On May 16, 2016, Pepsi launched to much fanfare the 4,000-square foot, state of the art content studio of its in-house agency unit “Creators’ Studio” right at the heart of New York.
The in-house marketing unit, initially launched in 2014, serves as Pepsi’s internal production arm for series, films, music recordings, reality shows, and other content distributed for television and online platforms. Beyond the internal Pepsi requirements, however, Creators League was envisioned to also be a powerhouse standalone content creation company, with its own independent P&L, working with non-Pepsi clients.
“Our goal is to really behave like a Hollywood studio,” said Mr. Jakeman, former president of PepsiCo’s global beverage group during the launch. He oversaw the launch of the content studio along with Kristin Patrick, senior VP-global brand development. “The holy grail for me is to leverage the incredible power of our brands and their equities to essentially fund their own marketing.”
Big Vision, Epic Mega-Fail
Fast forward to a year after launch of the content studio, and we witness the massive fail of Creators League with the hugely controversial Kendall Jenner ad it launched in April 2017. The spot, which featured Kendall Jenner as a socially-conscious protestor offering a Pepsi drink to a police officer in the middle of a street protest, was slammed on social media right after launch.
Critics said that the ad trivialized and exploited the “Black Lives Matter” movement, and sought to capitalize on such an important social advocacy movement in the U.S. to sell more sodas. The social backlash was massive, prompting Pepsi to pull out the ad in just 24 hours. Kendall Jenner later on apologized, crying, and said that she didn’t know how to recover from such a debacle. She said that if she knew the backlash was going to be that fierce, she wouldn’t have taken on the assignment in the first place.
For all the big vision, fancy high-tech toys, and 4,000-square feet office, that single Kendall Jenner fiasco single-handedly dealt the Pepsi Brand a huge beating in the U.S.. How much brand value was lost with that Kendall Jenner debacle?
While the Creators Studio has had a lot of other successful work, that single mega-fail with the Kendall Jenner ad overshadowed publicity-wise every other good that the unit has done to date.
In-House Agency is Now Seeking Outside Investors
Four years after its launch in 2014, we need to ask: What has been the return-on-investment thus far on Pepsi’s in-house agency operation? Do the benefits outweigh the Pepsi brand value lost with the Kendall Jenner debacle? Do the incremental savings versus agency fees outweigh the huge capex and talent investment made in the last four years? Is the work output of the in-house team quantifiably better than those of external agency partners?
Last April 2018, Pepsi announced that it was now looking for “outside help” for Creators Studio, and is looking at external investors and partnership arrangements with companies such as agencies and production units.
Any business that is looking for outside help - whether via investment funding or operational management supervision - for me is a form of acknowledgement of a bit of an internal failure. If the business was a financial success, why does Pepsi, with all its massive financial muscle, need external funding for its agency unit? Why does it need the strategic help of competitors of the studio such as agencies and production outfits?
If the business was launched with the premise of “in-housing” content creation, why is it now being “externalized” and being partnered with “external” groups that it sought to compete with in the first place? Why go through the expensive exercise of investing so much capex and in-house talent, only to essentially plan to partially or fully exit the business in the end?
In-Housing is a Massive Trend
Despite the high-profile hiccups of in-house agencies such as the Kendall Jenner Pepsi debacle, in-housing of marketing work - particularly for content creation, digital media buying, and digital creatives - is definitely a growing trend and is here to stay. According to the Association of National Advertisers (ANA) in the United States, thirty-five percent of marketers have already expanded their in-house digital programmatic media capabilities, and have subsequently reduced the role that external agencies play for digital media.
Some of the biggest businesses in the world, particularly the “new economy” digital-based businesses, have already set up their own in-house marketing units to realize cost savings, achieve better transparency on media buying, and create faster turnaround times for content creation.
Unilever has reported up to 30% savings on costs through their in-house content creation unit, U-Studios. Unilever’s 2017 annual report states: “In marketing, we are creating more of our own content in house while making existing assets go further. Our 17 U-Studios in 12 countries are creating content for brand teams faster and around 30 percent cheaper than external agencies.”
L’Oreal early this year announced the launch of the Beauty Terminal in the U.S., their own in-house content studio based in New York. Marie Gulin-Merle, Chief Marketing Officer, L’Oréal USA, said: “For years, the demand for social and digital content has increased across every platform. Content trends now come and go at a record pace and our audiences are consuming this media faster than ever. Having the Beauty Terminal, a dedicated place for content creation, gives L’Oréal brand teams the ability to create, edit, and post-produce content with speed and agility so we have more relevant, dynamic content to engage and delight our customers faster.”
Booking.com cited lack of speed and the need to control data as their reasons for setting up their own in-house digital unit. Booking.com CMO Pepijn Rijvers said: “We have way more data than the media agency has. I’d make a very strong case that anything that generates data, you need to own as a business. You cannot have anyone else be the expert.”
Why Marketers Go In-House
Based on my research on this topic, there four common reasons that marketers cite as their basis for going in-house with their marketing: speed, transparency, cost savings, brand knowledge. Curiously, in my research, I have rarely heard a marketer say that “creating better work” was their primary purpose for going in-house.
Isn’t creating better work supposed to be the #1 reason for making any changes in your advertising and marketing setup? Whether it’s calling for a pitch, changing agencies, or going in-house, the primary consideration for marketers ought to be the need to create better work that ultimately leads to higher sales for the business.
And yet, the oft-cited reasons for going in-house are anything but about creating better-performing work.
How Much Can Marketers Really Save by Going In-House?
One of the major reasons for going in-house is cost savings. But we need to ask: how much do marketers really end up saving by in-housing marketing work?
