AGENCY RANKINGS 2002: It's a small world after all

"(GM CEO) Rick Waggoner said to me, 'We need consistent help in crafting the platform messages for a variety of constituencies whose opinions we need to influence.' This goes beyond customers to Washington, legislators in London and Beijing, shareholders, suppliers and competitors."

"(GM CEO) Rick Waggoner said to me, 'We need consistent help in crafting the platform messages for a variety of constituencies whose opinions we need to influence.' This goes beyond customers to Washington, legislators in London and Beijing, shareholders, suppliers and competitors."

Having this kind of global relationship is not impossible with a number of different agencies, but it certainly makes things easier. While PR depends on local capabilities to be effectively executed - and any corporate PR person would happily attempt to break ranks from any agency alignment in order to secure the agency with the best local relationships - the desire to have it all filtered down from one central place is surely understandable.

But whether it is consistency of message or cost driving a company's consolidation decision, the effect is the same. It may be taking its time, but the gradual consolidation of the PR industry into a cluster of big agencies - with an enormous chasm between them and the small independent players still working their niches - is inexorable.

The recession surely didn't spare the giants, who scrambled to minimize losses. Eleanor Trickett reports on how these parents dealt with the downturn - and how it proved PR's place in the big picture.

Being English, Martin Sorrell, CEO of the WPP Group, could have a handy prop when describing his prediction for the outcome of the economic slump: He could point right to the small plate holding his teacup. In recent months, he's been quoted dozens of times in the world's press describing a saucer-shaped recovery.

His anticipation of an almost painfully gradual recovery is unlikely to comfort him and his fellow CEOs sitting atop Madison Avenue's Mount Olympus - the triumvirate of WPP, Omnicom and Interpublic Group. All three saw PR revenues tumble in 2001. Omnicom, though falling just over $26 million, leapfrogged WPP to sit at the top of the tree once more.

WPP fell $56 million - a loss that seems small compared to IPG's $137 million tumble. Coming in fourth is Publicis Groupe, and if you were to add its PR revenues to Saatchi & Saatchi's for both years - the former acquired the latter in March - you'd see they dropped $9.6 million.

Given the PR shortfall, some of the major holding companies were able to show only single-digit gains overall, and many posted a decline. And although the soft economy, combined with the tech slump, would have done the job itself, immediately after Sept. 11 it was clear that these firms - stuffed full of ad and media buying agencies - were going to suffer even more. On Oct. 1, Taylor Nelson Sofres media reporting company CMR said that network, spot and cable TV lost a total of $312.2 million in ad revenue for the week of September 9-15 alone, as advertising was cut to make way for continuous news coverage. But that's advertising. PR's OK - it's recession proof, right?

PR feels the pinch

Another sweeping statement from Sorrell that has appeared numerous times in recent months has been his frank, hands-up admission that he was plain wrong about PR's much-hoped-for recession-proof qualities. Holding companies (or "parent companies

as Sorrell insists on calling WPP) long ago realized that the best way to retain financial health was to diversify as much as possible and specialize in non-advertising services such as PR.

But he, alongside the entire industry, soon became aware that "corporations, when they come under pressure, make wholesale cuts, and PR expenditure is regarded as discretionary, and is the first to be cut back.

The phenomenon was especially disappointing to an industry that believed it had a more vital role than ever to play when marketing budgets are pinched back.

"A lot of people were disappointed by what happened in 2001,

Sorrell continues. "A lot of us, me included, thought that the increased specialization would result in more resilience in a recession - certainly in the one we saw in the technology, media and telecoms areas. That has not proven to be the case. As has been well rehearsed, PR and public affairs were probably most affected by the recession."

The president of a large PR firm, who sold his agency a few years ago, saw the problem from the other end. "The CEOs had an image of something that wasn't realistic,

he says. "I remember early conversations with (our holding company CEO) that we should be delivering 30% profits. And in a sense, we've lost a little clout now. Didn't we all enjoy the high prices we got when we sold our agencies? We propagated it, but we had a very willing audience. They were playing us back to the analysts and investors, saying 'We have agencies that can do well in any downturn. When they stop spending in advertising, they go to diversified.' But PR agencies are not recession-proof. They're subject to the same downturns as ad agencies."

MS&L CEO Lou Capozzi agrees, somewhat. "Because of the huge downturn, the managers of PR firms now have a problem within their holding companies,

he notes. "They need to regain fiscal credibility. We had three or four years when we were riding high, but now we are definitely in a downturn."

