PR agencies are working towards specialization and differentiation.
Being an agency leader through the downturn was brutal. Being an agency leader now, with business picking up across the board, amid a fragmented media environment, with ethical questions swirling about the industry, and working with clients who learned tricks of their own in the hard times, may be even tougher.
In 2004, much of the focus was on how agencies, particularly large agencies, were more effectively organizing themselves to service client needs. Weber Shandwick was demonstrating new competitive momentum, and was particularly vocal about its collaborative approach across offices and disciplines. It wasn't the only firm thinking that way, but in the wake of its restructuring following its merger, the firm was able to build on that buzz.
WS is still proving itself to be a juggernaut in new business and attracting talent. But improvement in the business across the board has accelerated an overall industry shift. Collaboration is almost cost of entry. Specialization is the next phase - one that is well under way. In addition, the opportunities and risks of the new media channels are still being assimilated into the PR tool kit. For these and other reasons, many big firms are in a period of positive transition, with no one firm always leading the pack.
Midsize and small firms, the vast majority of those in the rankings tables, had a better year in 2004, with 82% of the firms in the rankings reporting gains over 2003. With agency acquisitions still few and far between, this organic growth points to healthy relationships. Some new entrants did not report 2003 numbers, but a conservative estimate indicates a 13% overall increase.
Anecdotally, most of the holding company-owned firms may be looking at mid-to-high single-digit or low double-digit growth over 2003. But since the interpretation of Sarbanes-Oxley, adopted by parent companies, has made speculation over the numbers more or less meaningless, other indicators are needed to evaluate a firm's health.
One of those indicators is an investment in an agency's innovation, especially now, when business doesn't necessarily depend on it. Agencies, particularly big firms, have gotten to be very good at what they do, in both strategy and execution, from pitch to post-campaign measurement. Smart clients have learned how to be specific, how to set expectations for meaningful results, and what to look for in a new firm.
Now big agencies are taking an even closer look at all facets of their operations, from branding to innovation, to talent, geographic reach, and leadership. Differentiation is the goal. It turns out the midsize agencies were right all along - large, generalist agencies have been trying to figure out how to strike a balance between scale and depth, how to compete with the knowledge a midsize niche player has. Some say they are getting pretty good at doing just that.
"I really do believe, and it's such a painful thing to say, that the midsize firm is an endangered species," says David Paine, CEO of PainePR. Last year, Paine agreed to sell an 80% stake to Canadian-based advertising company Cossette Communications Group, becoming the company's lead PR agency in the US.
Paine says large agencies labored for years to compete with smaller firms on quality of client service and counsel. But he believes they have learned how to do that well. "They have absolutely gotten smarter and better, they are the 900-pound gorilla. The gorilla has awakened, on a number of different levels," he says.
More and more, large firms are using the term "specialization," to describe how they are not just bringing offices together, but expertise. "Specialization is necessary to compete with the smaller firms," explains Paul Johnson, Fleishman-Hillard's mid-Atlantic regional president. "They have gotten so good at marketing themselves and making the point that it's great to be specialized. Unless we really have traction within these specialties, and are engaged in those communities and have reputation built on experience, we are going to leave that business on the table."
To that end, Fleishman launched a few brand extensions last year to reflect niche expertise, including FH Out Front, which focuses on the lesbian, gay, bisexual, and transgender communities. Fleishman also launched a creative subsidiary called BlueCurrent in Dallas, to catch clients looking for a small-agency feel.
Examples of specialization are popping up all over the place. Ketchum launched its Women 25 to 54 practice as a specialty within its global brand marketing practice, which aimed at helping clients target female consumers. Rather than staffing the area specifically, the discipline is being layered into all Ketchum offices and is to be offered alongside other branding efforts. And WS launched a sub-brand called Axis, a boutique focusing on multicultural marketing.
But formalized branding of offerings isn't a cosmetic affectation. "Practice leaders are saying we either do it to be successful or we fail," says WS CEO Harris Diamond, citing the firm's work on corporate social responsibility initiatives as one example. "We continue to find great opportunities in what used to be called niche marketing, and is now called specialization. We will continue to focus increasingly on that this year."
