Do holding groups help or hinder innovation?

INNOVATION   START-UPS

Many of us probably think we know the answer but come and explore it for a bit. You may be surprised where we come out.

Most of us probably think innovation is a good thing. There are exceptions like certain poorly controlled financial derivatives, but innovation generally moves us forward to better quality products and services and higher standards of living. Professor Peter Drucker believed innovation to be so crucial that he stated it was one of only two basic functions of any business. The other is marketing. "All the rest", he declared, "are just costs".

For two decades we've seen the rise of listed marketing services holding companies WPP, Havas, Omnicom, Interpublic, Publicis etc - all involved in providing services to support clients in their marketing efforts. My question is simply: Have they have been a good thing for innovation?

What do holding companies actually do? They accumulate revenues as cheaply as possible, reduce costs as far as possible to make as much profit as possible so that holding company management and investors become as wealthy as possible. That sums up most businesses though, so let's dig deeper. There are two main ways holding companies operate: they buy a successful operation and tune it to increase profits (ideally but not always) or, they buy once-successful businesses and restructure them to try and regain lost glory and profits.

Now aggregate that for the bigger picture. Acquired operations are arrayed against the world rather than each other to increase holding company market share. Back-end functions are shared as far as possible to reduce costs. Many negotiate bulk deals with recruitment firms, property agents and similar service providers to reduce costs by using their buying power. In some cases entire groups of held companies are "co-located" in one building.

OK, stay with me for just two more paragraphs and then we'll come up for fresh air, I promise. Publicly listed holding companies exist to make money, which they do by taking it as dividends and management service fees from the companies they own. They set aggressive margin targets allowing regional and local office managers almost no financial flexibility. They tie their managers to a number, bonus them if they beat it, fire them if they miss it. The result, which clients know all too well, is that office managers often settle for less than the best people and work them very hard resulting in service levels and ideas which are often average at best.

There is no room for in their budgets for doing start-ups, research & development and precious little for sharpening the saw. Those of us who've been involved with "training" in marketing services know how little is done, how poorly, how fast those budgets are cut and how much further our clients have pulled ahead. Why? Because listed holding companies must maximise earnings per share and dividend yields to support their share prices and keep them rising. Why? To satisfy big investors, keep the wealth of their top managers rising in the form of vesting stock options and so they have a strong currency with which to pay for acquisitions.

OK. That's the long and short of it. Sorry if that was a bit blunt, but it needed to be written. Now, does any of that look like it fosters innovation? Not a snowball's hope in hell, right?

OK. I promised you some fresh air. Here it is. You see, everything I've just written about does drive innovation, just not the way you were expecting.

You see, for any of those embattled managers asking her - or himself the question "How do we improve upon ‘that's how we do it around here'" there is only one answer. You start your own, better business. Top managers are well paid and don't need to do it for the money.  It's the frustration and knowing they can do it better that trips it. They start their own company. They win clients, they make headlines and change the way the industry does things. In the "old days" those entrepreneurs would then sell to a holding company as their exit strategy, but will they keep doing so? They may, but I think there's something else happening. Watch Nitro and iris.

Meanwhile there are probably lots of people gritting their teeth until the downturn passes. Others simply aren't going to wait any longer.

Mike Langton has worked across Asia Pacific for 20 years in the marketing communications industry, and was involved in founding XM ASIA with Russel Cheng, and building the Bates Indochina offices and the Bates 141 network in the region. He has previously had stints as APAC region director of Momentum Worldwide, Wunderman Asia president and as CEO of Carat Singapore and Malaysia. Recently he left his role as managing director of Interbrand Singapore to launch his own company called Innovize.

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