Holding Companies at a Crossroad

What is a holding company? A financial owner of weakening portfolio companies -- or an operating company with declining financial performance? What problems need to be fixed? Where?

Credit: Edward Koren, The New Yorker, The Cartoon Bank

The merger of Omnicom and IPG, and the appointment of McKinsey at WPP to “advise on a strategic review” for Cindy Rose, WPP’s new CEO, raise some interesting questions about the “business definition” of a holding company.

Omnicom. After the merger, what will Omnicom become? A very large financial holding company, owning (and fixing) a significantly larger number of autonomous business units? Or, alternatively, will it strive to become a Publicis-like “power of one” operating company, where the agencies simply provide the resources for a centralized company, driven from the top?

WPP and McKinsey. And what about WPP, which will redefine itself with McKinsey’s help? McKinsey’s reputation and experience are based, to a very large extent, on helping centralized corporate centers redefine their structures and roles. This goes back to the days when corporations were functionally organized into “manufacturing and sales.” McKinsey was the only game in town, a “reorganization expert” that created “strategic business units” (SBUs) that had their own income statements and strategies but were overseen by corporate centers.

GE was a prime example in the McKinsey playbook. McKinsey helped GE develop its portfolio-management approach, and the GE corporate center became one of McKinsey’s major references.

McKinsey defined the role of the corporate center, ensuring the centre added parenting value rather than bureaucracy. McKinsey’s 2012 article “The power of an independent corporate center” argued that many centers get bogged down in costs and bureaucracy rather than organizing to add value.

BCG and Bain, which were founded after McKinsey had already established its corporate reorganization reputation, stayed away from this type of practice, deciding to focus on corporate and business strategies.

My bet is that Omnicom and WPP will each move in the direction of becoming, like Publicis, more centralized operating companies. This is unfortunate. Very unfortunate.

The real holding company problems are in the business units, particularly in the media and creative agencies. They are underpaid, understaffed, juniorized, threatened by AI and delivering work that does not help clients grow. They are the source of all revenue, and revenue is under threat. Their talent bases have been weakened by decades of downsizings. Their remuneration systems, based on man-hours, are in shambles.

Who’s going to fix the agencies while the C-Suite executives are arguing about “the role of the center,” reviewing PowerPoint slides and wondering if any of them have a future in the new corporate structure?

Agencies’ main performance problem is the gap between fees and scope workloads. It’s unconscionable that agencies, who generate a lot of stuff, do not measure the stuff, staff the stuff appropriately and charge for the stuff. Their scopes of work are too large, with too many unnecessary and unproductive deliverables.

Only if agencies know what’s in the scopes are they in a position to do something about them, including revising their scopes so that they deliver brand growth for clients rather than delivering low-cost and low-effectiveness work.

Holding Company History. Martin Sorrell defined the holding company strategy and structure.

During his negotiations for the acquisition of JWT in 1987, WPP’s offer letter promised that JWT would continue as an “autonomous unit” under the same name within WPP – a written, explicit assurance of non-interference in operations at the agency level. Later, In 1989, Sorrell secured Ogilvy’s agreement by convincing Kenneth Roman and the Ogilvy board that he would let Ogilvy “maintain its independence” and by giving “very significant assurances” about the agency’s autonomy and continuity.

He later required the agencies to improve their profitability through downsizings, but after a decade of working with them, he shifted direction and began to lay the groundwork for WPP to become an operating company, subordinating the agencies as brands.

• “The people running the agencies were more aligned to their brands than to the holding company,” he wrote in Chapter 4 of Madison Avenue Manslaughter, my 2019 book.

• “I had to bring about a change in this alignment if we were to achieve something important. The brand CEOs were dead set against co-operating with one another.

• “This is understandable. Many of them had spent 20 years of their life at their agency brands, and they viewed the other agencies as deadly competitors and the WPP centre as an interfering presence.

• “My thinking was ‘it has to be WPP, one united company,’ so we can operate efficiently and competitively on behalf of our clients. We had to become one company, like a McKinsey or a Goldman Sachs. The uncertainty about ‘what do we do to create one company,’ and ‘what is an appropriate pace of change’ consumed much of my thinking.”

Holding company relationships became the new game for all of the holding companies, and when Mark Read became CEO of WPP in 2018, he began merging the WPP agencies. JWT, Wunderman, Y&R, VML, AKQA, Grey and Ogilvy all saw fundamental changes in their structures and management reporting lines.

Likely Outcomes

Omnicom / IPG have promised $750 million in cost reductions, with IPG throwing in another $250 million before the deal closes. IPG’s media agencies have been consolidated under IPG Media. Omnicom created Omnicom Advertising Group under Troy Ruhanan, overseeing DDB, BBDO and TBWA, with rumors suggesting that DDB will largely disappear as a brand.

At WPP, McKinsey, more expert in reconstructing corporate centers than having the expertise to fix agency operations, will “simplify” and “restructure” WPP’s center and make it more active, treating WPP as an operating company.

Their recommendations will be sensible, no doubt, but if the desperate economic situation of the media and creative agencies is not fixed, it might be all for nought.

If the agencies are not fixed so that they can generate profitable income and deliver effective work, who cares how the WPP center is organized?

We’ll wait and see, friends, wait and see.

We won’t have to wait too long to know the outcome.