Silicon Valley: Valley cuts deeper

With tech's heyday long gone, Andrew Gordon looks at how firms are surviving in a brutal economy.

With tech's heyday long gone, Andrew Gordon looks at how firms are surviving in a brutal economy.

The days of style over substance are long gone. When reality paid Silicon Valley a visit, it hurt. As companies crashed and burned, PR firms saw clients and revenue wither on the vine. And those that have managed to survive are slashing budgets and demanding sound business models from their agencies and, for perhaps the first time, ROI.

"At the risk of oversimplifying, there were lots of bad companies made up of bad managers putting a ton of money into bad products in 1999 and 2000," says Lou Hoffman, president of The Hoffman Agency. "It's going to take some time for Silicon Valley to get this out of its system."

Of course, everyone is a lot wiser looking back over their shoulders. PR agencies are saying that despite how painful the past year has been and how slow the recovery will be, it will all be for the best in the long run.

"Everyone at some point bought into [the hi-tech boom]," says Zanku Armenian, SVP and GM of Brodeur Worldwide's Western region. "You can't be a PR agency and say we can't do [the buzz or hype] until we figure out what your business model is. Because the client will just take the money to someone else who can."

"I think we're going to be better in some respects," says A&R Partners president and managing partner Bob Angus, of the downturn. "We're going to be focused on getting more value for the client. And the agencies that aren't good aren't going to get it."

Armstrong Kendall principal Jean Armstrong agrees, arguing that agencies will have to be more focused and responsive to their clients' needs if they want to survive. Hype is worthless, she says, because everyone had it. Substantive PR is now worth its weight in gold.

"The tough market conditions have illustrated to us the importance of accountability to our long-term success," says Hoffman. "I won't speak for the entire profession, but I know we as an agency need to improve our ability to show our clients the ROI related to PR. We see this as an area of importance for years to come."

Setback in Silicon Valley

So as agencies go back to sound PR practices, what's life like in Silicon Valley for companies with sound business models in the PR industry?

"It's pretty bleak right now," says Andy Cunningham, CEO of Citigate Cunningham. "When we come out of the recession, things will pick up a bit, but we won't even return to the days before the pre-internet bubble."

"It's dismal," adds Sheri Benjamin, president of Weber Shandwick Worldwide's US technology practice, "especially since tech expectations, and thus PR expectations, had been ratcheted up to such unrealistic levels. Tech is simply a sector, not a magic potion."

But instead of lamenting and dwelling on the past, PR agencies are more concerned about surviving the present.

"Our work this year can be characterized as back to basics," explains Hoffman. "With budgets being reduced and increased scrutiny on ROI, there's a real emphasis on strategies and tactics that deliver visible results. I think it's fair to say we're striving to find new ways to support our clients' sales process with activities that fall outside the boundaries of traditional PR."

That's one area where A&R Partners is finding success. As the agency spreads into areas such as demand generation, much of the work in Silicon Valley is reactive in nature.

"Clients are adjusting to changing conditions," says Angus. "We are involved with lots of message refinement and helping companies distill what they want to say in a changing environment. Your message in a booming economy is much different than it is in a quiet one."

Corporate comms challenge

Corporate communications is dealing with the same challenge. Kevin Whalen, VP of corporate communications at Solectron, says his work during the past year has been spent managing the company's reputation to cope with the economic downturn ramifications, such as layoffs.

"We've had to increase communications internally due to the business climate," says Whalen. "I use the term 'aggressive reaction' to describe what we're doing. There's a lot of caring, feeding, and making sure our key constituents understand what is going on. We're more aggressive on announcing customer wins. We've beefed up our investor relations staff."

Jim Finn had his hands full this year protecting Oracle's reputation. As VP of worldwide corporate communications, Finn faced an extremely aggressive media reporting on the scandal involving the purported sale of Oracle software to the state of California.

"We are in an increasingly out-of-control media environment," says Finn. "No one predicted this downturn. No one is focusing on the fact that this is part of the business cycle, and who the winners and losers will be. The media just wants to place blame. Because the filter is so bad, we're increasingly going to our audiences directly. We can't count on the media."

Of course, the big story in Silicon Valley is Hewlett-Packard's consolidation of its PR agencies. HP currently uses more than 50 firms globally, and the ramifications for the "losing" agencies could be devastating (see panel below). And replacing lost business will be tougher than ever, with clients increasingly demanding more for less.

Harry Pforzheimer, president of Edelman PR's Western region, has noticed that clients' expectations are higher than ever due to the downturn, despite smaller budgets.

"Companies are realizing that advertising is not going to sell," says Pforzheimer. "Advertising's a tool, but it's not the most important tool. Companies realize that outreach to the media and investors and analysts is important, because when they are saying something nice about your company, there's a lot more credibility than if you're saying it about yourself."

And though that translates into a lot more work, it doesn't necessarily mean more money. Agencies have to work harder than ever to win new business. And if, and when, they win that business, they have to work harder still to meet higher expectations.

"We spent a lot of time over-servicing current accounts," says Neale-May & Partners president Donovan Neale-May. "We're tied up in consulting, brand positioning, and messaging. And just because [clients have] cut their budgets, that doesn't mean they've reduced your expectations. So you have to do more. During the dot-com days, about 80% of the time we spent working for clients was billable. I would say our hours are 20% billable now."

The long road back

So is there light at the end of the tunnel? Sure, but how long it's going to take to get there is up for debate. Hoffman and Angus say that diversification of clients and abilities within the hi-tech industry was essential for surviving the downturn, just as it will be for getting out of it. And for those who didn't have their fingers in various hi-tech sectors, Benjamin and Neale-May predict that consolidation will loom over many tech firms. But not Cunningham, who argues that even diversification within various hi-tech sectors isn't enough.

"The need for a tech-specific PR firm is much less than it used to be," says Cunningham, arguing that such firms were needed over the past 20 years to help educate the public about the importance of hi-tech.

"Agencies are in survival mode," says Cunningham. "They're squeezing their eyes shut and praying for it to come back. But there's no value in the marketplace right now for hi-tech PR firms. Look at Niehaus Ryan Wong and Wilson McHenry," which both shut down.

So PR firms are now faced with three options for the future, says Porter Novelli partner Rhonda Shantz. Firms have to be more efficient with their own budget and time, as well as their clients'. Agencies must also become innovative, moving into areas like consulting, branding, and research. And what's that third option? Shutting down.

For whom the HP bell tolls

Not that Silicon Valley PR agencies need another blow to the bottom line, but there is one more bomb waiting to go off: Hewlett-Packard. HP has not said which dozen agencies received the RFI for its plans to consolidate its PR firms from more than 50 globally down to just a few. But those that are in the running have a lot riding on HP's business. "When you get involved with a large company, it can use up a lot of your resources," says A&R Partners president and managing partner Bob Angus. "You can become too dependent on that one company." So for any firm that already has a large chunk of HP's business, losing it could be devastating in an already brutal economy where new clients are few and far between. "Consolidation always means less room for fewer players," says Zanku Armenian, SVP and GM for Brodeur Worldwide's Western region. "This will seriously hurt some players." Andy Cunningham, CEO of Citigate Cunningham, goes even further. "For some of the agencies that are part of the process, who don't have a parent company and aren't diversified, it will be just devastating," she says of smaller agencies that might lose HP's business. But it won't necessarily be easy for the winners either. HP will select the chosen few by mid-October, so the agencies are in place by the beginning of the new fiscal year, November 1. "Whoever wins this business will need to hit the ground running," says Angus. The merger with Compaq "is a major change for this company, and it will need someone adept enough to help focus its message."

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