In business, the cycle is almost always the same. Over time, profitable companies with focused business models diversify themselves into unprofitability and irrelevance. History should be a better teacher here, because the results are predictable: companies that attempt to assemble too many products and services under one roof always reach a point where they realize they must shed their excess baggage and refocus on fewer things, usually accompanied by a press lease about how "we're returning to our roots."
The advertising agency business has followed this cycle. Up until the late 1980's ad agencies were in convergence mode, typified by Young & Rubicam's "The Whole Egg" concept – the idea that you could find every possible service under one roof.
Then holding companies entered the scene and began unbundling agency functions and agency brands. Agencies like Y&R, Ogilvy and JWT lost their media departments when their new parent company, WPP, created Mindshare and MediaCom. The 1990's and early 2000's were periods of disaggregation in the advertising world. True, a handful of very large holding companies (such as WPP, Omnicom, IPG, and Havas) went on a buying spree and gained controlling interest in almost 85 of all the world's advertising activities. Within those holding companies a broad variety of specialist agencies blossomed: advertising creative, media, digital, PR, design, experiential marketing, direct, CRM, strategy, etc.
A federation of agencies, not an AOR
Today, according to the Association of National Advertisers, the result is that Fortune 500 companies employ an average of 17 agencies. Unlike in the 1960s, there is really no such thing as a classic AOR (Agency of Record) relationship; one firm that does it all. Deutsch CMO Michael Goldberg recently observed, "There's a reluctance to say the term 'AOR' because clients want to have something like an open-marriage relationship." In the same Advertising Age article, author Rupal Parekh points out, "The days when agencies could expect multiple $100 million-plus, agency-of-record accounts to go up for grabs each year are now barely visible in the rear-view mirror."
Enter the new players
Against this backdrop, a completely new set of competitors has entered the scene. Media companies like Viacom, NBCUniversal, Meredith, and Conde Nast are establishing their own agencies in order to provide creative services to their clients. Google, Foursquare, and Facebook all have agency-like units who often have direct relationships with marketers. Production companies like Radical Media and B Reel are no longer just producing someone else's concepts; they're squarely in the business of developing concepts and creating their own branded content, from television programs to websites to mobile apps. Even consultancies like Accenture now have agency operations as well.
The entire agency universe is blurring, as a new form of convergence is taking hold. PR firms like Edelman and Golin Harris describe themselves not as "public relations" firms, but as communications and marketing problem solvers. Most of the big PR firms now handle some paid advertising business as well. Agencies with a digital heritage like RG/A, Razorfish, and SapientNitro are competing neck-to-neck with more traditional agencies for accounts and assignments. The traditional agencies are morphing in the opposite direction, trying to cash in on the surge in digital spending and new realities of the digital marketplace.
The best of everything?
But of course the problem is that marketers don't hire an agency because it can do everything, but because it can do something. No agency can be excellent in all forms of all media. Further, today's marketers aren't looking for a single source relationship, but rather a federation of partners who deliver best-in-class capabilities in specific areas. By definition, no organization can be best-in-class in everything.
The urge to try to do everything is both understandable and predictable. It's the same knee-jerk reaction that leads most companies down "the long road to unfocus," a phrase coined by Al Ries, co-author of the seminal work Positioning: The Battle for Your Mind. But just because a client has a need doesn't mean you should be the one to fulfill it. Remember that the essence of strategy is deciding what not to do. Choosing to do "everything" is not a strategy; it's the absence of a strategy.
This article has been written and reprinted with the permission of Thought Legion (www.ThoughtLegion.com). Tim is founder of Ignition Consulting Group (www.IgnitionGroup.com), which helps agencies focus their business model and optimize their value.