Economy Watch: New-business paralysis sets in

By Published on .

When the economy goes down, agency reviews go up-or so the theory holds. But not this year, which has seen one of the most severe new-business droughts in memory.

Marketing executives, review consultants, agency new-business mavens and Wall Street analysts have been struck by the severity of this year's prolonged dry spell. "Without question, it's the slowest I've seen," said David McMurry, equity research analyst, Credit Suisse First Boston. Credit Suisse figures show that in June, only $547 million in net new business was added, a trickle compared to the monthly average this year of $1.29 billion. (See chart and TurnSignals, P. 32.)

In this barren climate, shifts like this month's $400 million AT&T Wireless account to WPP Group's Ogilvy & Mather Worldwide, New York, are few and far between. One veteran agency executive said it's the quietest he has seen in his more than 20 years in the business. Said another: "It stinks out there, and there's no sign it's getting any better."

Oddly, marketers have not been as quick as in past economic downturns to blame agencies for their woes. Top executives typically put pressure on their marketing chief in a downturn, who in turn leans on the ad agency for new ideas, lowered compensation-and sometimes goes for an agency review. That hasn't happened this time around. Some agency executives believe that's because troubled marketers are so busy laying off staff they haven't focused on vendors. Others think accounts are not put up for grabs because marketers can't get a fix on where the economy is going: up, down or sideways.

"They don't want to change [agencies] if this is a bump in the night," said consultant John Costello, a former senior exec VP marketing at Sears, Roebuck & Co. and former CEO at MVP.com. "Expect a change when there is a clear direction in the economy."

Mr. McMurry, however, cautioned agencies to be careful what they wish for. He noted that of the top 200 marketers with the largest ad budgets, 42.5% have missed earnings since September 2000. In an agency review, those marketers might not necessarily be seeking dazzling creative or strategy, but instead cut-rate pricing. Already, one San Francisco agency president who picked up new business this summer has experienced contract negotiation headaches. The erosion of agency fees is "really alarming," the executive said, noting some clients are pressing for fees 50% below usual compensation.

The genesis of new-business paralysis has spawned many theories. Richard Monturo, director of account planning at Omnicom Group's TBWA/Chiat/Day, Playa del Rey, Calif., believes agency and client consolidation has restricted the flow of requests for proposals. With large clients committed to a holding company's stable of agencies, particularly in conflict-clogged categories such as automobiles, marketers' options to switch are limited. Instead of free-for-all reviews, it's more like "rearranging the deck chairs" among the client's existing agencies, he said.

Bill Gray, president of Ogilvy, New York, agrees one reason big accounts aren't moving is that clients are more ingrained with agencies that handle the full spectrum of TV, print, direct marketing, events and promotion.

Tim Maleeny, strategic development director at Publicis Groupe's Publicis & Hal Riney, San Francisco, is not surprised by the new-business dearth, noting that during the dot-com boom, reviews for traditional businesses already had virtually dried up.

Review consultants-now increasingly pitching marketers for the job of conducting agency reviews-said full-fledged agency searches have been replaced by reviews for other marketing activities. Mike Agate, chairman of Select Resources International, West Hollywood, Calif., said clients are examining resource mix assortments to determine whether they are, for example, handling direct marketing optimally. Consultants are also handling issues related to agency compensation.

Some ad insiders speculate agencies, absorbed with internal layoffs rather than pitches, are contributing to the new- business slowdown. There are also theories that agencies are having trouble finding money to mount new-business attacks or that they have simply gotten lazy from dot-com days when new-business success meant merely answering the phone.

Jeff Goodby, co-chairman at Omnicom's Goodby, Silverstein & Partners, San Francisco, blames the dot-com fiasco for the drought. The last thing marketers want Wall Street to know, he said, is that they are spending $50 million on advertising next year.

One other thesis is that the parched new-business environment may be due to the simple fact that more clients are finding reviews costly and ineffective. Jack Calhoun, senior VP-brand management at Charles Schwab & Co., calls reviews an expensive search for the Holy Grail. "It doesn't exist, unfortunately," he said.

Contributing: Hillary Chura, Kate MacArthur, Lisa Sanders, Jean Halliday and Mercedes M. Cardona

In this article:
Most Popular