By Marsha Appel, SVP, 4A’s Research, [email protected].
Although the term “in-housing” is relatively new, the concept of marketers bringing the advertising function in-house is not. It will serve us well to gain some perspective on this cyclical phenomenon.
Before there were advertising agencies, there were people employed by media, primarily newspapers, to create ads for companies as encouragement for them to advertising in their publications. Advertising agencies arose to fill a need for independent services, unaffiliated with media properties, to represent client companies by creating and placing ads for them.
As long ago as the 1930s, there was substantial ink expended on the benefits and drawbacks of companies taking ad functions in-house. Advertisers have always found the idea of “house agencies” enticing, particularly because of the (often erroneous) presumption that they would save money. The same pro and con arguments have been invoked for about a hundred years now.
Pro in-house resources:
- Cost. Saving money and cutting costs. Eliminate the media commission, agency markups, agency profit margin. Reduce operating costs. Functions like video production, internal communications, and collateral development are easily handled in-house. “It’s all about costs,” said Bill Duggan, EVP, ANA, in 2009.
- Control and improved efficiencies. Control the brand message and maximize brand assets on a limited budget. Dedicated team of employees. Flexibility in assigning talent and resources. Course correction is easier with internal team under clear chain of command.
- Convenience of having ad talent onsite, speedy response time, and facilitated communications. Employees speak the same corporate language. Easier cross-department collaboration.
- Institutional knowledge. In-house teams have a deep understanding of brand, culture, product, and internal processes.
Pro external advertising agencies:
- Cost. Yes, cost. Building an in-house resource from scratch has steep overhead costs that are easily underestimated, resulting in a false economy. An advertiser must invest just as much as an external agency in fixed costs: people, office space, furniture, equipment, syndicated media research, and employee costs and benefits–all expenses that agencies can allocate over multiple clients. Saving the agency’s profit is not as large a savings as it sounds. An article in Printers’ Ink from June 16, 1927 explains why two large advertisers with in-house teams had reversed course and hired agencies, “Our guess is that in spite of the fact that they received the agent’s commission, it was costing them more than the amount of the commission to handle the business.”
- Talent. Top creative talent craves variety. Advertising attracts competitive, ambitious, entrepreneurial people who are creative problem solvers. They thrive in the highly charged atmosphere of an external agency, not in the relative safety and security of a house agency.
- Objectivity and an external point of view. An outsider’s perspective can prevent a company from becoming too insular. Agencies look at products and services from the consumer’s point of view, not the advertiser’s. And agencies know how to say no to a client, which may be more difficult for an employee to do. “One of the greatest contributions the agency can make to its client is the independence and objectivity of its recommendations,” said Victor Bloede, Chairman, Benton & Bowles, in the 4A’s publication, The Full-Service Advertising Agency,1983.
- Creativity and innovation. Creativity, fresh thinking, and innovation are agencies’ core competencies. Client expertise focuses on developing and producing products and services. Marketers can benefit from external expertise instead of trying to become a jack of all trades.
- Experience. Agencies solve many different kinds of problems for many different types of advertisers. Collective agency wisdom can be invaluable to a client.
Role of the Media Commission in Suppressing House Agencies
The media practice of the time was granting a 15% commission to advertising agencies—and only external agencies—placing ads on behalf of their clients. That 15% commission was the agency’s primary source of income. The client paid 100% of the media cost to the agency; the agency kept 15% and passed along 85% to the media property. The rationale was that agencies played a valuable role in promoting use of media. Media companies could vet a finite number of agencies and thereafter extend credit to them with little risk. This was vastly preferable to checking the financials of potentially thousands of individual advertisers.
Some advertisers thought they’d keep the 15% by creating and placing the ads themselves, bringing those functions in-house. The Lydia Pinkham patent medicine company unsuccessfully undertook a series of subterfuges to have what was clearly its house agency qualify for the media commission. Union Carbide asked for agency status and then retracted the request. General Electric didn’t even pretend its ad department was an agency; it simply demanded a discount as a direct buyer that should benefit from the lowest rates available. They were all stymied in their goal because media denied them the commission, granting it only to recognized independent advertising agencies.
In response to these and other attempts to circumvent the system, the American Newspaper Publishers Association, Associated Business Papers, and other media associations required companies to file an application for recognition as an agency in order to receive the commission. McGraw-Hill Publishing announced its own rules in 1932. In addition to requiring financial information to satisfy their credit requirements and an assurance that the agency would not rebate the commission to its clients, they also included the following:
- We require that the agency shall be independent and in a position properly to serve its clients and our company without bias.
- We require that the agency must be free from ownership, either direct or indirect, by either client or publisher.
