Slower growth era requires smart cost cuts by agencies

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Over the past five years, the superagencies-Omnicom Group, Interpublic Group of Cos., WPP Group-each grew revenue at an annual rate of more than 20%. Reported profits also posted big double-digit gains.

These agency companies bought growth and benefited from a booming economy. There's not much left to buy, and near-term growth prospects are limited as the ad market attempts to dig out of the post-boom bust.

Holding companies hope to boost revenue by selling more diverse services. But the Big 3 can't all keep growing revenue at 20% in an ad market likely to grow in the single digits at best. There is another way to improve the bottom line: Take costs out of the business. That requires new thinking and different management skills.

For marketers, a sluggish economy leaves limited opportunity to grow revenue-alongside a need to cut costs. Colin Probert, president of Omnicom's Goodby, Silverstein & Partners in San Francisco, noted to my colleague Alice Cuneo that pressure to restore "earnings of quality" will require clients to pursue aggressive cost control. "That's bad for the marketing budget," Probert says. One thing sure to grow: Demands that agencies do more with less.

Agency staffers like to kvetch that quality suffers when shops cut costs to meet demands of clients. That misses the point. Clients need more for less. Agency companies have the opportunity to meet that need by rethinking the process.

Is there still room to cut staffs? No doubt. Bloomberg data show revenue per employee at Omnicom, Interpublic and WPP grew annually at just 0.8%, 2.1% and 4.3%, respectively, over the past five years. WPP, whose first-quarter revenue fell 2%, cut staff 10% in the first five months; that should help productivity. But there's more to improving efficiency than cutting jobs, as WPP Group Chief Executive Martin Sorrell said at last month's AdWatch conference. Agencies must rethink processes, technology and staffing.

Advance Publications, the New York-based parent of Conde Nast, Parade and other media, is creating a 100,000-square-foot "shared services center" in Wilmington, Del., to provide back-office functions. Rents and salaries are less in Wilmington than in midtown Manhattan. Agency companies have an opportunity to make similar moves.

At ad agencies, the assets go down the elevator each night, but the liability-the long-term lease-remains. In any given year, one agency or discipline in a holding company shrinks while another grows. Is there a way to stack them all into one office building and reapportion space as needed over time, while keeping walls between competing clients' accounts?

Clients build products where they can do so cheaply-and so can agencies. An account may be based in the Los Angeles office, but does the holding company have a branch in North Carolina that could produce some of the work at a lower cost? Could more services be farmed out to subcontractors? Could an international office do the work for less?

Agency companies are like a retailer that grows quickly by opening or buying stores; at some point, it must focus on improving productivity of existing stores. Holding companies, after assembling an assortment of disparate assets, have a tremendous opportunity to streamline operations to reduce costs-and to make it simpler and more appealing for clients to buy a bundle of services.

A more efficient agency can make good money providing better service at lower cost to the client. That's the bottom line. How else can agencies cut costs? You tell me.

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