The advertising industry has been through so many changes that it's easy to forget what it was like when Martin Sorrell bought JWT in 1987 with borrowed money. He knew that JWT, like all agencies at the time, was extremely well paid by its clients, and that its high income permitted the agency to spend lavishly on salaries, headcounts, bonuses, parties and new business development. JWT's meager 4 percent profit margin signaled that costs were "fat" and could be cut.
Sorrell was not trying to get into the agency business
Instead, he wanted to build a diversified financial conglomerate that bought well-paid, cost-rich companies, like JWT. Diversification by marketing type would balance risk. WPP's real goal was to deliver growing income and improved margins to WPP shareholders, who would benefit from rising share prices. Improved performance would be achieved through tough budget negotiations with acquired companies., with a focus on reducing their excess costs. WPP became expert in buying companies and squeezing better performance out of them through annual budget negotiations.
WPP's individual companies were specialized and encouraged to stay that way. "People of specialist skills work best and contribute more when recruited, trained and inspired by specialist companies," states WPP's 2003 Annual Report.
However, client needs for "best in class" agency expertise across marketing disciplines drove WPP into becoming an operating company. Sorrell saw this need and put a lot of energy into developing WPP client relationships under the "horizontality" banner. He became an indefatigable salesman for the bundling of WPP agencies to serve clients like Ford and others.
He never lost his zest for micromanaging agency costs, though, and year after year, especially in the face of fee cuts by procurement, Sorrell continued to impose "stretch" budgets on WPP's portfolio agencies. Typically, agencies responded by downsizing to meet holding company needs.
Sorrell's energy and focus on acquisitions, cost reductions, "horizontality" and industry conferences was legendary. So was his desire to be well-paid for his successes.
This, of course, made him vulnerable when WPP's share price declined. Although Sorrell blamed clients for "shortsighted" cuts in marketing spend, he missed an important fact: WPP agencies, like all holding company agencies, had been cost-reduced into weakness. They were no longer seen by their clients as valuable strategic partners. Senior agency personnel had been let go; juniors had taken their place. Client brands, which ceased to grow very much after 2008, were in trouble, and agencies were not capable of making a difference.
Client cuts in spend were a symptom of agency weaknesses, not the cause of them. Sorrell's overreliance on agency cost reductions to generate profits led to clients' loss of confidence in the agencies. They no longer thought it wise to spend at the same rate as in the past, and they began to develop their own internal agencies.
The cost-reduction path must be abandoned, and a new strategy developed.
One option would be to focus on strengthening the individual agencies, so they can become more capable and useful for clients. This will require new people with strategic skills, improved scope of work planning and management disciplines and an improved focus on providing consultative services. Fee declines will need to be reversed, but this can only be done when agencies improve their offer.
Another option, currently pursued by Publicis, would be to transform the holding company into a single global agency, and to downgrade the importance of the individual agency brands. This, too, will require new skills and disciplines and a reversal of declining fees.
Finally, new WPP leadership might find that it is too late to go down either of these paths, and instead, they may break up the portfolio, selling off the various pieces in the belief that the parts are worth more than the whole. Alternatively, they could sell the whole and let the acquirer decide what to keep and what to sell.
Whatever the path, WPP shareholders are likely to be rewarded for their shareholding investment, just as they have been during the past 30 years. Sorrell's vision and energy made this possible. He transformed the industry in dramatic and important ways. Now, under new leadership, a new transformation is needed.