Working Capital

If there’s one thing the recession has taught ad agency management, it’s that staffing costs determine profitability. Woe betide the shop or holding company that doesn’t closely match head count and salaries to revenue from clients.

That lesson was illustrated most starkly at WPP Group. In late 2008, with the collapse of Lehman Brothers and Bear Stearns triggering a death spiral on Wall Street, WPP CEO Martin Sorrell gave this warning at the UBS Global Media and Communications Conference in London: “In the first nine months of this year and through October and November, head count [at WPP] grew faster than revenue. In our business that always means trouble. In the developed areas of our business, the mature parts — that’s the polite phrase for them — there will be pressure on head count. In other words, there will be cuts.”

Sorrell then axed some 14,000 jobs between the end of 2008 and the first quarter of 2009 from WPP’s agencies across the globe, according to WPP’s financial disclosures. In September 2009, he told Reuters he wasn’t done cutting. WPP’s big agencies, including JWT and Ogilvy & Mather, he said, all have their own back-office operations, a duplication of efforts that Sorrell called “ludicrous.”

In an interview with AdweekMedia, Sorrell says, “I don’t think we’ve done enough in looking at that. If you take a bird’s-eye view of these operations and look at these back offices … there’s a lot more we can do of that nature.”

The reason Sorrell was so focused on getting rid of staff is not just that organic revenue was dropping 8 percent and he wanted to keep costs in line. It’s that most of the time he had nothing else to cut: On average, about 72 percent of an ad agency’s entire operating expenses are made up of salaries and bonuses for staff, according to holding company financial disclosures. The rest goes to real estate and other overhead bills. When clients reduce their spending, it’s a lot easier to get rid of bodies than it is to move to a cheaper part of town. (Ogilvy, however, did just that last year, leaving its skyline-defining Worldwide Plaza building in Manhattan for the remote address of 636 11th Ave., many blocks from the closest subway line.)

“You can manage staff costs to revenues, but property costs are the second-biggest investment you can make,” says Sorrell. “It’s much more difficult to manage because once you lock yourself into a lease there’s little you can do about it for, say, five or more years.”

Agency staffing costs, in fact, make the difference between whether an agency is profitable or not, and the stock price that rides on that.

The agency holding companies aren’t equal when it comes to operating costs. The most efficient large network is Publicis Groupe, which earns back $1.21 for every dollar spent on employees and other overhead, according to the company’s 2009 annual report. Publicis has a systematic approach to staffing costs, and rewards agency managers for keeping them low.

“All the bonus ‘envelopes’ are controlled at the group level, so basically each agency gets a specific envelope and has some criteria based on organic growth, cash and margins,” says Publicis investor relations officer Capucine Boncenne. “The rest is based on overall group performance.”

The least efficient is MDC Partners, which generates only $1.04 for every dollar spent. That’s how thin even good advertising margins can be: just cents on the dollar. (In the pharmaceutical business, by comparison, some companies get returns of up to $3 per dollar spent.)

Five agency holding companies break out staffing costs in their financial disclosures, allowing us to compare how well their people earn revenue. In order of efficiency by staff costs alone, they are: WPP, Havas, Publicis, Interpublic Group and Omnicom Group.

Publish date: May 16, 2010 © 2020 Adweek, LLC. - All Rights Reserved and NOT FOR REPRINT