September 18, 2007: In-House Creative Threatens Agencies

With companies like Hearst and NBC increasingly creating ad programs for themselves and their clients, how will it affect agencies? A panel discusses the issues.

A new advertising trend is emerging which, if it proves popular and cost-effective, could compel ad agencies to rethink their business model and methodology. Many organizations representing a wide variety of vertical markets, particularly publishers and broadcast companies, have opted to create their own in-house ad agencies. Some of these have included Conde Nast, Hearst Magazines, Meredith Corporation, NBC and Reader's Digest.

What does this trend portend to traditional agencies? Are there any strategies and tactics that need to be implemented to keep abreast of these evolving changes?

iMediaConnection asked three ad industry executives to voice their thoughts and concerns. Andreas Roell heads up San Diego, CA-based Geary Interactive, an online marketing agency. Jeffrey W. Hamill, based in New York City, is senior vice president of advertising & sales for Hearst Magazines and manages Hearst Integrated Media, the company's corporate sales arm. John Miller is chief marketing officer for NBC Universal TV Group in Los Angeles.

Here are excerpts from a recent roundtable discussion:

How long have companies been creating their own in-house ad agencies?

Roell: Publishers have always had these types of capabilities since their inception. It mostly started with the fact that some marketers (mostly smaller businesses) did not have any creative solutions available, either because their agency was not focused on a particular media placement or because they may have been too cost prohibitive. So they created in-house agency services to fulfill their specific client requests. The difference now is that some publishers have either created or bought full-service agency capabilities with the objective of taking care of clients beyond their own publisher service offerings.

Hamill: At Hearst we began doing custom marketing and creative work for our clients almost 10 years ago. We were one of the first to approach corporate advertising sales in this manner. I would say that the practice has accelerated since 2003.

Miller: We started the NBC Agency (which now has 225 employees) in the late 1990s and initially did work for MSNBC, CNBC and also created a relationship with Snap.com, which became NBC-I. Our account group also does work for Bravo, Telemundo and other digital properties.

How has this affected ad agencies' business?

Roell: There is an added piece of education and confusion that has been created. We don't mind having to compete with additional agency organizations, yet over the past few years, it has resulted in an additional layer of time that needs to be spent on educating the clients about why we work with a company for their services while they are pitching the account directly, what the value of the agency is, what they get from an agency versus a company-led agency, and how the company attempts to provide services beyond their own offerings. It is an added effort that we are facing as the rate of innovation and complexity about competitive differentiators has already increased tremendously. It is hard for clients to identify the differences from one interactive agency to the next and now we have an additional set of service providers.

Hamill: I think this is more of a reaction to changes in the ad agency business than anything else. As agencies unbundled media buying from strategy and creative there was often a disconnect between communication strategy and media. Publishers, for instance, who have great knowledge of their readerships, are in a strong position to offer insight and advice on how to communicate most effectively in their space. Agencies are now formally asking media companies to help them with strategy and tactics.

Miller: There is plenty of work for traditional agencies and I really don't see too many media companies creating in-house agencies. Every cable and TV operation has some level of in-house work; this mostly relates to on-air promotions or on-air branding because it's easier and cheaper to do this yourself and it is daily and immediate. We do 30,000 spots annually; no outside agency could handle that kind of volume. But it can be quite effective to go outside for certain types of campaigns.

Why are these companies adapting this strategy?

Roell: The early adaptors of this strategy are more visionaries than the most recent ones, who understood that direct client relationships based on strategic approaches are more long-term oriented and provide a hedge against their publisher-specific offerings. Publisher offerings, for example, are very commoditized, and in today's fragmented media, clients have numerous choices. With agency relationships, the client and agency tie goes deeper (still) and provides organizations with a long-term revenue opportunity. At the same time, agencies have the ability to steer clients in certain directions, so publishers are thinking, "Why not steer some of the media plan to our publisher group?" That is the big discussion: the objectivity behind the campaigns.

Hamill: Custom marketing projects are great business for publishers. The process of generating ideas and executing them brings you inevitably closer to your clients and provides a deeper relationship as well as solid funding.

Our strategy is to manage our business with our best advertising customers through customization and partnership marketing. To do that we are in fact operating and structured much like an internal ad agency. Senior advertising directors manage accounts with the support of a full marketing team, a research team and a creative team. A trademarked three-part collaboration process helps us work with our ad partners to maximize the effectiveness of their communications program. We also routinely bring them solution-based ideas that utilize multiple Hearst assets as well as retail promotions, event marketing, primary research and often creative. In 2007 we will do about 30 custom projects for our corporate clients that will increment sales to Hearst Magazines by about $30 million and create over 500 ad pages.

Miller: At the NBC Agency, for instance, we know the company intimately and can gear up very quickly. We also have long-term relationships in our business so it's somewhat like dealing in shorthand.

How much does it save them by not retaining an agency?

