Opinion: WPP's addiction to cost reduction needs to change

Recent agency mergers focus on the wrong problem, argues veteran agency consultant

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Does anyone seriously believe that the WPP-led mergers of VML with Y&R (creating the eyesore VMLY&R) and of Wunderman with J. Walter Thompson (now Wunderman Thompson) are strategic moves that will restore WPP's growth, profitability and share price performance? These mergers are mostly a continuation of the agency cost-reduction activities practiced by WPP since 1986, when it bought the underperforming J. Walter Thompson.

Mark Read inherited a difficult situation after the departure of Martin Sorrell. WPP's growth and profitability had already sagged in 2017 and 2018, causing a serious decline in its share price. It's understandable that Read needed some "quick hits" to fix his profit problem. Agency mergers to cut overhead and senior management costs must have seemed obvious, and they could be disguised to look "strategic."

However, these mergers / cost reductions focus on the wrong problem. What's really killing agencies and holding companies is the declining level of agency fees and billing rates, and the uncontrolled growth of agency workloads. These are "price problems" rather than "cost problems," and they are not currently being addressed by agency CEOs.

Up to 2005 or so, most creative ad agencies were "fat" with resources. This was a hangover from the media commission days, when agency income was astronomically high relative to the amount of creative work that needed to be done. The big creative agencies could "staff up to the gills," in the words of one former agency CEO, and ensure that they had more than enough people to do "anything and everything" for their clients. They never needed to worry about counting the amount of work they were doing; they could handle anything.

Holding companies acquired agencies under these conditions, and they began to squeeze agency staffing every year so that profit margins could widen. Agency squeezing was the basis for the growth of holding company margins from 5% in the '80s to the 15-20% levels expected today.

Once fee-based remuneration replaced media commissions, though, and agency fees were in the hands of fee-cutters from finance or procurement, agencies had to downsize even faster every year, getting rid of surplus headcounts.

After 2005, though, with the introduction of digital (and later, social) media, agency Scopes of Work grew more rapidly despite fee cuts, and agencies were out of surplus resources. Agencies continued to cut their staffs, though, failing to use growing Scopes of Work as the new basis for negotiating fees. They didn't document the work they were doing, client by client. They had never done it in the past; why should they do it now?

I know of few holding companies today who have agencies who plan, document and measure their Scopes of Work in a uniform manner -- and have a methodology to negotiate fees based on the amount of work they do. It's a disgraceful oversight – fees and Scopes are left in the hands of clients. Procurement tells agencies what fees they are prepared to pay, at what billing rates, and marketing piles on unplanned creative work in the hope that something will happen to rekindle brand growth.

If Mark Read wants to make an enduring long-term impact at WPP, he needs to refocus his agencies on "getting paid for all the work they do" at appropriate rates. This will require WPP agencies to engage in the tedious, routine exercise of planning, documenting and measuring the work they do, client by client, with a uniform agency-wide system, and using this information to plan for client brand growth and negotiate annual fees. Thus far, agency CEOs have shown a distain to initiate this nitty-gritty work, strategic though it might be. Instead, CEOs focus on getting new clients to replace the ones that they so routinely lose.

It will take some real WPP muscle to redirect agency CEOs to get their agencies to take control of fees and Scopes of Work. Is this on the CEOs' agendas for VMLY&R and Wunderman Thompson? I hope so. The price problem needs to be solved.

SOW management is hard to do, but it reaps long-term benefits. Today's apparent strategy, though – merging agencies to get rid of overhead and top management costs – has no long-term future unless it is coupled with serious efforts to regain control of fees and workloads.

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