Big marketers like McDonald's, HP and State Farm are changing the ad agency model as we know it

McDonald's Ronald McDonald After

The ad agency model is under increasing pressure.
Brands are increasingly demanding single, full-service, dedicated agencies.
McDonald's, HP, State Farm and most recently Mercedes-Benz are some big name brands that have gone down this path recently.
"Brands today need to engage along every step of the consumer journey, and the way the current model has been structured doesn't work," Rishad Tobaccowala, chief growth officer at Publicis, told Business Insider.

Ad agencies are facing an increasing number of outside threats to their business model. As a result, many are reaching into the past in an attempt to reinforce their relevance — while some are being forced to by their clients.

A growing number of major brands, including McDonald's, HP, State Farm and most recently Mercedes-Benz, are demanding bespoke, integrated ad agencies.

Specifically, they want creative department (those that make the ads), the strategy teams, and the media departments (the folks that buy ad space) all under one roof. And ideally, they want teams of specialist ad executives focused only on their business.

Given the state of the ad agency business, most are complying.

Having media, creative, and everything else marketers needed from an agency in one place was how things used to be in the industry. But over the past few decades, marketers started working with lots of specialist firms.

However, that's increasingly problematic in an era when marketers need to coordinate various digital channels and leverage loads of data to make decisions.

"There is an increasing recognition among both brands and agencies that media separatism is not necessarily the best idea," Brian Wieser, senior analyst at Pivotal Research, told Business Insider. "The hope was that the benefits of specialization outweigh the costs, but there is a realization that a lack of integration can produce significant inefficiencies."

Thus, rather than coordinating between a bunch of scattered agencies, big brands are asking for dedicated agencies just for them.

McDonalds wants a new kind of ad agency: one that serves only McDonald's

McDonald's arguably set the stage in 2016, when it awarded the bulk of its account to Omnicom, combining creative and media assets from agencies like Sparks & Honey, Critical Mass and other entities to eventually launch a dedicated agency called We Are Unlimited.

Since then, other big name brands including HP, State Farm and most recently Mercedes-Benz have gone down a similar path.

In fact, the trend has started gaining steam to such an extent that Omnicom CEO John Wren addressed it in his prepared remarks during the company's fourth quarter earnings call on Thursday.

Wren highlighted the network's success with clients like HP, McDonald's, State Farm and Intuit's QuickBooks, largely due to its coordinated, client-tailored approach. Omnicom has created what it deems the "Global Client Leader Group," which is comprised of client leaders responsible for overseeing Omnicom’s top global accounts and coming up with connected solutions for them.

"I want to emphasize that most of these wins are a direct result of the organizational changes and strategic investments we have made over the past couple of years at Omnicom," he said. "Simply put, our clients understand the advantages of an agency model that puts their consumers at the center and is agile across disciplines."

The old ways of marketing aren't cutting it, and neither are old ad agency models

To be sure, having dedicated agencies isn't an entirely new phenomenon — auto brands like Ford, Hyundai and Lexus have all had their own units in the form of Team Detroit (now GTB), Innocean and Team One over the years. And WPP has tried to implement the concept of "horizontality," or having different units with different competencies work together multiple times with clients such as Colgate-Palmolive and Emirates.

But the combination of fundamental changes in the way people find out about products and make buying decisions, along with the recent slow revenue growth many marketing giants are enduring, is pushing these companies to experiment.

"Brands today need to engage along every step of the consumer journey, and the way the current model has been structured doesn't work," Rishad Tobaccowala, chief growth officer at Publicis, told Business Insider. "What they need is faster speed, more holistic data and the ability to target at different points ... more than ever before."

Brands need to reduce friction. And they also need to rethink how and when they advertise to consumers in a world where products are a click away, said Wendy Clark, global president and CEO of DDB Worldwide, a global agency network within Omnicom.

We Are Unlimited, for instance, employs a proprietary insights tool called "The Cortex," which monitors trends that resonate with McDonald’s consumers, generates ideas across creative and media based on those findings and delivers work for McDonald’s at every touch point.

"The currency of today’s marketplace is speed – and in service of our clients, agencies too must operate with more speed," Clark said. "Integrated agency models make a lot of sense for an increasing number of our clients as they remove silos, lead to faster and more efficient operations, lead to a single accountability and a single P&L and stronger, more integrated, more impactful work."

Plus, in today's day and age, brands must use data effectively to drive their marketing decisions — and gathering, unpacking and utilizing that data requires seamless coordination.

"The proliferation of data and touchpoints has created complexity — more data doesn’t mean more insights, and more touchpoints don’t mean messages are heard more loudly or clearly," said Antonio Lucio, marketing chief at HP. "We need a single go-to integrated team that knows our business and can quickly turn data into insights against which emotional and compelling stories can be told across the entire customer journey."

Expect more advertisers to follow suit – albeit with risks

Such models are theoretically a win-win for both clients and agencies. They eliminate duplication, thereby cutting costs and improving profitability for clients, while agencies — with larger pieces of a business — eventually add more to their bottom lines, said Tobaccowala.

"It is getting increasingly hard to find growth on both the client side and the agency side," he said.

However, the more that ad agencies put all their eggs in one advertisers basket, the bigger the risk. If an agency dedicated to a single client suddenly loses that client, it could be turning off the lights.

Yet ultimately, this trend has legs, said experts. Among Omnicom clients, Johnson & Johnson as well as Conagra have followed in the footsteps of McDonald's and State Farm.

"All of our progressive clients who have the scale of multiple agencies are asking us about more seamless and efficient models," said Clark. "Traditional ways of operating simply can’t keep up with the mandates of today’s marketplace."

"The forces driving this change are universal to the industry, so we will certainly see more of it," agreed Lucio. "This is a period of reinvention, and we want to be at the forefront of it."

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