The Transformation of Saatchi & Saatchi 1970-2006 (C) Navigating in a Shifting Landscape

Models for the new millennium

WPP, Omnicom and Saatchi & Saatchi’s own parent, Publicis, were all executing variants on the same generic strategy of building global scale in multiple segments of marketing services. WPP, led by its deal-making founder and still-CEO, Sir Martin Sorrell, was the arch-advocate of the globalisation strategy. Over its twenty-year existence, WPP had been busy evolving its value creation formula.

In the first phase the game had been one of squeezing margin and cash from what were traditionally poorly-run businesses. In the second phase WPP’s corporate centre had begun to operate as a fulcrum for best practice sharing, talent management and back-office services. In its latest phase, WPP was beginning to envision the ‘holding’ company as nothing less than an engine of business development and service delivery integration. The pivotal event had been WPP’s success in securing HSBC and Samsung’s global advertising and marketing business in 2004. The HSBC and Samsung appointments were unique in that, for the first time, a major global client wanted to consolidate their business exclusively within one of the major holding companies, rather than in a specific network such as an O&M, BBDO or Saatchi & Saatchi. This had led Sir Martin to muse that clients would use holding companies as ‘a portal to access sophisticated sets of resources.’ In essence, felt Sorrell, the traditional full-service agency had been reinvented as a full-service group, with access to a portfolio of specialist skills dispensed via specialist group companies, rather than as ‘second class citizen’ functions within the old full-service model¹⁹.

‘Today’, said Sorrell²⁰, ‘The new super-agencies have a big opportunity. Clients still require, first and foremost, creativity and great creative ideas. Secondly, but increasingly, they want better coordination (although it is no good coordinating a lousy idea). Finally, they want it at the lowest possible price… The middle of the road is becoming an increasingly difficult place to be, with traffic coming from both directions. Those agencies excluded from the super-agency pitches because they lack the scale and resources must be feeling uncomfortable. Our business is increasingly polarising between the very big at one end and the small at the other.’

Kevin Roberts commented on what made Saatchi & Saatchi distinctive from the super-agencies like WPP. Whereas WPP was looking to offer an integrated package of services from its member companies, Saatchi & Saatchi focused their own efforts on the creative ideas in which they excelled. As ‘idea navigators and connectors’ Saatchi & Saatchi were then willing to work with a broad range of best-in-class partners within and beyond Groupe Publicis to put outstanding ideas into practice. ‘We connect a client and a consumer with the idea,’ said Roberts, ‘We connect talent..’ Asked what enabled Saatchi & Saatchi to be so effective as the creative connectors, Roberts spoke of ‘Our brand, our Board room access, our flexibility in hiring, the way people are thrilled at the risks we take on. We have no agenda about how people connect. I am media neutral and partner neutral. I have no below-the-line stuff to sell.’

‘I spend zero time looking at the conventional competition,’ Roberts continued. ‘We are rarely pitching against Martin’s agencies. He competes in his space, I compete in mine. WPP is about being directive; it’s made in Sorrell’s image. Saatchi expresses me – it’s connective.’

In an industry shaped around global conglomerates at the top end and myriad start-ups, breakaways and niche players at the bottom, the midfield of larger but still independent companies was thinly populated. The traditional dilemma facing the maturing start-up had been to sell or float. The latter option, while popular in the 1980s, had declined in importance given the challenges of listing and the willingness of the global conglomerates to provide a more straightforward route to value realisation via the earn-out.

However not all agency principals wanted to renounce their independence for the Faustian bargain of life within a global corpocracy. In an industry that more than most lives by its dedication to its craft, independence and freedom is highly prized. Up to the 1990s, the model of the independent boutique focussed on its own local market had been both viable and attractive, evidenced by the success of agencies such as Chiat Day in Los Angeles, Crispin Porter in Miami, Fallon McElligott in Minneapolis and Abbott Mead Vickers in London. However as the client base globalised, the imperative to work with large, prestigious advertisers increasingly forced the issue of the need for a global route to market and delivery capability.

It was precisely this dilemma that was beginning to exercise the Saatchi brothers. Having left Saatchi & Saatchi in 1995 to form M&C Saatchi, by the turn of the millennium the agency had become a highly successful player in the London market, based around the cornerstone British Airways (BA) account. Spurred by its ambition – and the need to service BA worldwide – M&C Saatchi had pursued a distinctive strategy for international expansion. M&C Saatchi preferred the ‘greenfield’ approach to local market entry rather than ‘buy and build.’ Local advertising entrepreneurs were identified and offered 20% of the equity in a new local M&C Saatchi operation that they were invited to run. After three to five years, this stake could be converted into parent company shares. In order to finance this model, M&C Saatchi listed on London’s AIM exchange in 2004. The strategy had resulted in a global network that employed 750 people in 17 offices in 13 countries. However rivals claimed that the 20% equity share was too low to attract the right local talent, while M&C Saatchi’s languishing share price (see Exhibit 14) – impacted by the recent loss of the BA account – was compounding this lack of attractiveness²¹.

An alternative model to Saatchi & Saatchi had been pursued by Bartle Bogle Hegarty (BBH). The darling of the 1980s wave of London agency start-ups, BBH had refused resolutely to yield its independence and instead opted to sell 49% of the business to BCom3 (subsequently acquired by Publicis) in 1997. BBH operated from a small number of global ‘hubs’ in London, New York, Singapore, Tokyo and Sao Paolo, relying on the more extensive BCom3 network for access to smaller local markets.

The local ‘hotshop.’

Despite consolidation, the entrepreneurial impulse of the marketing services industry, combined with still-sizeable markets for locally bought services, continued to nurture a flow of start-ups and breakaways, well capable of challenging the majors around the quality of their ideas.

