Arun Sudhaman 08 Nov 2013 // 4:46PM GMT
As Next 15’s results starkly revealed, it has not exactly been a year to remember for the holding group’s second-biggest business, Bite.
One year ago, Next 15 revealed employee fraud at Bite North America, which has since cost the agency more than £2m. This week, meanwhile, brings news of another £2m charge, thanks to a Bite acquisition in Germany that now has zero value.
The symmetry in those ill-fated events is as much a function of the financial calendar as anything else. Regardless, they serve to bookend a 12-month stretch that has, as Next 15 CEO Tim Dyson candidly admitted, seen Bite “lose its way.”
Bite’s financial woes, taken in conjunction with Waggener Edstrom’s layoffs, might suggest a pall over an industry that appears to have fought its way back on track after the traumas of the global recession. They should not. Each situation is unique, rather than a sign of wider industry malaise.
2013 global growth is expected to, at least, match last year’s eight percent. From my conversations with agency heads around the world, furthermore, it appears that ‘visibility’ — that most elusive of commodities — has finally cleared, giving people a much more encouraging idea of how 2014 will play out.
Meanwhile, Wag-Ed has suffered from cutbacks in its flagship Microsoft account. For Bite, financial issues have been compounded by personnel moves. To lose founding CEO Clive Armitage, who had steered the agency’s expansion for 18 years, was always going to be difficult, but became more so for two specific reasons. Firstly, the aforementioned employee fraud, and, secondly, the short-lived tenure of his successor as global CEO, Andy Cunningham.
Which means that, in interim CEO Dyson, Bite is now on its third chief in less than 12 months, a scenario that rarely spells success in an industry where strong, stable management is so important. Thankfully, Bite has exactly that in both EMEA and Asia-Pacific, although the former region continues to digest its merger with digital agency Bourne — a sound move that will still, as most mergers do, cause substantial short-term pain.
It may also be worth asking whether Next 15’s strategy of holding multiple small firms within a relatively small holding group has served to dilute talent across the different businesses.
Regardless, Bite’s strategy in recent years has rarely appeared anything other than sensible. Like any smart PR firm, it is aiming to redesign its offering in line with emerging demands, by becoming more digital and less archaic. The grand plan, however, has been marred by the “process and control” issues, which have seen Next 15 part with two CFOs this year: Bite’s Hamish Macphail and group finance head David Dewhurst.
In doing so, it has shone a light on a segment of the industry that rarely attracts as much attention as it probably should. Next 15’s own due diligence failings will rightly attract scrutiny, but it is worth noting that the PR industry is, frankly, awash with agencies that are run along fairly ‘relaxed’ financial lines. This is an industry that sees a strong entrepreneurial benefit from low barriers to entry and a focus on people as primary business assets.
For those reasons, it has a very long tail; of the world’s 250-largest PR firms, more than half bill $10m or less. Many PR firms, moreover, are started as quasi-lifestyle businesses by talented PR executives who are weary of the big agency treadmill. Typically, financial governance is not top of their to-do list. Instead, they focus the business on what they do best, PR advice.
At bigger agencies, meanwhile, people do not progress into the top jobs because of their business acumen; instead, it is their fundamental ability as PR consultants and, sometimes, good managers, that is prized most. Dyson, who has bought numerous small PR firms for Next 15, knows this better than most. It is why he admitted to me that financial problems can “trip up” even the most creative, brilliant PR agency.
“We know how poorly finance functions in many of these companies are run,” says Dyson. “Very often the guy running the agency has some book-keeper somewhere. Finance functions of marketing services companies are notoriously poor. They are not run by numbers people.”
Overlooking finance is, according to another agency head I spoke to, a false economy. Better controls help the agency and its clients, rather than constituting a drag on earnings. It is no coincidence perhaps, that the big four holding groups are run by “numbers people” rather than agency consultants. And while Dyson is right to bemoan financial controls at smaller firms, he also acknowledged that, whatever the accounting issues at Bite's German acquisition, this was as much a failure in Next 15’s due diligence.
Next 15 is not the first group to be tripped up by a flawed acquisition and it will not be the last. But, it is unlikely that the group’s shareholders will take an especially charitable view of events. For all of Bite’s strong fundamentals, including a solid transition strategy, some excellent people and encouraging new management in North America, the past 12 months have not been kind ones to the agency. The hope is that the group’s next annual results announcement, in another 12 months time, will bring happier news.