Agencies feel business pinch, eye more cuts

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Agency new-business strategy has consisted of answering the phone for the past couple of years, but with the economy slowing and cutbacks looming-hundreds may be laid off this week at Leo Burnett alone-the new-business pressure cooker is turned up to high again.

"For the past three years, people have been living off the fat of the land," said Matt Hofherr, managing partner and director of business development at Omnicom Group's TBWA/Chiat/Day, San Francisco. But particularly now in the first quarter, new-business pickings are slim, with the majority of action on the media-review front where cost-cutting is a driving factor.

A number of agency execs are pinning their hopes on an increase in business activity by the second or third quarter, spurred by what one executive, Roger Lewis, a partner at Hoffman/Lewis, San Francisco, dubs the "BOSS Theory of Marketing-Blame Others, Save Self."

Once sales drop, Mr. Lewis and many others in the business reason, marketing directors and their bosses look for quick bottom line fixes, chopping the marketing budget or picking a new agency to make it appear action is being taken to reverse a downturn.

If a recession develops, Steve Bowen, director of business development, Omnicom's Merkley Newman Harty, New York, anticipates more account volatility. "There is far less patience with advertising today than ever in the past," he said. "And as a result, people will be far quicker to pull the trigger on an account review, resulting in more churn than in previous years."

It adds up to a high-cost game of musical chairs. "The same amount of agencies are competing for fewer communications dollars," said Paul Levine, chief exec VP-marketing officer of Cordiant Communications Group's Bates Worldwide, New York.

This results in high stakes contests, where co-workers' jobs hang in the balance and, in some cases, where a shop's survival is on the line. For example, the future of Interpublic Group of Cos.' Lowe Lintas & Partners, San Francisco, which lost the $100 million Sun Microsystems account late last year, hinged on a pitch for Virgin Mobile's $55 million to $60 million account (See story, P. 1). Lowe pitched against two other hungry San Francisco agencies, Black Rocket and Leagas Delaney, which won the $35 million Replay TV business, only to have it evaporate when the company shifted marketing from consumers to cable operators. Lowe got the Virgin business.

The pain of reviews is being felt on agencies' bottom lines. TBWA/Chiat/Day's Mr. Hofherr anticipates agencies will be forced to up their pitch budgets. He estimates that in 1998 the average per-pitch cost ran in the range of $60,000 to $75,000. As the dot-com influx began in 1999, that dropped to about $45,000 to $60,000, he said. However, at the height of the boom by early last year, that number dropped to a low of $25,000 and a high of $50,000, he said. "It now will get up to 1998 levels or more," he expects.


Advertisers, for a brief moment in the supplicant's role, once again are asserting the upper hand. Agencies privately complain about the growing demands prospective clients make in reviews. One agency exec said his expenses in one current pitch would come to the $20,000 the client was reimbursing participants-plus the first few years of profit if the agency got the business.

"Abuse is alive and well in advertising once again," he said.

The phones are ringing at review search consultants-from agencies, including some that in the past didn't see reason to pay the fees to be part of a service. "We have had so many agencies calling, we are reconsidering how we are doing business," said Catherine Bension, president, Select Resources International, West Hollywood, Calif., one of the largest search consultants in the country and the largest on the West Coast.

While agencies hunt for work, the layoffs continue as shops restructure and brace for tougher times.

Bcom3's Leo Burnett Worldwide, Chicago, this week is expected to cut hundreds of jobs as part of a restructuring. But Bob Brennan, Burnett's president, said the move also is intended to free up money to invest in more new-business people, creative department talent "and certain areas of client services and new tools, be it research, tech systems to make us a better company." Mr. Brennan earlier managed a similar efficiency drive at Burnett's media-buying sibling, Starcom.

Such moves often take a high toll on the head count, noted Stan Beals, a consultant with Jones Lundin Beals. "Typically you fire 43 people at lower pay scales to make up for a handful of people at the top," he said.

Smaller cuts are occurring at many other agencies. For example, Fuel North America, a marketing services arm of Havas Advertising's Messner Vetere Berger McNamee Schmetterer/Euro RSCG, late last week laid off at least seven people, according to a Fuel insider. Executives at Fuel and Messner referred calls to a spokesman, who declined to comment.

In addition to the announced layoffs, other shops are carefully looking at staffing down the road. "The market is very, very soft in San Francisco," said Julie Bauer, CEO of Publicis Groupe's Saatchi & Saatchi, San Francisco, and a managing partner for North America. "Like every agency, we're going to have to make some tough decisions if the market doesn't rebound, but I suspect it will," she said.

The slowdown also is affecting Ad Age's Agency of the Year. Jeff Goodby, co-chairman of Omnicom Group's Goodby, Silverstein & Partners, San Francisco, said he won't fill vacancies for the time being. "We're not going to be actively expanding for a month or so," he said. But the agency, currently in the Goodyear Tire & Rubber Co. and Symantec software reviews, is looking for more business.

While reviews are good for shops on the prowl, they are also a problem, noted Hasan Ramusevic, senior VP-director of strategic business development at MarchFirst's McKinney & Silver, Raleigh, N.C., and previously managing partner at search consultancy AAR/Bob Wolf Partners, New York. "The more reviews there are," he said, "the more chance of one of your clients conducting review."


Agencies often are left moving down the food chain, looking for smaller accounts than they might normally seek. Mr. Bowen believes that's a "false remedy" because shops today are more bottom-line conscious.

Once a client is out the door, agencies can try to sell their category experience. "But on the other hand, there's a question of what caused you to lose that client," said Peter Drakoulias, director of business development at Inter- public's Deutsch, New York. "You might be perceived as damaged goods."

Contributing: Hillary Chura, Wendy Davis, Laura Q. Hughes, Jon Fine and Kate MacArthur.

Copyright January 2001, Crain Communications Inc.

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