Roell: The question is not about saving money, as I have come across companies that are actually charging much more than agencies. The questions for clients include questions about the value proposition or what their needs are when choosing the proper agency relationship. Pricing is only one area to consider. Others should include the level of skills based on the marketer's needs, strategic levels required, technical resources and information, to name a few.

Hamill: I think most advertisers who are utilizing the custom marketing services of media partners still have their own agencies. They are working with the publisher in order to more effectively and efficiently communicate with the consumer. They may have some savings if we do the creative but I don't think that is a driving factor.

Miller: We're saving between $8 and 12 million each year by having our in-house group handle various projects. Many of these tend to be quick and easy projects that you would not do if you had to pay for them.

Do they lose out on creativity by not getting outside, objective opinions: companies, for instance, can become very insular.

Roell: The answer to this question is based on how companies have created their in-house agency. If they have built it from an internal standpoint, meaning it is an extension of what their services are, in our experience, we have found them to be less objective and more tunnel-focused. This may lead to a lack of creativity. However, in the most recent acquisition phase, there was a land-grab for outside agencies to make them part of the environment. In this case, you have a group that was already operating independently as an agency and unless they become too integrated with the publisher side (mostly independent), you would not foresee a loss of creativity.

Hamill: Most of these programs get looked at in the inception phases by lots of eyes. There is a great deal of discussion on creative issues. I don't think there is a creative trade-off.

Miller: It can get insular but on the whole, since we're part of the same corporate culture, we have a better understanding of the network's unique needs and requirements. And since media funnels through the NBC Agency, we get good rates since we can bundle them.

How do the ad agencies interact with these in-house ad firms, and is it somewhat awkward?

Roell: This depends on the clients' needs. In many cases, ad agencies had to work with in-house ad firms, mostly for execution on an in-house company's campaign-specific needs. So, here the ad agency was the lead on the strategic side and the in-house ad firm simply executed for a particular placement. These new forms of in-house ad agencies compete directly with outside ad agencies, so there are situations where ad agencies have to work side by side with in-house ad firms and both of them have a strategic relationship with the client. So it comes down to what is everyone's responsibility, and the most significant factor for success of a campaign relies on the client who has to steer multiple ad agencies and make sure everyone plays nice in the sandbox and provides the specific services they were hired for.

Hamill:There can be some awkward moments as competing agendas work together, but generally a client whom everyone would like to please is leading the projects. In the unbundled agency world it is not an uncommon practice.

Miller: We act as both client and agency so it's not awkward. We will go outside to vendors, boutique agencies to supplement internal creative work. But if the creative work isn't good, the savings doesn't matter. On the flip side, if we're not on message and distinctive, we'll look outside for fresh, creative thinking.

Are there any inherent advantages for publishers and other companies to utilize this concept?

Roell: The biggest advantages for them are to expand their revenue opportunity beyond just their publisher services and have the ability to tap into revenue that goes across the entire ad relationship with the client. The other portion is that it provides a publisher the ability to elevate its relationship from a tactical, publisher-specific type to a more strategic, cross-campaign type of relationship. These relationships tend to be deeper and tend to have the ability to steer a client in a certain direction, which may well be redirecting the client into the other part of their businesses, which is the original publisher-side of the business.

Hamill: I think the big advantage is putting your fate in your own hands. The thirst for accountability in marketing puts pressure on all parts of the system. By creating and executing a custom program for the client, the publisher is using its own knowledge and best strengths to produce effective results. Additionally, there is great benefit overall to becoming a closer partner with your best accounts.

Miller: Since we have multiple businesses, it makes sense for us. We don't do our own media buying but do planning. Also, when an advertiser wants to come in and embrace a show and utilize our content, we have done work for clients that a regular ad agency may not want to get fully involved with. As an example, for "Kidnapped" we created some special scenes for KFC.

How will agencies change tactics/adapt to this emerging trend?

Roell: For once, we have already seen that agencies (i.e. WPP acquiring 24/7 Real Media) are fighting back, by going right into the heart of publishers and purchasing publisher outlets or distribution channels themselves. Now they are already in the position to have a strategic relationship and are providing clients with a cost-effective proprietary advertising network. One way to combat this is by going up-stream and internalizing your own media placement or media distribution channel. The other way ad agencies are fighting back is by taking advantage of what they are good at: client relationships, strategic consulting and strategic guidance that are clearly focused on providing objective decisions.

Hamill: The agency business seems to be very cyclical in nature. If clients believe that their media partners are doing a better job of connecting with consumers I suspect that agencies will adjust and compete.

Miller: Having an in-house ad agency doesn't really challenge an established outside agency. The latter should understand the benefits since they speak the same language. As an example, we often help our outside agencies in coordinating celebrity endorsements and other tasks that they might have difficulty in completing on their own.

Neal Leavitt is president of Fallbrook, CA-based Leavitt Communications, an international marketing communications company with affiliates in Brazil, France, Germany, Hong Kong, India, and the United Kingdom.

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