The branded practices and subsidiaries may sound a bit back to the future, a reminder of the dot-com days and the early years after the bubble burst, when agencies would launch trial-balloon practices on any number of hot topics. The difference now may be that during the past two years agencies invested more time on their geographic structure, building stronger foundations for collaboration, and seeding new areas of expertise. Specialization is not simply a function of hiring an expert in a particular area, but rather of connecting multiple practices and individuals, creating a matrix of strategy and service.
Better cross-office coordination also differentiates this trend from its earlier incarnations. Edelman, which launched a dedicated entertainment practice last year, and recently unveiled its new word-of-mouth discipline, has placed a greater emphasis on that level of collaboration. "It's working much better," says CEO Richard Edelman. [President] Pam Talbot has made a big effort on that, measuring it with [an] index, giving credit to people that share."
Hill & Knowlton has been striving to better staff and coordinate its US offices, and to deploy the resources it has already built - research and planning tools in particular. It has all been an effort to, as chairman and CEO Paul Taaffe puts it, become more consistently expert within a specific practice.
The effort has fueled opportunities in such areas as technology analyst relations, a specialty within the practice that has been gaining traction. "While we've always had practices, for the past few years we've been focused on fixing geographies," says MaryLee Sachs, chairman of Hill & Knowlton. "We've been so busy fixing ourselves over the past three years, we hadn't always focused on the proprietary tools that we already had."
Account consolidation is another driver of this trend, as well as the focus of many of the big firms on organic growth of existing clients, which is far more cost effective than trying to win new business. Increasingly, too, the success of a firm hinges on its ability to sustain and build those relationships, which necessitates constant analysis and upgrading of services. MS&L last year expanded its relationship with Philips to become the company's global agency of record. "Getting a global appointment like this is a terrific opportunity for us but also creates challenges," says CEO Lou Capozzi. "You have got to become a more cohesive and comprehensive network, and fill in the blanks where clients expect you to provide service."
Commoditization and relationship managers
The innovations, now apparent in large agency structure and launches, are perhaps the strongest signal that confidence in the business has increased. No longer simply preoccupied with survival, agencies are looking at the long haul, and the far trickier task of differentiation.
A large firm might, at one time, have truly stood out from its competitors on execution alone. That is no longer the case, as tactical know-how is expected. Bob Feldman, CEO of GCI Group, explains that his firm made an informed decision to continue to focus on intellectual capital. "We did some pretty intensive market research a couple of years ago, when we said that going into 2003 we're back in the business of investing in the future.
"What came out was very clear analysis that the successful agencies in the future would be those that did an exceptional job in what we call the 'northeast quadrant' - high value, high strategy work, the quadrant of strategy and specialization," Feldman explains. "We're not looking to be management consultants or do just pure strategy work. However, if you don't keep pushing the organization into that quadrant, the forces of the market will draw you down into lower left quadrant, which is tactical and general - a commoditized space. That's a short path to oblivion."
Specialization is the extension of a trend that was apparent last year as more and more large firms formalized or created the role of client relationship manager, or leader. The role has become a legitimate career path by firms that embraced it, where at one time becoming a GM or practice leader was the only way to move up. Client relationship leaders may also head an office, in some cases, but the point of the role is to cross geographies to pluck vital resources for key pieces of business. Fleishman and WS both formalized the role in 2003, while Edelman did so last year. "Client relationship managers are some of the most valuable people in our company," says CEO John Graham.
Fleishman is so bullish on the benefits of its client relationship manager program that it is already looking ahead to its next iteration. Right now the program focuses on the top 100 clients, which make up 60% of Fleishman's business. Forty of those top 100 clients increased their spending with the firm by 10% or more.
Fleishman believes there is potential to expand some form of the program to the top 500 clients, the pool from which it believes the next generation of top 100 clients will emerge.
Burson-Marsteller is notable in that it has had leaders of what it calls key client relationships for nine years. Now that its competitors are touting this critical innovation, Burson's take is that, "it's just the way we do things."
The function of the client relationship leader has been to amplify the matrix that is serving clients, increasing collaboration and cross pollinating expertise. It is a critical part of the large agency strategy for competing against the mid-size niche firms, in particular.
Midsize agency performance
The specialization trend among the big firms may make it tougher for the smaller firms to compete on their traditional turf of senior, in-depth counsel. Still, the numbers reveal that the prospects of midsize firms improved greatly last year. Peppercom's revenues grew 15%, for example, and it's easy to forget that a few years ago this firm was in a dire state. But now, having picked up business with blue-chip brands like Honeywell, Genworth, and Tyco, the firm says it most often finds itself competing against the big guys.
