The hullabaloo over Tony Blair’s “demon eyes” and the subsequent ennobling by the Conservatives of the agency chiefs at the heart of the campaign, just happened to break at the same time that solid interim results from the world’s largest market services company, WPP, were being feted by industry watchers.
If there is any moral to be drawn from this coincidence, it is that a return to financial stability after the torrid years of the late 80s, does not signal any diminution in the industry’s ability to provoke controversy.
Indeed, controversy – or anything else that catches the eye and the attention of a fickle world – is, paradoxically, precisely one of the ingredients of financial success in this most volatile and high profile of industries.
However, an ability to grab the headlines, whether for themselves or for their clients, is just the start for any agency whose principals care for their enterprise’s long-term survival. If the 80s had any lessons to teach the industry it was that the same harsh business rules that determine who wins and who loses in other sectors apply to this sector as well.
Striving for sensible margins, not mortgaging cash flow for growth, devising performance driven reward packages, justifying spend on new technologies – all these things are critical for long-term success and ad agencies ignore them at their peril.
At the same time, the world of the 90s has and is posing a fresh set of challenges. The increasingly global nature of the markets for many of the industry’s traditional clients is diverting marketing spend away from many of the mid-range and smaller agencies. At the same time it is forcing the larger agencies to acquire or extend worldwide networks of offices. Below-the-line work (direct sales campaigns, public relations, brochure work) is increasingly seen as an attractive growth area. New technology, such as the Internet and multimedia, is already generating a profit for some agencies, while the ability to pipe graphics, film and copy down telephone lines to clients has created the “virtual ad” and increased client participation in the creative process.
As firms face up to these changes, the role of the financial director within the industry is becoming ever more critical. FDs in this industry have traditionally had something of an uphill battle making their authority felt in a world where the spotlight naturally falls on creative teams, planners, media buyers and account directors. There are signs, however, this is beginning to change.
Robin Price is financial director of Howell Henry Chaldecott Lury (HHCL), whose accounts include the AA and National Savings and whose recent wins include Nouvelle and Guinness’s Ireland campaign. The firm is interesting both for being focused on the UK and for its innovative approach to both the creative and the business side of things – an approach that, according to Price, now ignores the time honoured industry distinction between above-the-line and below-the-line advertising, in favour of across the board “solutions”. Though there is no “P” in HHCL, the firm is also something of a landmark for being the first – or one of the first – agencies to include an FD among its five founding partners. The other four are all tried and tested ad men. Rupert Howell came from Young and Rubicam, Adam Lury was at BMP, and the two creative partners Steve Henry and Axel Chaldicott joined from WCRS.
The basic idea in the formation of HHCL, Price explains, was to create an agency that would run along fundamentally different lines, hence his early involvement. “We spent about a year and a half planning the business before we opened our doors. London is full of agencies all run in exactly the same way, yet fundamentally clients are now looking for a different solution. We took the view that you do not get different solutions by having cleverer people – you get different solutions by coming at things differently. The whole heritage and culture of the agency had to be different,” Price says.
The “different idea” HHCL came up with was to operate with a team-based structure instead of the usual, departmental approach. “We tried addressing the advertiser’s requirements from both a creative and business perspective, on the basis that clients are business enterprises first and advertisers second,” Price notes. The idea, even then, was to base business on cultivating long-term relationships with clients. Nothing new there, since every ad agency is always after a “forever” relationship, but HHCL’s team approach was novel enough at the time – even if the agency still had a few lessons to learn. The biggest of these, concerning the inherent fragility of their basic market, hit them virtually as soon as the new firm opened its doors.
“We started the firm as a pure advertising agency in 1987, just 17 days before the crash – it was, with hindsight, perfect timing since we were lean by definition, not having had time to gather any of the fat that everyone else spent the next few years trying to cut,” Price recalls.
The recession dealt the whole industry a body blow. One of the defining characteristics of advertising agencies is their high staff costs. The typical figure for agencies is that the wage bill makes up between half to two thirds of their costs. HHCL was relatively lucky in not starting the recession overburdened by high staff numbers. Others were not so fortunate.
The industry spent the next six or seven years shedding more staff than it hired.
“People tend to forget that proper resource planning is just as important in advertising as in any other business,” Price says. Agencies who gear up with too many creative teams and fail to attract or maintain a sufficient client base to justify that overhead are inevitably going to face a stark choice – either lose money or cut to the bone. The most sensible way forward, he believes, is for agencies to concentrate on hiring or training staff that are more multi-disciplined in their approach.
“One of the major advantages of operating on a team basis is that you do away with the compartmentalisation and redundancy of effort that is built into the linear departmental approach. If you have a traditional set-up where the executive takes the brief, gives it to the planner, who gives it to the creative people, who come back with the result, which the exec presents to the client – you are institutionalising a series of separations,” he says.