These steps effectively quashed any large scale movement to house agencies for decades. In a March 1953 article in Advertising Agency magazine, respected agency consultant Kenneth Groesbeck remarked, “A house agency, of which there are only a few, is really the advertising department of the client masquerading as an advertising agency so it can buy space and time at the discount rates given bona fide agencies.”
Impact of the 1956 Consent Decree
In 1956, a federal restraint of trade challenge resulted in a consent decree signed by the American Association of Advertising Agencies (4A’s) and five media associations. The document barred media from denying the commission to any agency, and enjoined the 4A’s from endorsing that practice.
While it seems that this might have been a trigger for a torrent of house agencies, a Printers’ Ink article from June 24, 1960 stated that less than 2% of U.S. advertisers had house agencies. However, the article went on to say that there was more than mild interest in them among other 98%. That year, advertisers with house agencies included Sunbeam Bread, Sterling Drug, Wrigley, Warner-Lambert, and American Home Products.
Remington Rand had disbanded its house agency in 1956, saying “We wanted the counsel, background and experience that only a traditional agency can give. You get more ideas from people working on a variety of products in a traditional agency.”
Advertising Age commented in its September 5,1966 issue that “there has been a net trend away from house agencies during the decade since an anti-trust decree made ‘house agencies’ not only legal but respectable. And there is mighty slender evidence to indicate that the trend is currently being reversed…it seems mighty far-fetched to see a resurgence of house agencies on the horizon.”
The Seesaw of the Late 20th Century
The decades of the ‘60s through the ‘90s were characterized by a constant shifting of major advertisers to and from house agencies. A few examples of prominent advertisers follow.
- In 1970 alone, Alberto-Culver, Pillsbury, Bristol-Myers, and Pfizer set up house agencies.
- Lever Brothers went in-house in 1976; back to agencies in 1982.
- Best Buy went in-house about 1997 and back to a creative agency in 2007.
Going to external agencies:
- Warner-Lambert’s 40-year-old house agency closed in 1963 because a house agency “was out of date in the fast-growing and highly competitive marketing of the 1960s.” (Ad Age, 5/27/63)
- Richardson-Merrell closed the house agency that handled $8 million a year in Vick advertising in 1966. “We see the need for concentration of creative people in numbers and in a variety of talents which a company agency cannot provide.” (WSJ, 7/19/66)
- In 1970, these companies reversed course by shuttering their in-house operations and returning to agencies: Schenley, Shulton, Firestone, and Sunbeam.
- The John F. Murray house agency of American Home Products had been around since the 1930s and was closed in 1982.
Acquiring and selling house agencies:
- Quaker Oats sold its house agency, AdCom, which was founded in 1970, to Backer & Spielvogel in 1985.
- Revlon acquired the Tarlow agency in 1989 to function as its house agency, but then moved the Revlon account to outside agencies in 2000.
4A’s “Movement of Advertising Accounts” Studies
The 4A’s was prompted to undertake a series of surveys to ascertain the true extent of the impact of in-house agencies on independent advertising agencies, as press coverage increased.
In 13 of the 16 4A’s “Movement of Accounts” studies conducted between 1975 and 1990, a higher dollar volume of accounts moved from in-house to agencies than the reverse. Only in 1975, 1982, and 1989 did the shift favor the movement to in-house. But it’s worth noting that in each of those three years, the loss was one hundredth of one percent of total billings of 4A’s members—hardly an exodus.
Starting in 1976, 4A’s also surveyed its members about “fragmentation or partial service,” whereby a function such as media buying, public relations, or creative for broadcast or print media was assigned to or removed from a 4A’s agency. Cumulative data show that the movement of partial services followed the same pattern as that of the total advertising function, but with one glaring exception. There was a distinct trend toward moving all or part of the media function in-house or to a media buying service. This was a harbinger of the broader phenomenon of media unbundling, which then led to the rise of media agencies in the 1990s.
Media was the costliest part of the budget, and was also at the fulcrum of the 15% commission system that so irritated advertisers. That made it a particularly attractive candidate for advertisers to separate from the creative account.
That is why so much of the “fragmentation or partial service” action from the late 1980s into the 2000s was of media accounts:
- Pfizer formed an in-house buying service in 1970 and closed it in 1992.
- R.J. Reynolds opened an in-house media operation in 1976 “for faster turnaround”.
- Seagram shifted $55 million in media planning and buying to its new House of Seagram Media to save money in 1985, and shifted it back to agencies in 1990
- Anheuser-Busch simply hired the 23 people staffing the TV buying unit dedicated to their account at agency DMB&B to establish Busch Media Group in 1985, after deciding “not to pay for the cow when the milk was free.” (Ad Age, 12/25/85). All media buying and planning functions followed in 1991. Decades later, in a stunning reversal, A-B outsourced $1B in media buying in 2014 and shuttered the in-house operation.
