REGIONAL FOCUS - SILICON VALLEY: Tech slump hits Valley - JuliaHood reports on the financial survival strategies of agencies andclients

The boom times are over - King Midas would struggle to turn a

profit right now. Layoffs of up to 30% have become ubiquitous throughout

the region's PR agencies. Corporate PR budgets are being slashed, and

competition for new business is ferocious.

"It's not quite as bad as some of the sensationalist headlines suggest,"

says Harry Pforzheimer, president of Edelman's Western region. "But

there are a lot of people walking around who have lost $100

million in net worth - there's uncertainty."

The changes in everyday life in the Valley also resonate. Empty

restaurants and noticeably lighter traffic on the commute from San

Francisco are the most visible reminders of the slump. But the Silicon

Valley story is still evolving. Agencies and companies are beginning to

understand the work of surviving the tough times and preparing for the

next phase.

"The bottom line is we have not hit bottom," says Stephen Jones,

director of Ketchum's Silicon Valley office. "In Q2, people were saying

that there would be a recovery by Q4. Now they're saying by Q1 2002, or

the first half of 2002. The whole thing is being pushed back."

The deflating bubble

Some of the agencies listed in PRWeek rankings have had significant

up-heavals over the past year. Alexander Ogilvy, ranked sixth according

to income figures for 2000, closed its Valley office and rolled staff

into San Francisco last autumn. Weber Shandwick, now ranked number one

as a result of the 2000 merger, has now merged with BSMG Worldwide. At

the same time, The Weber Group has moved from its Palo Alto, CA office

to share space with WSW in San Mateo. However, Waggener Edstrom has

bucked the trend, opening its first Silicon Valley office earlier this

year. Incepta acquired Cunningham in 2000, which became Citigate


While acknowledging that incomes will be lower than they were in 2000,

agencies are extremely reluctant to speculate on their expected results

in 2001. Lee Caraher, EVP of the Western region for The Weber Group,

says, "We're not sure the top-line results are what we would have

projected a year ago." Barbara Hagin, EVP and GM at TSI, says that

income for 2001 will be "certainly less than last year. We're looking at

a very different scenario, and we'll be building from there."

Edelman's fiscal year started in July, and Pforzheimer says that while

huge growth is clearly not expected, "it's just a little mystifying to

forecast that well." One of the reasons for the caution in predicting

the future may be because one client win can change the story. For

example, Citigate Cunningham has endured a number of painful job cuts,

but its fortunes were recently boosted when it was retained last month

as agency of record for Sybase. The agency is even hiring again, as is

Text 100 following its successful IBM pitch.

The job market

While some agencies are beginning their turnarounds with new accounts,

the job market in Silicon Valley PR is bleak. "I've been telling

everyone that this year is like a Fellini movie," sighs Barry Shulman,

head of recruiting agency Shulman and Associates, which has handled job

searches for companies such as Sybase and Sun Microsystems. Last year,

Shulman retained seven recruiters; this year, he is down to four, with a

65% decrease in his workload.

One disturbing trend Shulman has observed is companies and recruiters

advertising for PR jobs they have no intention of filling in order to

boost their databases of potential hires for better times. But some

agencies maintain they are still hiring in Silicon Valley, including

Edelman and The Hoffman Agency. On the corporate side, Oracle has

announced it will be hiring more PR staff. But that news comes as a

result of the company's decision to jettison Applied Communications, its

agency of record for eight years, and go it alone. Such a decision can

have a chilling effect on the PR industry.

Client priorities

Even if clients are not dumping PR firms, many are in a state of flux

with their agency arrangements. Sun Micro-systems dropped

Burson-Marsteller earlier this year, and divided the account among

Citigate Cunningham, Ogilvy, Eastwick Communications, and KVO. A few

months later, KVO's portion was slashed, and Eastwick was dropped

altogether. Sybase went through several rounds of agency reviews after

dropping The Weber Group in July, and then settled on Citigate


Companies are generally taking much longer to make agency choices, and

have been employing a rigorous RFP process. "Nothing is a simple RFP

anymore," says Caraher. "They're big, involved, probing RFPs." Clients

also want assurances that the senior people involved in pitching the

account will be involved in its execution. Agencies are also being asked

more and more how they measure their effectiveness in order to make PR


Clients also want to keep costs down. Susan Baldwin, EVP of The Hoffman

Agency, reports that there is no standard approach - some clients are

freezing budgets, some are cutting budgets.

3Com is an example of a company that has not changed agencies, but has

been working to change its message. The company has retained Coltrin and

Associates for six years. "The scope of the work has become more

focused," says Brian Johnson, 3Com's corporate PR director. "Previously,

we were focusing on many different issues, including public policy. We

are still active in public policy, but not to the extent we once were."

Johnson says that the priority for 3Com is communicating a consistent,

specific corporate message throughout its varied businesses.

Like many companies in the Valley, 3Com has responded to the tougher

business environment by focusing its PR budget. "We are applying more

energy into communicating a single message about 3Com to our current

customers, shareholders, prospective customers, industry analysts, and

employees," says Johnson.

