Vertical integrations were first used in the 20th century to achieve economies of scale. It can be described as the strategy of integrating into the company's operations, activities that were previously provided by suppliers. It can be done either acquiring the supplier or creating new companies from scratch and there are 2 models: backwards or forwards.
Backwards: this happens when the company acquires one of the suppliers that provide the inputs used by the company to produce the services or products sold to customers. A good example is a steel manufacturer that used to purchase iron from a supplier but decides to acquire an iron mine to benefit from the integration. Backwards vertical integrations are made towards the control of the natural resources used to provide the service or the product.
Forward: This is the opposite approach, and it happens when the company increases the control of the operations towards the final customer. A good example is when clothing brands open their own boutiques and stop selling in multi-brand stores.
Integrations have normally been well accepted and very popular in the direct procurement however in the last 10 years we have seen an increase of integrations purely related to indirect costs. Let´s look at the evolution of creative agencies world.
At the very beginning of the marketing and advertising revolution (80s…), companies used to use agencies for everything and they used to pay a commission on the media investment. This commission used to be between 15% to 20%.
The advertising cost became too high and new pricing models appear in the market. The time-based pricing was the most popular in the way of a retainer. The company secured a team within the agency in exchange for a monthly fee. The Agency was applying an overhead in between 75%to 100% on top of the employee salary and then a mark up no lower than 30% on top of it.
During the first and second decade of the 21st century, a new trend came into action, mainly developed by large organisations. They started to build in-house studios for the low value and low complexity requirements, for which the resources from the creative agencies were too expensive. This studios were provided by specialised suppliers who selected the team and applied a markup on tops of their costs.
Finally, during the last 5 to 3 years we have started to see how some big companies are building their own creative agencies internally with no need to use any external resource.
Assuming we have got 25 members in the agency the cost can be estimated at $4m a year (full loaded including tax and creative technology) whereas the same cost provided on a "retainer" basis would have cost almost $8m.
The increase to the number of agencies and the availability of capable resources in the market has facilitated vertical integrations in the way of in-sourcing in the advertiser's area.