Monday, June 02
We are happy at the news that Hullabaloo are the new affiliate of TBWA, because it heralds the successful culmination of our two year long search for a suitable partner for Hullabaloo. We will make a prediction; there will be other deals of this nature, both here and in other smaller markets throughout Europe. We think that this is the consequence of the history of the last 25 years, both in CEE and in the rest of the world, principally in Asia.
Remember how and why the networks agencies arrived here, mainly in 1991. They opened up their wholly owned offices here because their clients told them to. Those who had P&G or Unilever as clients were especially fortunate. Not only was there decent commission-based revenue, but those companies trained their agency people (albeit sometimes the hard way, by learning on the job). Gradually the clients realised that CEE was not the goldmine they had supposed, and cut back their own national marketing teams and budgets. It is shocking to hear that these network agency offices now derive as little as 5% of their revenue from global network clients.
Meanwhile in Asia, we know that huge markets opened up. Everyone thinks of China and India, but don't forget Indonesia. When the CEO of a network agency in Indonesia attends a global meeting, he represents a market of 250 million inhabitants, with a positive birth rate. If he is lucky enough to have a telco client, he may report that his client aims to add 20 million new customers this year, for which he has a marketing budget. Messrs Sorrell, Wren, or Levy will pay close attention to what this CEO has to say. What chance of a similar hearing for the CEO of the Czech Republic?
The problem is that these CEE agency offices still need managing. They need to meet profit targets, and have the same type of problems as their colleagues in larger European offices. But they do not deliver the same revenue. The affiliate arrangement basically frees up precious management time.
But if that all sounds a bit sad, there is another side to this story, that of the local agency that takes up the affiliation. Hullabaloo had established itself as a high quality independent creative agency; but to develop beyond the Czech market, which was always their goal, was extremely expensive and quite a hit and miss process. Imagine the costs of pitching for a Russian client, when you are based in Prague. The Hullabaloo team believe in their agency, and its concept. They were not seeking a quick route to retirement. They briefed us to find an agency that would, quite simply, make them stronger. This agreement means they can hire more good people who will help them make a bigger national and regional impact.
The affiliate arrangement in these smaller markets, when carefully selected by both parties, is likely to deliver better results for clients too. The people at the top of the affiliate agency are the owners. They have 100% interest in making their agency as competent as possible. They can make their own decisions about things like staffing - they are not subjected to a ‘global hiring freeze'. They do not have to pay fees to the network for unclear ‘services'. If they decide that a 15% margin is sufficient, they do not have Maurice Levy shouting at them to make 21%, and in the process hastening cuts to resources, which do not facilitate top quality service.
An alternative approach, which networks seem to be considering, is to merge smaller offices. But this dilutes agency brands, and makes clients question whether agency brands mean anything in these markets. We have seen the fiasco around MARK/BBDO; we have seen JWT moving in with Y&R, and there are other similar rumours. Mergers are always difficult in advertising, because they involve merging people; ambitious people with big egos. Look at the Publicis - Omnicom failure; then consider the local failure to merge BBDO and DDB. The reasons for the failures are essentially the same.
Affiliations on the other hand have a record of success in CEE. It is often forgotten, but WMC Grey is an excellent example. (This was another deal we were involved in, that time on behalf of the network agency). Affiliates also dominate the agency sector in both Romania and Bulgaria. In the case of mergers, many employees rightly fear for their jobs, and clients fail to see any positives in terms of improved services. In the case of the affiliate - provided the local partner is carefully chosen - both the network and the local owners have a shared commitment to succeed through an improved level of service to clients.
Good luck then, to Hullabaloo. We hope the local TBWA clients will give the affiliation a chance to settle down and improve services. We think it offers the best chance in this market to deliver such improvements.