To answer this question, we need to understand a little bit better agency economics. Let’s take a look at the world’s biggest agency group, WPP. WPP’s average net margin for the quarter ended June 2018 was at 8.97%. This means that for every $100 that a client pays WPP agencies in terms of fees (agency fees, media commissions, retainer fees, etc), WPP ends up with $8.97 in profit. This amount is already net of everything - compensation costs, overhead, etc.
In theory, if a marketer decides to setup an in-house agency, the amount of savings will be equivalent to the profit that the agency makes, which is anywhere from 8-10% (the average net profit margin of an agency) of whatever fees are paid to the agency.
Is it worth all the operational headaches to setup an in-house team to save 8-10% off of whatever you pay agencies?
Marketers may argue that agencies have bloated structures, with high salaries of senior people like ex-WPP CEO Martin Sorrell, who got paid $66.4M in 2016. Say you can add 10% to the savings by not having to pay for expensive agency CEO costs.
Is saving 20% off the fees you pay agencies really worth not anymore getting advice for your business from the most senior, most experienced agency veterans in the industry?
Will you be able to get quantifiably better results from your in-house marketing by taking out of your advertising staffing plantilla the very best top-level talent?
The Need for Speed and Brand Knowledge
The need for speed and deeper level of knowledge of the brand and the clients’ operations are other oft-cited reasons for going in-house. It’s true that having your digital and content teams sitting right inside the client’s office will yield to faster turnaround times and lead to a deeper understanding of the brand.
But there’s a very simple solution that agencies and marketers can implement to fix this: embed agency people dedicated to the client’s account inside the client’s office. This was a very specific setup requested from our agency Mobext by a recent major new client that we got in the Philippines. And so far, it’s been working!
If marketers can get the very best agency talent work inside their offices, without the need to worry about everything associated with having people in their direct payroll, then the whole argument in favor of in-housing due to speed and more intimate brand knowledge falls apart.
Great Talent Comes First
With the agency business, talent is the single biggest determinant of success. Ideas build business, and the best ideas are created by the best creative talent. It’s really that simple.
Creative talent is not a cost line item that you should try to save on by cutting out the agency and hiring in-house. Creative talent is an investment that generates business returns. I am willing to bet that an experienced creative talent agency-side that is 2x more expensive than a cheaper in-house talent will produce results 5x better.
A more expensive agency team consisting of an experienced senior ad ops manager and a senior media director working on a client’s account part time will disproportionately outperform a lower cost, in-house ad ops buyer when it comes to performance-based digital media executions.
Not all clients have enough of the scale of a global marketer like Unilever and Pepsi to be able to afford to hire the very best creative and media people to their in-house units. Even global marketers need to grapple with the issue of localization - do they have enough scale on a particular country to be able to afford the very best creative and media talent in that country?
The Best Creative Talent are Artists First, Employees Second
Granted, some marketers will be able to afford to hire the very best creative or media talent in-house. But even if that was the case, are the very best creative and media people willing to work client-side?
My hunch is that it will be extremely hard for clients to recruit seasoned creatives with this pitch: “Move to us, I’ll give you more money, you get access to our global network of brands and all the benefits associated with working with a big-name client like us; but you’ll have to stop dreaming up of ideas for brands/clients that do not belong to our family of brands.”
If you are a top creative, are you really willing to limit yourself creatively and just work on household care products, for example, for the rest of your life?
I believe that the best creative talent are artists at the core, and not just paid-for employees. Their craft comes first. The best creative talent are craftsmen and artists, and I really believe that the best ones will not immediately ditch the wide creative canvass they have with a multi-client agency to take on a bigger salary in a one-category client-side assignment.
If you won’t be able to tap the very best creative and media talent for your advertising business, then you are setting up your business to fail.
Going In-House Really Means Getting into the Agency Business
The biggest takeaway for me when researching for this article is that marketers who choose to setup their own in-house marketing departments are in fact entering the agency business - whether they realize it or not. Unilever, L’Oreal, Booking.com, and many other marketers have essentially decided to enter the agency business, whether they admit it or not.
Setting up an internal marketing, content or digital department is not as simple as hiring a few people. If you will do things in-house, you need to make sure that the work output is the same, or even better than the work output of external agencies. To do that, you will need to hire the best talent and create a culture and systems that will allow you to retain that talent. That means, essentially, running an agency.
When you decide to launch your own in-house marketing department, you will need to consider all the following issues, which are all issues related to the running and operations of an agency:
How to hire best-in-class talent across highly-specialized disciplines, such as creatives, data, analytics, CRM, programmatic, animation, video, copywriting, and host of other requirements.
1.How to hire best-in-class talent across highly-specialized disciplines, such as creatives, data, analytics, CRM, programmatic, animation, video, copywriting, and host of other requirements.
2.How to retain key talent, particularly creative talent, by fostering a culture of creativity, open flow of ideas, lack of bureaucracy, innovation. Awesome creative talent won’t stick around with your company if your culture is highly-stifling and bureaucratic, which will snuff out the creative spirit from the people
3.How to manage peaks and valleys in requirements - there will be months that you will need 10 copywriters, 7 artists, and 3 animators, but then there will be lean months as well when all you need is 1 copywriter and 1 artist. How will you manage the peaks and valleys in requirements? Do you hire everything in-house, or do you tap a freelance pool for excess requirements?
4.What if you offer your in-house team’s services to external clients as well to manage slack time, or to be able to help subsidize the hiring of more expensive but better talent? In which case, you will need to have a new business strategy in place, account management systems setup, etc.
The key question marketers need to ask themselves before deciding to go in-house: Am I prepared to enter the agency business? Can I compete in this space? Can I attract the very best people?
Or will I end up like Pepsi - in the end, essentially trying to “exit” the agency business four years after setting it up?