Other clients warn agencies not to lose their critical edge in an effort

to win accounts. Futuredex, a start-up venture-relationship network set

to launch this month, hired Spiralgroup when the agency advised it to

rethink its PR strategy entirely. "That was a critical moment," says

Cheryl Hammer, managing editor of Futuredex. "The agency didn't just

come in and say, 'Hey, what a wonderful idea.' They assessed every

element, and made a recommendation that was a different path for


Tom Galvin, corporate communications director for VeriSign, which just

selected Applied as its new agency, agrees. "One of the things that we

asked agencies to do was tell us what the environment is out there -

what is the health of the patient. You have to let me know when I am

full of shit," he says. "The biggest missed opportunity that agencies

can make pitching for an account is not offering great ideas on how to

position a company at every opportunity."

A skeptical VC community

While established companies are reducing budgets, some in the VC

community are shutting PR out altogether in order to focus finances on

technological advancement. Barry Hutchison, director of media relations

at VC firm Draper Fisher Jurvetson (DFJ), helps companies kick off their

PR programs and, depending on the company's stage of life, might hand

off the PR work to one of DFJ's preferred agencies.

But now the companies DFJ works with are in the embryonic technological

stage, too early in the game for serious PR council. "Our VCs are not

encouraging any of the companies to spend that type of money right now,"

says Hutchison. "If at all, they are suggesting that on a project basis

they hire a PR agency to work on collateral material. The expenditure of

$15,000 a month to a PR agency is a waste of money that should be

going into the development of the technology."

Hutchison also says that PR agencies suffered some reputation damage

during the boom. "It's hard for me right now to even introduce an agency

to one of the partners," he says. "I think PR agencies did themselves a

horrible disservice during that time." Hutchison says that inflated

retainers and the prevalence of untrained PR people working on

high-profile accounts hurt the image of the PR industry.

But all isn't lost for PR agencies in the Valley. Hutchison says the

smart agencies will already be spending the time to build relationships

with "seed stage" companies. "If they can get to know a company as it

matures, they will have an inside track on fulfilling all its needs down

the road."

Fertile ground

While agencies wait for a new technology market to mature, they are

looking for business outside the industry, as well as trying to help

clients who are coping with the transition. PRx is an agency that never

focused exclusively on tech, but it has watched the economic problems

impact other industries in the Valley. One of the agency's clients is a

detective agency that flourished in the boom by helping companies with

employee background checks. As its business dwindled, PRx helped the

company reposition itself as an expert on workplace violence.

Other firms have created products to fit tighter budgets. The Hoffman

Agency launched High Impact PR Programs, intended to help clients

increase CEO visibility and the overall profile of the company.

The Benjamin Group/BSMG has received new business from nVidia to handle

its launch in Asia. EVP Ellen Roeckl sees great opportunities in the

semiconductor space, particularly for an agency that has global reach.

"Global PR is like weight loss," she says. "Everyone talks about it, but

not many people do it very well. The agency needs to work with the

client to help them understand their own organization and how it can

support synchronized PR internationally."

Biotech is potentially an area where tech agencies and staff could move,

particularly as Silicon Valley is home to Genentech and many other

biotechs. But working in the sector demands a rigorous understanding of

the healthcare industry and regulators.

Telling the story

Although some PR firms will deny that the dot-com bust left them

vulnerable, it is clear that no agency is unscathed. Agency news is

probably not much different from the stories David Satterfield, business

editor of the San Jose Mercury News, hears pitched daily. "We are

getting a lot of pitches here for the counter-trend story - some company

that is doing well in spite of the downturn," he says. Satterfield

praises the strategy, but there is one story he says he'd like to hear

about more often: "It would be nice to show how a company that is caught

in the downtrend is trying to survive it, trying to get through it," he

says. "That would be more interesting."


Ranking Agency Name Revenue (dlrs) Increase Staff

2000 1999 2000 (%)

1 N/A Weber Shandwick Worldwide* 16,196,702 5 76

2 1 Citigate Cunningham** 11,218,542 6 86

3 7 Ketchum 11,072,000 63 53

4 6 Edelman 10,300,000 32 78

5 12 BSMG 9,235,000 10 62

6 15 Alexander Ogilvy 9,002,200 50 90

7 NEW TSI 7,744,000 3 39

8 NEW Mindstorm 6,795,891 -10 39

9 NEW Text 100 5,889,087 -13 31

10 NEW Murphy O'Brien 5,565,691 13 61

11 NEW Phelps Group 4,932,925 30 35

12 13 Walt & Company

Communications 4,300,000 95 26

13 17 McGrath/Power PR 4,022,279 62 20

14 NEW Waggener Edstrom 3,800,173 -28 14

15 NEW Gibbs & Soell 3,376,041 -23 25

16 11 A & R Partners 3,370,000 37 62

17 24 ShapeTechnology 2,663,900 -7 19

18 4 The Hoffman Agency 2,600,000 18 12

19 3 Porter Novelli 2,500,869 18 18

20 18 Sterling Communications 2,237,690 -2 20

21 19 Brodeur Worldwide 1,520,000 38 10

22 20 PRx Strategic

Mktg. Communications 1,265,063 81 8

23 8 Eastwick Communications 1,222,756 N/A 16

24 9 Neale-May & Partners 172,500 N/A 2

Note: *Weber and Shandwick merged in September 2000

**Cunningham Communications was renamed Citigate Cunningham in 2000

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