"When we get hired by the big companies, they are saying to us, 'You can do what we need faster and more creatively,'" says Ed Moed, managing partner and cofounder. The pressure on a growing midsize is how to retain that spirit. "If we ever stop doing that, clients are going to stop bringing us in."
Strategy for growth continues to be an issue for smaller firms, as does protecting themselves from the perilous loss of key clients. "The industry continues to stratify, and the top 20 firms are getting better than 90% of the new business these days," Paine says. "Once you start to get up into the $10 million-$15 million range, you find yourself straddling the small and big agency environments, and you need big accounts to grow. You can be the most brilliant midsize in the country but you are still going to be challenged to combat the new business see-saw."
Midsize generalists may have the toughest battle. But firms like North Carolina-based Capstrat, which increased revenues 15% last year, have made a virtue of regional expertise, rather than focusing just on a specific practice area. "The question for us is, can we grow in North Carolina without running into conflicts of interest," says CEO Ken Eudy. The firm offers everything from crisis communications to brand positioning.
Prospective clients, Eudy says, will sometimes question the advantages of working with an agency his size, when compared to a large firm. "That's a fair question. What I will say is, give us a chance and we'll demonstrate. I think midsize firms need to ask that a lot," he explains.
But Eudy says there is still a rich vein of disaffected large-firm clients out there. "I've seen plenty of organizations who say, 'we've worked with a large agency and we want to do something different,'" he says. "What are large firms doing that will avert that? I can't see anything."
Dallas-based Vollmer's revenues were down about 3% in 2004, and CEO Helen Vollmer still sees a hangover from the corporate scandals like Enron impacting the region where her firm operates. "Last year, corporations were still just very hesitant to make decisions to move forward," she says. But towards the end of the year and into the early part of 2005, the situation has improved.
Looking at the rankings tables, the picture is healthy for the midsize firms in general. Whether its generalists like Padilla Speer Beardsley (up 9%), technology specialists like the Horn Group (up 17%), or financial communications specialists like Sloane & Company (up 13%), there are signs that there's enough business for firms of all sizes right now.
OutCast Communications launched itself into the high-expectation ranks last year, winning the EMC business when it was expected to go to a large firm. "The issue in my mind is not big or small. The issue is do you know your client's business," says OutCast cofounder Margit Wennmachers, who adds that the owned or independent agency debate is far from over, and her firm can benefit from that. "I think there is a perception, which in some cases is real and in some cases [is not], that if you are owned by someone else there is a tension between serving the client and the master."
Healthcare powerhouse Chandler Chicco Agency (CCA), with revenues up 42% over 2003, is rapidly becoming the poster child of independent, specialized, midsize success. "We have won every pitch we've gone after this year," says cofounder Bob Chandler. Last year, the healthcare business was notable for a few high-level consolidations of accounts, such as the Sanofi Aventis business that went to Publicis Groupe, and a couple of Pfizer drugs that went to WPP agencies.
But CCA believes that its deep expertise, coupled with the development of a strong management layer it calls its leadership council, will keep the firm dominant.
Branding and reorganization
CCA is not the only example of a firm that has been closely evaluating its management, and its brand.
As the need for differentiation continues to increase, agencies too have revisited their own branding and positioning in the market.
Porter Novelli took the decision to invest in a holistic overview of its vision last year. "In a sense what many of us are hearing from clients is, you guys are all starting to look the same," says Gary Stockman, PN's president. The dreaded "C" word - commoditization - is a specter that haunts the large-agency world, as it strives to leverage geography and scale to the client's financial benefit, without claiming only the tactical groundwork for its own. PN looked at what is driving change in the industry - positively and negatively - to help it define a strategy.
PN is in the process of implementing its program, following a period of consensus building within the agency. The plan includes about 11 operational initiatives including client strategy, business development, knowledge management, and more. The agency's boards have been consolidated to one executive board, and roles have been more closely defined, including those of account leaders and discipline heads.
Stockman likens the experience to, "changing the engine on a 747 while it's still in the air." The decision to invest in a program like this was a significant one, particularly because the firm did not consider itself in trouble. "It's a lot easier to drive change in an organization that is broken," he says.