2008 to Today
Things simmered along relatively quietly in the early 2000s, until the 2008 recession, when adverse economic conditions necessitated a careful reevaluation of marketing costs and led to renewed interest in house agencies.
The Association of National Advertisers conducted its first in-depth survey on in-house agencies in 2008, and reported that 42% of marketers had some form of in-house agency. In 2013, that figure was 58%, and in 2018, ANA reported that 78% of their members now have in-house agencies.
In 2008, ANA found the most common responsibilities of in-house agencies included:
- Direct mail and collateral
- Internal communications and company videos
- Brand identity activities
Since then, the rise of digital, technology, and social media have all contributed to the growth of in-house services. Newer disciplines often cited by marketers as being handled in-house in the 2010s are:
- “Biddable media” (paid search, programmatic, and paid social)
- Content creation
- Social media
- Influencer marketing
Some advertisers setting up house agencies or bringing more functions in-house in recent years are T-Mobile, Duracell, Lego, Nestle, Pernod Ricard, Chobani, Allstate, and PetSmart.
At the same time, Lenovo and Under Armour abandoned in-house teams for agencies, Burger King eschewed in-housing entirely, Reebok has some in-house teams but relies on external agencies for its big global campaigns, and Intel’s Agency Inside (established in 2004) was effectively closed in 2018.
House agencies have taken on a few new manifestations this time around. For example:
- Some advertisers have succeeded in recruiting top agency creatives to build their internal creative capabilities (e.g., Andrew Keller at Facebook, Lars Bastholm at Google, and both Tor Myhren and Nick Law at Apple).
- Also new this time are hybrid models incorporating in-house and external agencies (Anheuser-Busch’s Draftline handles digital and social, but still works with 50 external agencies; Verizon’s 140 in-house operation leads the brand tone and narrative within the general agency ecosystem; AT&T relies on external agencies for marketing strategies and ad campaigns, while its in-house group markets to existing customers).
Since we are still sitting in the midst of this latest era of house agencies, we don’t know when the current incarnation will recede. But even as Procter & Gamble and Unilever invest more in internal resources, the World Federation of Advertisers cautions the industry to reject what they dubbed the “hysteria surrounding the marketing in-housing trend” in June 2019.
A few bright omens for the future of agency-client relations:
- Almost half of CMOs (41%) anticipate an increase in the work they do with agency partners, with only 6% expecting to do less in the future, according to Dentsu Aegis’ annual CMO Study.
- According to Gartner’s Annual CMO Spend Survey 2019-2020, agency investments command almost a quarter of total marketing budgets, indicating that the flight to in-housing marketing capabilities is overstated. They went on to say that “the trend toward in-housing impacts the volume–rather than the value—of work that’s outsourced, reflecting the changing scope of many agencies. Lower margins and commoditized services [of agencies] have given way to higher-margin, longer-term strategic engagements, such as digital transformation, strategy or technology projects.”
- A World Federation of Advertisers 2019 study found that the only area where advertisers would in-house rather than outsource was low-cost, fast creative executions.
- WARC reported that brands still rely on external agencies for big brand ideas and their Marketer’s Toolkit 2019 survey revealed that globally, the creation of in-house agencies is a relatively low priority of advertisers (named by only 15%), behind issues like culture, automation, and e-commerce.
- Ironically, given the media unbundling rush of the 1990s, media buying is less likely to be appealing as an in-house function to many marketers. Aside from the cost of talent, the investment in ad-serving technologies required to make in-house programmatic cost-effective can erase potential savings for smaller companies, and clients often find they can benefit from the media price negotiating clout of outside agencies. The WFA expects agencies to benefit from the 80% of 2019 survey respondents expecting to ‘somewhat’ or ‘significantly’ increase spending on traditional media buying.
- ANA’s 2018 survey indicated that about one-quarter of house agencies handle programmatic media buying. A 2018 Digiday study of marketers reported that for each of the functions of programmatic media buying, creative strategy, and search, about one-third of respondents said they were planning to bring those in-house in the near future. And yet, programmatic was the most outsourced function, according to 43% of the 120 CMOs responding to a 2018 worldwide survey by marketing consultancy NewBase.
- For in-housed functions other than search and programmatic, about half of marketers still continue to rely on outside agencies for assistance with those activities, a 2019 Digiday survey reported.
- Agencies can fill in the gaps, supplementing or replacing advertisers’ internal operations as needed. Some agencies have been created or reinvented themselves to assist marketers with their in-house efforts, such as Oliver, MightyHive, Filter, Inside Ideas Group, and Beeswax.
It remains to be seen if in-housing takes root permanently or instead takes its place among so many cyclical phenomena, but it is unlikely that things will swing back completely to how they once were. Regardless, this does not represent the death knell for agencies. They’ve been here before and survived; they will survive this and live to see the next bout of in-housing activity, although perhaps with different nomenclature.