The growing threat for advertising's biggest players

The world's largest advertising companies face a growing threat from clients moving more of their media strategy and creative businesses in-house.

Why it matters: The trend is happening amid a trust fallout between agencies and companies over murky ad-buying and contract bidding practices, some leading to federal investigations.

Driving the news: A new report from the Association of National Advertisers (ANA) finds that agencies are suffering more than ever from companies shifting marketing functions that were typically outsourced to agencies to teams in-house.

• Nearly 78% of the companies surveyed say they now have an in-house agency function, compared to 58% in 2013 and 42% in 2008.
• Roughly 79% of in-house agencies have in-house video production capabilities, and nearly half (49%) have established their in-house production capabilities within the past five years.
• This year, over 36% of companies say they are bringing media strategy and planning functions in-house, compared to 22% in 2013.

What they're saying: The head of marketing and communications at a well-known consumer packaged goods company put it this way to me on a call:

"Sometimes we feel bait-and-switched. An executive team will come in to pitch us on a great idea, and then it gets punted down to lower-level staffers for execution who don't have the right expertise. It becomes more efficient to bring some of the creative services in house so we don't waste our time."

Between the lines: Financial struggles and minimal oversight at some of the biggest global agencies have for years led to bad practices, like kickbacks and bid-rigging, which have led marketers to question whether their dollars are being wasted.

• Federal prosecutors in Manhattan have opened an investigation into media-buying practices in the advertising industry, the Wall Street Journal reported last month. The Journal also reported that the feds are seeking help from the ANA in the probe.
• The investigation follows a 2016 DOJ probe over whether media agencies were undermining independent ad production companies by rigging the bidding process.

The big picture: The biggest agency holding groups, such as WPP, Omnicom and Publicis Groupe, have been struggling to drive growth over the past year.

The bottom line: "Investors are generally negatively oriented around agency holding companies at present, largely understandably," writes Brian Wieser, a senior research analyst for advertising at Pivotal Research, in a Q3 research note.

"Concerns around the potential impact of an FBI investigation into transparency related topics have re-emerged, and the regular drumbeat of doom and gloom from news reports of marketers' cost-cutting exercises, in-housing and use of consultants is ever-present."

What's next: Some marketing executives say this conundrum has pushed them to move away from agency retention models and instead move toward a fixed-fee project billing model.