Text 100 also went through a restructuring phase last year, to focus the firm on global strategic development across all markets. "For us, it was important in really taking the next step with our business," says CEO Aedhmar Hynes. "We had all the dots on the map in terms of geographic expansion, and growth in the future will be about enhancing services, growing breadth and depth in relationships with clients, rather than just attracting more clients."
H&K has been quietly unveiling its own internal branding initiative, partly in response to tough realities that have dogged its US business. "We relaunched H&K internally," explains CEO Taaffe. MaryLee Sachs, US chairman, conducted a brand-refreshing road show called Destination 2005, highlighting the "considerable" changes to the firm that have taken place during the past two years, including efforts to win more business on the consumer side.
H&K's acquisition of Chicago consumer shop Dome was one attempt to get closer to the marcomm business. There are two things every large agency needs to be a serious contender in the US - strong healthcare and strong consumer business. H&K's healthcare head, Paul McDade, recently left the firm, and has not been replaced, and Taaffe says that H&K does have a smaller healthcare business than other firms its size.
But Sachs maintains the agency is winning more consumer business than ever, including "nice shop-window accounts," which includes a launch for Motorola.
GolinHarris also launched a rebranding effort in 2004, following the promotion of Fred Cook to CEO in 2003. Coupled with the visual rebranding, the firm committed to focusing on key disciplines. "The rebranding was sort of a psychological turnaround for us as well," says Cook. "I have never felt more enthusiasm or seen more collaboration than we have now, and that includes collaboration with our sister [Interpublic] agencies as well."
Golin is working on rebuilding its New York office, which does not have a GM. Like the healthcare/consumer truism for big agencies, firms of a certain size need to be strong in New York, and that has been a vulnerability for both Golin and H&K. Taaffe adds that is starting to change now for H&K, saying that under Tom Reno's management, the New York office is seeing growth again.
Another agency that has emerged from a tough period with gusto is Cohn & Wolfe, which only last year began to really turn around. Donna Imperato became CEO about two and a half years ago, and committed to refocusing the firm. "It was such an incredible year for us," says Imperato. "My greatest satisfaction of the year is the morale at C&W. It's such an energetic and inspiring environment right now." Imperato says that with the reorganization, she has not had as much time to focus on the brand as she would like, but has plans to introduce new branding efforts this year. "My goal is to get to the marketing people," she says.
Ogilvy is not trying to reinvent its brand, but rather expand on its inherent value. "We think we have a brand that not only has great history and tradition, but also affords us the opportunity to get out there," says CEO Marcia Silverman. "When you've got this kind of legacy, it would be foolish not to." The brand represents more than just a venerated name, but also approaches and guidelines for doing business, such as the 360 degree approach. "It is exciting to refocus on the Ogilvy tradition," she says.
Talent wars and new leadership
Agencies large and small are keeping a close eye on their most valuable asset - their top performers on staff. The client relationship leader role is one way to keep talented people, who may not be suited to or interested in a career running a region or an office. Pay raises and bonuses are back, somewhat, but it is clear that for some, that may not be enough.
Bill Heyman, CEO of Heyman Associates, notes that large agencies are once again beefing up their corporate practices, an area that had been in the doldrums during the past few years.
Last year and during the early part of this year, Ketchum named Rob Flaherty head of its corporate practice, while WS hired Paul Jensen, former president of Euro RSCG Magnet, as EVP in that area. H&K had a trio of senior level corporate departures earlier this year, most notably Harlan Teller, former worldwide corporate practice leader, who left for Financial Dynamics.
"We're getting great people because we're building a great business," says FD's US CEO, Declan Kelly. "Money is one motivation, but there are plenty of other firms out there that pay as well as we do."
Several other senior roles remain unfilled in the agency business. Edelman is still looking for a global technology leader, following the departure of Rich Moore. Healthcare remains the toughest area to find good people, and Heyman says that corporations in the healthcare market are competing with agencies to attract the best and the brightest. Significant hires in that area include Peter Pitts, former head of communications for the Food and Drug Administration, who was hired by MS&L, and Greg Baird, formerly of Novartis, who went to PN.
There is increasing, nagging concern within the industry that there still are not enough great people to go around, at every level. Grousing about poaching methods is pervasive.
Agencies are investing a lot in differentiating themselves to prospective employees. Flexibility in the work environment is back as agencies may be willing to make accommodations for some people to work from home, or at child-friendly hours. The perks are nowhere near the dot-com level, but the fact that the quality-of-life attractions of a particular agency is mentioned at all is a strong signal that the pendulum is starting to swing back, if only to woo the really proven talent.