The result, all too often, is that the client gets presented with an idea at the end of this process that is miles from what was wanted, while the agency carries more staff than it strictly needs. The team approach allows for a great deal more collaboration and builds the client into the process from day one.
Even with teams however, as Price acknowledges, advertising remains a people intensive business. “Staff are the reason they have to continually look for new business,” he says. “Market forces can kill off a major account at any time, so though agencies can seek to spread their risks through building up a good mix of clients, they can never relax their drive for new business.”
On the theme of new business, a second lesson HHCL learned was that pure advertising, team-based or no, was not the way of the future. Within a few years it had dropped its “pure” stance and found itself some highly skilled “below-the-line” people to assist in transforming its teams into proper “through-the-line” campaign developers.
This is a lesson that has been learned across the industry. Paul Snudden, director of integration (itself a relatively new post) at Saatchi & Saatchi, Cordiant’s principal trading subsidiary, reckons a focus on the “total communications solution” is now the way things are and will be in the business. “This change is being driven not just by the ad firms but by the clients, for two very good reasons: cost and effectiveness,” he says.
The economic climate of the post-recessional 90s is not one that encourages profligacy in client marketing spend. Everyone these days is after value for money so anything that smacks of a duplication of effort is likely to draw fire from clients. “If you have a segregation of above and below-the-line work, so that a total campaign involves the client having to brief a series of agencies, things are not going to work. Not only do you have the waste entailed in multiple briefings, but you also have the nightmare job of trying to ensure what results from all these individualised agency efforts represents a co-ordinated and coherent campaign,” Snudden says.
Not surprisingly, Saatchi & Saatchi also, is after multi-disciplined personnel. It has just set up a training programme which all new graduates and account execs will be going through, aimed at turning out what Snudden calls “the Renaissance ad exec” – skilled at everything. It sounds more than a little ambitious and those outside the industry will doubtless wonder whether – training courses or no – the ad firms will find many recruits able to pen a slogan or a brochure with one hand while directing a quick take or two with the other.
Clients too, are still feeling their way with this new, multi-disciplinary approach. “In the past clients used to take the view that they’d give the above-the-line, brand strategy control to the agency and give their own marketing manager control over the below-the-line spend. With a total, integrated approach that kind of split doesn’t work. We’re all having to grow up together with this new approach,” Snudden says.
Faced with the problem of suddenly having to expand their portfolio of below-the-line skills, agencies will inevitably be tempted to repeat the errors of the 80s, where industry leaders like Saatchi & Saatchi and WPP went on a scattergun acquisition spree, buying everything from management consultancies to design shops. However, in Snudden’s view, an incremental approach through internal training and development, offers the only real chance for success. “If you persist in acquiring specialist companies rather than building integrated teams, all the problems of overlap and redundancy will just keep coming up. Even if you put all the companies under the same roof, there will always be tension over how you cut the cake and who gets credit for what on territorial overlaps,” he says. Agencies can’t afford that kind of internecine squabbling in a world that increasingly demands transparency and accountability for every pound spent.
Alex Graham, financial director at Saatchi & Saatchi, believes the group’s “total communications package” drive has succeeded to the point where it now ranks in the top ten in the UK in below-the-line revenue earnings.
“This was business that used to be scorned in the industry in the search for high margin television revenues, but those days are gone,” he says.
The renewed focus on business development means an FD in the industry is likely to be involved in almost every aspect of an agency’s business – particularly in the more pioneering areas like the revenue earning potential of future technologies. “Everybody is talking about new media. At Saatchi & Saatchi I’m involved in discussions about new media virtually every day. We set up Saatchi Futures, a specialist unit devoted to 3D, multimedia and the Internet. This unit is starting to earn significant money and will make a profit in its first year of operation,” he says.
One of the curious – if unsurprising – features about the advertising industry has always been its ability to bulk much larger in the public perception than its actual size as an industry sector might appear to warrant. The two largest UK-based companies, Cordiant and WPP are not quite large enough to feature in the FT-SE 100, and even the US can show only a handful of players like Omnicon and IPG. This has some interesting implications for multinational advertisers who want to take a global, rather than a local, approach to product promotion, for by definition, there are very few players for them to choose between.
Robert Lowell, financial director of WPP, says the position in the industry already bears a striking resemblance to the state of affairs in the audit world, where multinational audit work is carried out almost exclusively by the Big Six accountancy firms. “The statistics are hard to get hold of, but in the US – which is a pretty fair guide to the way things are going – 14 of the top 30 brand names are shared between the top three agencies,” he points out. The classic example of globalisation was IBM a few years ago, when it pulled its budget away from the 42 agencies around the world who had each had a piece of the action and gave the lot to Ogilvy & Mather. Somewhat less spectacularly, DeBeers went from two agencies to a single global agency, and Kodak went from three down to one.
