According to a 2017 Wall Street Journal (WSJ) article, “The End of Employees,” outsourcing has become a leading and long-term driver of productivity and growth for large corporations over the past two decades. In fact, the article says, some companies are seeing productivity improvements of up to 23 percent per employee thanks to strategic outsourcing.
The WSJ article notes that between 3 percent and 14 percent of the US workforce is estimated to work in outsourced roles. Moreover, “At large firms, 20 percent to 50 percent of the total workforce often is outsourced, according to staffing executives. Bank of America Corp., Verizon Communications Inc., Procter & Gamble Co., and FedEx Corp. have thousands of contractors each.” WSJ quotes SAP Fieldglass Head of Strategy and Customer Operations Arun Srinivasan as saying that “outside workers sometimes outnumber employees by at least two to one” in fields like oil, gas, and pharmaceuticals.
In my experience, large ad agencies have been uniquely resistant to the outsourcing trend, particularly in their cash-cow media buying divisions, even when their creative and public relations agencies have embraced outsourcing wholeheartedly. What gives?
Why Media Buying Agencies Are Bucking the Outsourcing Trend
Given that the industry is plagued by flat and declining revenues, margin compression, a longstanding talent gap, and a growing trust problem with clients, it seems surprising that more holding companies — including WPP, Omnicom, IPG, and Publicis Groupe — haven’t followed the lead of other industries to seize the cost, risk, and scale advantages of outsourcing.
Holding companies are premised on economies of scale, aggregating dozens — or in the case of WPP, more than 150 — individual agencies together to pool buying power, centralize operations, and jointly pitch large opportunities. But the pioneer of the holding company model, former WPP CEO and current S4 Capital Chairman Martin Sorrel, now describes the outlook for the conglomerates as “catastrophic” due to their inability to change and their excessive focus on traditional media.
Why are holding companies struggling? For one thing, with dozens of independently operated businesses acting together, coordinating change can be a nightmare. One holding company COO told me, “There are some of us who get it, and we are championing change. But there are so many individual entities and conflicting incentives that the politics are insane.”
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For a giant like WPP, the pace of growth can present its own challenges. When a company is reaching more than 50 acquisitions in a single year, the sheer volume of real estate under management can become a problem. In his inaugural earnings call, WPP CEO Mark Read listed consolidation of real estate holdings as a top candidate for increasing financial efficiency for the company.
However, competing priorities and operational complexity are not the only things that limit the holding company model. One media agency CEO told me, “If I don’t own a capability, I don’t feel like I can pitch it. It’s not differentiated enough.” Outside of the media buying discipline — even within a single holding company — this mindset is not as common. In fact, PR and creative agencies often already rely on broad talent networks.
“I was surprised at what I saw when I came over to media from creative,” said one industry C-suite executive. “I didn’t realize there was such a big gap in the use of outside talent.”
Publicis, which recently preannounced an earnings miss, is widely known for an internal offshore capability. In 2018, it also announced an AI-based platform, Marcel, to better manage internal resources, but the company has been relatively quiet about its impact to date.
With competitors elbowing in on the advertising market, the time is right for holding companies to look at new talent options. One recent entrant into the advertising market, consulting giant Accenture, is famous itself as an outsourcer and well known for its people and process management skills. Accenture is now competing directly with agencies for brand budgets. In parallel, a new crop of “in-housing” agencies like MightyHive and Oliver are helping brands fire their existing agencies and bring all or part of the media buying life cycle inside their four walls.
With pressure mounting on all sides, it’s never been a better time for agencies to take a fresh look at their talent models. Outsourcing presents an opportunity for agencies to increase focus on and dedication to their most important, high-skilled, billable resources; limit risk due to fluctuations in business; and lower overall execution costs.
The question is, will agencies finally take advantage of the opportunities presented by outsourcing?
Brian Dolan is CEO and founder of WorkReduce.