Heyman says some agencies may be flaunting their inflated pay packages to entice stars, but that employees are looking closely at prospective firms. "I still believe the companies that have the most well-defined, confident cultures are the ones that end up, long term, being most successful," says Heyman. "That being said, they can't be asleep, they have to stay competitive on compensation and growth opportunities."
New leadership came into Euro RSCG Magnet, following the merger of Magnet Communications with Euro RSCG Middleberg. Aaron Kwittken, from the Middleberg side, replaced David Kratz as CEO. Kwittken claims there have been "very [few] transition" issues for him. "It was somewhat seamless," he says. Kwittken is focusing on positioning the firm as a "challenger agency."
"It revolves around the need to be idea based, not discipline based," he says.
In other senior-level shuffles, Jim Allman was promoted to CEO of DeVries PR, with Madeline DeVries becoming chairman.
Of course, the most high-profile hire of 2004 was Tom Nides, who was named CEO at Burson-Marsteller, following the retirement of Chris Komisarjevsky. Not only new to Burson, Nides is new to the business of public relations. He joined from Credit Suisse First Boston, and has emerged from immersion training in the industry with a focus on balancing the firm's long tradition of thought leadership, particularly in the area of CEO communications, with its need to promote brand marketing capabilities and the aggressive pursuit of new business.
Nides launched himself into the agency, as one of the firm's leaders put it, "from the mailroom up," first meeting with the agency's administrative staff, and progressing up through the ranks to his leadership team. According to the source, Nides has been successful at winning consensus for new initiatives.
A recent meeting with Burson leadership was interesting for its atmosphere of energetic camaraderie, a team spirit among people who have worked together for a long time, but are now creating a new set of expectations for each other, and their CEO.
Nides says he is motivated by the opportunity to leverage the holding company network to win and grow accounts. His name is not on the door, but he is increasingly tapping a critical resource who does have that privilege, founder and chairman Harold Burson.
Without revenue figures, it is impossible to know how Burson is truly performing, but
Nides says 2004 was an improvement over 2003. But Nides admits the US business has outpaced its overseas operations, particularly Europe. The rest of 2005 will test Nides' goals, vision, and reputation.
What's coming next
In many ways, agencies have never been better positioned, or structured, to offer clients excellent service and counsel. Nevertheless, some in the agency world believe that many in the PR industry have been late to recognize and harness the new media landscape for clients, while also protecting them against its pitfalls.
On the positive side, there are more channels to reach consumers than ever, though many are off the path of mainstream media. Blogs, tagging, wikis, podcasting, and RSS feeds are becoming part of the vernacular, and the tool kit for agencies. The risks are as frightening as the rewards are enticing, as information and misinformation about companies can bubble up through the blogging community and threaten an organization's reputation almost before they even recognize a problem exists.
A smaller firm, CooperKatz, has already taken the lead in this area, particularly through its blogging VP Steve Rubel, who is frequently tapped by mainstream media as an expert on the subject. "The whole definition of earned media has changed," says Rubel. "The overarching trend is that consumers have a voice and the tools to spread that voice. This has to be taken seriously by every organization and their agencies. It's also a tremendous opportunity. But for the first time in perhaps the history of our profession, the term public relations will really mean relating with the public."
Of course, the big firms are mounting strategies to promote and defend clients in this environment. Edelman recently released a white paper on the impact of blogs, and Ketchum plans to make the full media relations picture a key strategic focus this year. WS has launched products incorporating RSS technology. But the smaller firms may have the edge on this topic, until the big firms once again catch up.
The themes of specialization and differentiation are affecting every aspect of the large agency landscape, from hiring to new products. The nagging doubt running underneath this trend is the fear that while accounts have grown larger, and agencies are returning to their pre-downturn levels, the market for PR services still needs to grow. Perhaps some have expected bigger returns as the so called "end of the 30-second spot" has been repeated so often.
In fact, there are challenges ahead. Ketchum and Fleishman-Hillard have faced high-profile problems that have made PR something of a mainstream media punch line. The health of the US economy is relatively tenuous. And while the power of PR is recognized more and more throughout client organizations, it is still not attracting the same kind of investment as its other marketing disciplines. "We've got to grow the market," says Richard Edelman. "Not just take business away from each other."