The sudden demise of a lauded agency has the advertising industry on the defensive

The news that independent ad agency Barton F. Graf is shutting down highlights the growing struggles facing independent agencies and the ad business at large.

Digital platforms Google and Facebook dominate ad spending and clients are demanding more data and project-based work.

Some insiders say that independent agencies have an opportunity as the holding company model is called into question.

However, agencies admit they need to do better at proving their value.

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This week, New York-based agency Barton F. Graf announced that would close at the end of the year. The independent creative agency — known for its quirky and entertaining ads including Supercell's “Clash of Clans” Super Bowl ad starring Liam Neeson — blamed shifts in client contracts and spending, staff exits, and declining revenue.

The news, which was first reported by AdAge, highlights the growing struggles facing independent agencies and agencies in general.

The ad industry is going through several seismic shifts

The landscape is a far cry from what it was when founder Gerry Graf set up the agency a decade ago, when creative was still king and TV and 30-second spots ruled. That has changed considerably, with digital platforms Google and Facebook dominating digital ad spending and clients demanding more data and project-based work.

Creative agencies have struggled to grow in this environment, expanding only at the current rate of inflation in the US, said Forrester analyst Jay Pattisall. Independent shops have been especially hit, with independent agencies decreasing as a percentage of agencies from 51% in 2016 to 39% in 2018, a result of agency M&A and closures, according to Forrester's research with SoDa.

Many creative agencies have lost their core proposition as clients increasingly value business expertise, data, and C-Suite relationships, said Jack Skeels, founder and CEO of Agency Agile, an agency consulting organization.

“Shops built around selling a big idea no longer work,” he said.

More broadly, the ad industry is facing strong headwinds. The holding company model is under pressure; brands including Verizon, Marriott and Mastercard are increasingly taking their advertising in-house; direct-to-consumer brands have upended traditional advertising; and new competitors including in-housing specialists and DTC agencies and consulting firms like Deloitte and Accenture are encroaching on agencies' turf.

Read more: Brands continue to take their advertising in-house at an unprecedented rate — and it's terrible news for ad agencies

Adding to that, clients are increasingly trying to drive down agency fees and opting for project-based work over agency-of-record relationships. P&G has said that it has saved upwards of $1 billion in agency fees, and Johnson & Johnson also recently made sizeable cuts to its marketing budget.

“Obviously, procurement pressure is increasing and scopes are decreasing,” said Jason Harris, co-founder and CEO of independent agency Mechanism, pointing out that even big agencies were not immune to the shifts.“The recent mergers of iconic shops — most which no longer have the equity of their founding names — show that it can happen to any and all of us.”

The shift to project-based work has been hard for agencies of all sizes, said Pete Imwalle, EVP and chief operation officer at Los Angeles-based independent agency RPA.

“The amount of effort to win an assignment needs to be adjusted to the size of the potential win — we can't do three-to-six month, multi-round reviews with spec work for assignments that only pay the winning agency,” he said. “The math doesn't work.”

But the era of independent agencies may not yet be over

While some fear that the closing down of Barton F. Graf signals doom for other independent agencies, others remain optimistic.

As the viability of the holding company model is called into question, there's opportunity for independent agencies that are smaller and more agile, said Ted Nelson, CEO at Mechanica, an independent agency.

“[They are] independent to fully take ownership of client objectives, independent of quarterly revenue targets that force cyclical talent layoffs, independent to truly innovate on behalf of their clients, and independent to evolve along with today's always churning restless markets,” he said.

Indeed, some, including Wieden+Kennedy, Mother, and Johannes Leonardo, continue to thrive.

“Smaller agencies usually have lighter operational models, less legacy overhead, and more nimble ways of delivering content at speed, which is what larger agencies can often lack,” said Claire Telling, co-CEO of grace Blue. “They just have to set up a financial structure that allows for the company to stay afloat during potential dry spells.”

Independent shops Red Tettemer O'Connell + Partners and Stink Studios said they have done exactly that. Stink Studios has leaned on project-based work, which lets it hedge its bets by working with a variety of clients, CEO Mark Pytlik said. None of the agency's clients accounts for more than 8% of its total billings, he said.

“It's a win-win, because clients don't have to commit, and it keeps us on our toes,” said Pytlik.

RTO+P created a content creation unit called wakeandmake.studio five years ago that has helped provide a stream of work and been one of the agency's fastest-growing segments, said Steve Red, president and chief creative officer at RTO+P.

“We've embraced change by changing our business on the regular,” said Red. “We never bring boilerplate solutions, because we're not beholden to a holding company that forces it. And that more often than not, leads to long-time relationships with even our project clients.”

That said, independent agencies admit they need to do better.

“100% of the clients we serve come to us because a big agency isn't right for them,” said Ryan Kutscher, co-founder and chief creative officer of Circus Maximus.“The challenge we address is about proving value, which has propelled us into the world of data, and media and analytics.”

Independent agencies need to stop accepting outmoded fee structures and ask for performance-based payment terms as the hour-based approach is tied to the agency-of-record model that's no longer prevalent, said Stink Studio's Pytlik.