas and needs to be heard. If you

put the PR agencies under an ad agency, then where's the respect for PR?

You're making them second-class citizens."



Defending the decision



Havas defends its decision, pointing out that the ad agencies that have

been fitted into the two major networks have still been allowed to

retain independence while having the ear of the top guys. The same will

apply to the 70-odd diversified firms and their individual leaders, says

Simon Gillham, Havas' VP of corporate communications. The agencies

concerned will still be reporting into network heads rather than ad

agency heads.



This is true by definition, he says, as the ad agency networks will now

have PR and DM firms within.



While the logic is unarguable, this cyclical argument is "hardly the

foundation of a credible corporate philosophy," complains one senior

Havas insider. "While 27% of Havas' income came from DAG, the margin was

5%, which is pathetic. Havas is running scared, and the analysts are

telling them to sort themselves out fast, or they'll tell people to

invest in their rivals."



Another industry source adds, "Just slapping a PR agency here, a DM

agency there, onto an ad agency, doesn't automatically imbue the ad

network's president with an automatic ability to understand these areas

and use them to all the agencies' advantage."



Havas, of course, tells a different story. In his statement last week,

de Pouzilhac said, "Our two major advertising brands will be given the

means to achieve high performance levels in all the communications

sectors, particular in marketing services."



Gillham expands on this: "There's a sense of wanting to refocus the

business and reinforce the main brands of Euro, Arnold, and Media

Planning Group," he says. "Everything will focus on two areas:

integrated communications and media expertise. The agencies will be

integrated into those three divisions according to their business, their

corporate cultures, and their fit."



It's all about integration



So Havas is selling the change as a step toward integration. But Tom

Harrison, president of Omnicom's DAS, thinks that integration should be

a given regardless of the structure of a company, and argues that

successful integration is more likely if the diversified agencies don't

report through a network headed by an ad agency. "The way we have it,"

he says, "everyone is on equal footing, from advertising, to direct

response, to PR. If any of these agencies report through an ad agency,

they are going to be subservient."



The argument for having a diversified division is also an

entrepreneurial one, he says. "It gives the agencies an opportunity to

work across a larger constellation of clients, without the fear of

conflict. In Havas' case, if the PR firms are going to be merged into

the ad agency networks, are there any potential - or real - conflicts?

Who wins? It will be the ad agency. Which," he adds thoughtfully, "could

be good for us."



For Havas, the way things are right now - especially given the small

size of DAG - means that the process of rearranging reporting lines will

be fairly simple, and it must be said that there is a certain symmetry

about some likely alignments, especially on the DM side. However, the

issue is that of future growth. Acquisitions will be trickier if they

have to be aligned with an ad agency network, especially if the dreaded

conflict issue rears its head. There's an unspoken agreement when it

comes to marketing services agencies that goes something like, "Two's a

conflict; three's a specialty." While ad agencies don't yet have the

same degree of leniency from their clients, Harrison may well be right

when he says, "I just don't think PR capabilities could grow as well

within a general ad agency framework."



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