Big boys and the bottom line

But these holding companies are still plowing their money into non-advertising services - not only PR but also direct marketing and sales promotion.

At the management conference of the American Association of Advertising Agencies (4As) in April, IPG CEO John Dooner said that while five years ago more than 90% of the revenue of the major holding companies was from advertising and media services, he predicted that five years from now, less than 40% of the revenue of the top four would come from those areas.

The remaining 60% will be split between marketing communications and other marketing services.

Last year, just 7% of IPG's revenues came from PR, according to PRWeek's figures. Of the large holding companies, Omnicom's share of PR is the greatest, with 11% of its income derived from its PR firms. According to Sorrell, 55% of WPP's business is non-advertising (and he plans for two-thirds within five years), and just 10% of that comes from its PR agencies, which include three of the top ten global agencies - Burson-Marsteller, Hill & Knowlton, and Ogilvy.

As small as Havas' PR revenues were - just 5.2% of overall revenue - many say its decision last year to decentralize its PR firms from the (now-defunct) Diversified Agency Group and align them into ad agency networks was a psychological blow to the discipline. While some praised the decision as showing a commitment to cross-disciplinary work and a seat at the advertising table for the PR agencies, others criticized it because dismantling a mini-holding company for PR firms signaled that investment would no longer be made in those areas, to say nothing of the PR agency bosses now reporting through ad men, rather than top management.

IPG, with the finalization of its True North acquisition occurring last year, managed a compromise in that respect. While its PR agencies - Weber Shandwick Worldwide (into which BSMG was merged) and Golin/Harris being the largest two - were nominally aligned with ad agencies, IPG housed them under Advanced Marketing Services. Advanced chairman and CEO Larry Weber says that PR firms reporting into ad agency chiefs is inappropriate given that "we report into different clients, not through marketing,

which clearly shows that "there are two very different systems, which should have two very different reporting structures."

Despite the criticism leveled toward it, Havas' commitment to develop beyond advertising was affirmed by CEO Alain de Pouzilhac in December, when the group paid Vivendi Universal some $3.5 million for the right to retain its name - thus being able to drop the word "Advertising

from its moniker. "It underlines our intention to develop as in international communications group beyond just advertising,

de Pouzilhac said at the time.

But the extent to which Havas can do that now is under question. There's an enormous gap between it and its nearest multidisciplinary rival on the list of the world's top holding companies. Havas' $2.73 billion in revenues falls significantly behind the newly expanded Publicis Groupe's $4.77 billion (advertising-only Dentsu comes between them), and this gap has many questioning the future of midsize players, which also include Grey Global Group ($1.86 billion) and Cordiant Communications ($1.17 billion).

As one (owned) agency CEO says, "It's not a matter of if, it's a matter of when. They're all going to go. They have to. The pressure will be enormous, both competitively and financially. These companies have employees and managers who own shares, and they're watching their peers get rich. They have no liquidity. The biggest pressure will come from the companies themselves."

Cordiant's well-publicized woes add weight to the argument that by this time next year, if the company exists at all, it will be in a very different state. Like a row boat in stormy seas, the slightest gust can blow it into trouble. A small UK newspaper article in January predicted that CEO Michael Bungey would be asked to step down ahead of the annual results, causing the share price to plunge 15% in one day. Among its catalog of woes last year, it issued three profit warnings in four months and slashed 1,000 jobs. It is, by all accounts, ripe for takeover, as are its similarly sized siblings. After all, that's the way the industry is going.

The consolidation conundrum

Of course, the M&A fervor of the past few years has led to the "Is size important?

debate. Sorrell maintains that it's not size that counts - it's what you do with it. As he points out, "the only area of business with economies of scale is the media buying business.

Volume discounts and year-long contracts with the major media outlets have driven massive consolidation of the media agencies within networks - the advantages of which are so huge that client conflict is rarely an issue, especially with this non-creative discipline.

Publicis Groupe's acquisition in March of Bcom3 - a company that had an uncertain year in the "will it/won't it

matter of its IPO - has definitely turned the big three into the big four. Publicis chairman Maurice Levy's previous foray into the US market was the attempted hostile takeover of True North in 1997, which all but ended in fisticuffs between him and TN's then-CEO Bruce Mason.

This time around, the maneuvers were far more elegant. The new group - which rocketed to number four behind Omnicom - has a strong presence not only in Europe and the US but, thanks to Dentsu's strong stake, in Japan as well. That market has been tough for many of the groups to crack, and while most will boast some kind of presence there, Dentsu's sheer size and heritage in that market will provide Publicis with an inside track that few others can truthfully say they have.