New agencies could be started on the basis of largely ‘sweat’ equity with a typical working capital investment of probably less than £500,000 – a number well within reach of a group of senior people working for a bigger agency and looking to break away. The unbundling of media buying in the 1980s had significantly lowered the barriers to entry because new, creatively led start-ups could instantly ‘plug in’ to the resources of a media independent with no upfront investment. The public nature of the product coupled with the shop window created by the various industry awards meant that a new ‘hotshop’ could establish a high profile inside a year or two and soon be competing with the majors for local business. ‘Hotshops’ could also be magnets for some of the best young talent. ‘We are much more likely to lose a potential star recruit to somewhere like Mother than to any conventional agency,’ Kevin Roberts observed.

Critically, hotshops were often looking to maximise their reputation, rather than short-run profit, reflecting a value creation model that looked to value on exit (usually via an earn-out deal with a major) rather than distributable earnings. As a result local markets remained highly competitive, with local players willing to discount heavily to win prestigious business. (Exhibit 15 shows examples of three hotshop competitors and sectors in the UK market.)

Many global agency principals were envious admirers of what consultancies like McKinsey had achieved over the past couple of decades, not least because some of their success had probably come at the direct expense of the agencies, who were widely believed to be operating at a lower tier in the advisory value chain than they had been in the full-service heyday. Some wondered whether this was a more meaningful and aspirational success model than those within the marketing services industry. This interest was not new: the Saatchi brothers had bought (but never integrated) the Hay Group in 1984 and WPP, Omnicom and Publicis all had niche consulting businesses under their banner.

There were a number of attractive features of the consulting firm business model, not least that it appeared to be significantly more valued by clients than traditional marketing advice and services. Whereas typical revenues per employee in global marketing services were in the range £70 - £90k, in management consulting they could range from a low of £70k at Accenture (which had a lot of low value-added outsourcing business in its P&L) to £180k - £250k in high-end strategic consulting such as McKinsey and BCG. Crucially, these other professional services businesses were operating on lower ratios of employment costs to revenue, leaving a significantly bigger value-add margin to reward shareholders or partners (Exhibit 16).

The ability of the top consultancies to realise revenues per employee of three times that of the agencies was fundamentally attributable to a pricing model that linked professional fees more closely to the value of a solution rather than the cost of providing it. Consultancies seemed a lot more attuned to their client’s bottom line and had much keener sense of how to capture the value of their impact on it. Furthermore consultancies seemed much less willing to give away advice for free (what Sir Martin Sorrell had waspishly described as ‘on pack offers’) – a positive legacy of living exclusively off fee income rather than the fat gross profits that the agency commission system used to allow. For the consultants the benefit of all this pricing gravy was that there was a much bigger pool of profit from which to reward and incentivise the principals in the business, as well as to provide a strong economic incentive for those lower down to stay the course to the top.

Some agency principals also envied the management consultants for their ability to create proprietary knowledge. This was as a result of the consultancies’ track record in capturing, codifying and proselytising their intellectual property, be it ‘content’ IP around things like industry sector expertise or ‘process’ IP around how to create and deliver client solutions. In turn, that seemed to stem from the ability to nurture distinct cultures and capabilities. In contrast to the fickle and volatile nature of the agency world and its vulnerability to the defection of key talent, the consultancies had championed a more corporatist style with an explicit emphasis on the whole firm, not just a few talented individuals. This cascaded into high and sustained investment in talent recruitment and management, a clear ‘up or out’ development track and a lot of emphasis on evangelising ‘the way we do things round here.’ For all the jokes about the ‘Accenture Androids’ and ‘the Suits from McKinsey,’ the model was proving durable. Kevin Roberts put McKinsey among the businesses he most admired.

In 2006, a senior management reshuffle (see Exhibit 17) gave Roberts the opportunity to appraise Saatchi & Saatchi’s progress to date and plot the next stage of its performance and transformation against this evolving market and competitive landscape.

To drive performance, he appointed Jim O’Mahony as CEO for EMEA, adding to his existing responsibility for LATAM and Asia. For all the indicators of further structural change in the sector, the traditional business model and the 30-second TV commercial still remained very much alive. 2005 had been Saatchi & Saatchi’s best ever year with operating margins approaching 20%. Jim’s task was to help it perform even better.

To drive transformation, Roberts appointed Richard Hytner as Deputy Chairman, Saatchi & Saatchi Worldwide and leader of the firm’s Global Strategy and Planning function. Hytner had been at Saatchi & Saatchi for three years as CEO, Saatchi & Saatchi Europe, Middle East and Africa, based in London. He had enjoyed a distinguished career in the marketing services industry before joining the agency, working both with Maurice Levy, Chairman of Groupe Publicis (as CEO of Publicis U.K.) and Sir Martin Sorrell at WPP (as CEO of The Henley Centre). In 2002, he had taken a year out to pursue London Business School’s Sloan Fellowship programme, as a result of which he had a broad worldview and a strong strategy development capability.

‘Looking to the future, the whole issue of reaching consumers is becoming very complex,’ said Bob Seelert, Chairman of Saatchi & Saatchi before its acquisition by Publicis and still a key player on Group Publicis’ main Board. ‘It’s challenging the very foundations and capabilities of the big networks. There are all kinds of things you can do in today’s world that were just never thought about, or deemed possible. It’s not evolutionary, it’s revolutionary.’

‘We as a company need to recognise that this revolution is in the here and now,’ said Seelert when asked what would be his advice to emerging leaders at Saatchi & Saatchi. “And I’m not a hundred percent sure what it takes, but I know it’s a lot of new things and new people compared to the capabilities we have in house today. My own feeling is that all of the stuff we try today probably won’t work out, but I’d like to have a lot of horses out on the track.’