Arun Sudhaman’s recent article 'What’s eating WPP’s PR firms' raised some interesting issues regarding the relative growth rates of agencies in holdcos and independents.  These extend beyond WPP.

There are many benefits of large group-owned PR agencies but there are endemic barriers to fast growth. Some have been exacerbated by the long downturn and, yes, the impact of the changing media climate.

Size matters - big agencies have more to defend

By definition they are therefore likely to be, on balance:
- more rulebook driven, less flexible.
- less entrepreneurial/experimental; there is less reward for taking risks
- more expensive (It's true, overhead costs money)
- less liable to have a high level of creative output as a proportion of the total
- more 'generalist' with specialist talent often comparatively thinly spread and uninfluential (eg digital)
- more resistant to disruptive change and innovation (eg social media)
- less dependent on individual clients so fundamentally less client-centric
- more likely to employ people who fit the above agency profile

Clearly, these are not hard and fast rules - as Edelman shows!

Agencies within large groups are constrained

Membership has its privileges but restrictions too. Agencies usually:
- have to work within group financial guidelines regarding margins, investment, pay etc
- have top management which is by definition only middle management with relatively little ‘ownership’
- are restricted in prospecting for new business amongst group clients
- may be prevented by group rules from moving into new areas if these are already served by other group companies; PR agencies particularly can become ‘siloed’.

Public ownership means public scrutiny

Agencies in quoted holdcos have all the joys of the two factors above, plus:
- they are open to market scrutiny
- expansion/contraction is not in their control because acquisition/divestment becomes a group balance sheet issue

The ‘WPP effect’ is special

WPP made sense of the crazy ‘Wild West’ marketing services sector for investors and is now arguably the most financially organised and rule-driven (and transparent) of all holding groups; it is a financial brand whose primary duty is to their shareholders.

However, rapid right-sizing for major group agencies like B-M and H+K is problematic (ie balance sheet impact) so both, especially the latter, are stuck with large office networks and legacy employee distribution.

Also, to help improve earnings per share, there has been an employee compensation squeeze over the last decade; overall and in the ratio of fixed to discretionary reward.

There are understandable but strict non-poach rules for staff and client prospecting; the group’s massive industry and geographic footprint accentuates the impact of this.

Sir Martin himself is a key factor. He created, virtually single-handed, the 21st Century holding group model for the sector and made it 'investable'. But equally he is, famously, a micro-manager and a dominant personality — across the group he is as much feared as admired. And he has never believed in international PR, the ultimate raison d'etre of all the big networks.

The impact of recession

Big agencies downsize most and create a pool of senior ex-employees who:
- go in-house and restrict agency spend and/or conduct reviews which favour ‘arms and legs’ solutions;
- start their own ‘senior’ agencies offering lower rates.

Buyer power increases enormously. Existing large clients reduce spend but maintain service requirements, challenging network economics; but often do not change agency, locking in lower rates.

Formal procurement procedures become the norm in big pitches; cost becomes a key issue and large agencies are always perceived as more expensive.

The impact of recovery

Is it safe to come out yet? A long recession creates a mindset in agencies geared towards safety first: ‘don’t rock the boat’ etc.

Because they are generally less nimble, large holdco agencies can be slow to react and miss out on the first fruits of any upswing; this may well be happening again now.

However, while large clients’ needs can switch very quickly from risk mgt to growth, costs remain tight; so they look for new kinds of help and often conduct major agency reviews, especially while recessionary pricing can be locked 

There are many good things about networks but routinely growing faster than independents is unlikely to be one of them. For investors, this may not matter: profit, absolute numbers and predictability may count for more.

But the PR industry should not be too downcast. The good news is that there is growth overall, last year apparently six - 8.5 percent, figures which many other sectors might look at with some envy.

Declaration: I am a current WPP shareholder and a former global CMO of WPP agency Hill & Knowlton, now H+K Strategies.