While pundits are waiting for Levy to pounce on one of the remaining midsize groups, he has said that there will be no more major acquisitions for the foreseeable future, just small-scale moves in PR, direct marketing and sales promotion. This leaves the new group enormously advertising-heavy, however, with neither of the component groups having been particularly blessed below the line in the first place - MS&L is the only real global force, and overall, PR is just 3.9% of the new group's revenues.

Sorrell appears to be cautioning his acquisition-hungry colleagues, however.

While acknowledging the sense of consolidating media buying, he continues, "In other areas, there are diseconomies of scale.

In other words, it's fair enough for a commodity company, whose success is based on offering the lowest cost, to seek scale in order to do this. However, companies based on intellectual capital - a non-scalable phenomena - are more likely to be hampered by size. "Size brings problems,

Sorrell continues. "I'm not sure that consolidation for it's own sake is a good idea.

He's one to talk, though.

Dooner, at the 4As conference, said the four largest agency holding companies controlled 55% of global ad billings and a whopping 82% of US billings.

In the past year, he said, agencies owned by those companies won 95 of 100 advertising account reviews tracked by IPG. Not surprisingly, the top three also scored the highest for multi-country accounts.

Moreover, the holding companies are playing more of an agency role than ever before. Creeping consolidation of clients' business into one group has been well-documented, but perhaps the starkest example was when PepsiCo and Coca-Cola last year sent out press releases announcing that they had hired, respectively, IPG and Omnicom, rather than the ad agencies owned by them. Long gone are the days when these groups were merely financial brands. Now, a holding company wins the business and then decides where to put it. When PepsiCo hired Omnicom for its $400 million business, it had a new agency created for it - after the appointment had been made.

Being able to satisfy a client itching for change without losing its revenues is surely an attractive option to the chiefs - even though they deny that such a thing as a "superagency

exists.

The PepsiCo move was due to a conflict. Having been handled by True North's FCB, it didn't like it when IPG bought the group, as it had Coca-Cola as a client. Such consolidation will inevitably throw up this issue. Perceived wisdom has it that the holding companies were invented in the first place to manage conflict across large agencies, still managing to center profits into one ultimate bottom line. But there has been more than just this one occasion in which a holding company's acquisition of a network with one client has dismayed a client already serviced by the company's existing network.

When these agency consolidations are driven by clients' demands, however (and most holding company bosses agree that this is the case), shouldn't they have a more flexible approach to conflict? This certainly seems to be the case in the Publicis deal. For starters, numerous car manufacturers - including GM, Renault, Fiat, Toyota and Audi - all sit somewhere in the group. (Incidentally, IPG clearly thinks this scenario is too good to be true, and instructed FCB to pull out of the Hyundai pitch at the end of March to prove its loyalty to GM.)

The future of the global giants

But despite all this talk of global clients and network alignments that has been dominating the industry in recent years, it would seem that PR is still rarely seen as a global discipline.

Many people got excited when IBM kicked off its massive review of global PR arrangements, whittling some 50-odd agencies down to just three. As proof of the unprecedented enormity of the task at hand, Omnicom fielded not just one of its top 20 agencies, such as Fleishman-Hillard, Ketchum, Porter Novelli or (IBM incumbent) Brodeur - but instead formed a supergroup called OneBlue, comprised of Fleishman, Ketchum and Brodeur staffers and helmed by Ketchum's Rob Flaherty and Tom Harrison, CEO of the agencies' parent division, Diversified Agency Services.

The PR industry had never seen such a huge review, nor has it seen one since. At the time, many agency heads were speculating about who would be next. Procter & Gamble was mentioned, and that did have some logic to it given recent consolidations in direct marketing and interactive agencies by that company - but nothing has materialized.

"One swallow does not make a summer,

Sorrell points out, although as CEO of a group that has prided itself on selling its agencies and disciplines as a package, he does add that just because it hasn't happened yet doesn't mean it's never going to. "There is still a general move toward greater coordination. People want to save money, and they don't want unnecessary duplication. By integrating disciplines, you get benefits and synergies - not least the opportunity to negotiate a better deal."

Weber says that just because the RFPs have not been terribly visible doesn't mean that PR is not consolidating. "The big clients may not be putting the PR business up for review,

he says, "but they're slowly adding another market to the mix. We'll wake up and suddenly see we're handling our large clients in more markets than just North America."

He adds that a good motivation for centralization is consistency of message.

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