“If multinational companies are going to give their shareholders the increase in returns that they expect, they are going to have to move into the emerging economies of South East Asia. There are only a handful of agencies who can provide that kind of global reach,” he says.
Although the trend for big clients to “go global” will inevitably mean smaller agencies losing out on some very lucrative revenue streams, the position is not as dire for the “local” shops as might be expected. Lowell points out that for all its size, WPP can claim no more than a 2% share of the overall world market in advertising. There are just so many advertising companies out there and new ones appear all the time to take the place of those who fall by the wayside or get gobbled up by their larger brethren.
The reason for the perennial rise in new start-ups in this sector is quite simply the extremely low cost of entry. Any creative and entrepreneurially minded individual can set up shop at any time with no more than a desk, a PC and a telephone. Of course, staying afloat once they’ve launched is another matter. And even if they should achieve success, keeping their independence is no easy matter. Even the most successful local shops tend to get scooped up in what Lowell describes as a continuing trend of consolidation within the industry itself.
Consolidation, of course, means acquisitions – the bane of ad agencies in recent times. Yet Lowell points out that it is a mistake to think acquisitions, per se, are a bad thing, or the industry has gone off acquisitions just because companies accumulated too much debt in the 80s through overpriced buy outs. Both IPG and Omnicom, he notes, make acquisitions year after year and their margins remain enviably high.
Nevertheless, it is perhaps worth noting that following WPP’s recently announced interim results, which showed a 40% rise in pre-tax profits – # 68.1m, up from # 48.5m in the six months to 30 June – the company’s chief executive, Martin Sorrell, was reported as saying that WPP was still considering what to do with its “surplus liquidity”.
The most likely use, after a further reduction in debt, Sorrell told analysts, would be a special dividend or increased payout – not further acquisitions. Although it expects prospects to remain good for the rest of 1996 with the help in the US of the Olympic Games and the presidential election campaign – both of which are traditionally beneficial for advertising revenues – the firm is still taking a cautious view of things. Its main focus continues to be to try to push its margins up at least one percentage point per year, with the target being to reach about 12% by 1998, bringing it closer to Omnicom and IPG.
Salomon Brothers media analyst David Forster claims balance sheets right across the UK advertising sector are now much improved. “All those deferred earn-out deals based on profit performance, which effectively mortgaged future cash flows, have now more or less worked their way out the system.
Take WPP’s total interest cover, for example. In 1991 was about 1.6 times, this year it will be 6.1. Where it had surplus property costs of # 15m per annum as a result of the acquisitions, those costs are now down to around # 1m and the group is generating free net cash again since cash flow is not mortgaged to servicing earn-out payments.” The overall industry, Forster says, is in much better shape, with the improvement most marked at the top of the scale.
While all might now be rosier in the sector by comparison with the dire times ushered in by the start of the 90s, a recently published joint report by KPMG and the Institute of Practitioners in Advertising (IPA) into the attitudes of financial directors outside the sector to market spend should ring loud warning bells for the industry.
The report was based on a survey of 100 FDs from The Times Top 1000 companies and according to Kevin Parry, KPMG partner responsible for services to advertising, it showed that most FDs valued just about everything else – including IT, human resources, training and R&D – ahead of marketing.
“We found that while more FDs are getting involved in discussions about marketing and advertising spend, the marketing budget is still widely seen by FDs as the most likely target when cuts have to be made,” he says.
The reason for this, he says, is the gap between marketing directors and FDs within client companies. The survey found that the marketing director had a main board seat, for example, in only 22% of cases.
Parry feels there are several steps agencies and marketing directors could take to improve this situation. First, advertising agencies need to work harder to help marketing directors provide more transparency and accountability on ad campaigns. The best way to do this, he suggests, is for agencies to provide their clients with more by way of empirical data. “Even in the difficult case of brand advertising, it is important for agreed criteria to be set and for campaigns to be allowed to stand or fall on the basis of their success in meeting these criteria,” he says.
Second, and just as important, the gap between the marketing director and the FD needs to be bridged so that campaigns actually reflect main board perceptions of pressures on the company. There is no point in the marketing director setting out on a long term branding exercise when the FD knows the company has a short term survival fight on its hands, he points out.
HHCL’s financial director Robin Price acknowledges there is a big gap between FDs working inside agencies and their colleagues in other sectors.
“I would like to see a great deal more contact between finance people in the industry and finance people in our client companies,” he says.
“FDs inside the industry meet on a regular basis, both formally and informally, but we don’t tend to have that much contact outside. If we did it would help our counterparts get to grips with that age old dilemma as to whether the marketing budget is a cost or an investment.”
Price believes the growing maturity of the ad agency business is itself helping to foster greater respect for the finance people working inside the industry. Closer contact between client and agency FDs could help to bridge the gap and provide both sides with a better view of the value to be derived from “total communications solutions”.
Anthony Harrington is a freelance journalist.