ANALYSIS: CEOs temper expectations as they devise future plans

In frank interviews with top agency execs, Julia Hood finds that while the outlook is more upbeat now, 2004 plans are being formulated using a pragmatic approach.

In frank interviews with top agency execs, Julia Hood finds that while the outlook is more upbeat now, 2004 plans are being formulated using a pragmatic approach.

The CEO of one of the world's top 20 firms was very pessimistic about six months ago. But he and several of his peers are feeling a little more upbeat now, not only because new-business leads seem to be picking up, but because his firm is operating with greater efficiency than ever. "The recession of the past three years has taught us how to run our business better," he says. This article is based on a series of off-the-record discussions held with CEOs and a few other senior executives from 17 of the biggest PR firms (according to 2002 Council of PR Firms rankings), with a view to gleaning some insights into the thinking behind 2004 planning. While the editorial merits of unattributed comments are sometimes considered questionable, the fact is agency leaders, particularly those for whom Sarbanes-Oxley has exacted new restrictions, have never stopped talking to each other about what's going on in the market. A wider audience will benefit from a glimpse into these conversations. It should be noted that "off the record" does not necessarily mean truthful, though there was no reason to doubt the veracity of any contributor. Performance and promise A sense of renewed optimism pervaded many of the interviews, as a resurgence of RFPs and business leads has accompanied the end of summer. But in planning ahead, these executives are not taking growth for granted. One CEO echoed a common fear by suggesting that the RFPs signal little more than a reshuffle of existing business. In terms of how 2003 is shaping up for firms, most say revenue growth will be flat or moderate this year as compared to 2002. There were a few exceptions that were looking to grow this year, either due to recalibrating after losses from the previous two years or from new business. "We are finishing this year slightly ahead of plan," says one CEO. "Frankly, that's the first time I can say that since 2000. What that really means is that business has stabilized, the economy is holding its own, and we could make a plan that was not aggressive." But the majority say they feel lucky to be looking at a flat year, or low single-digit growth at best. Margins are way up for many, in one case doubling since the first half of the year. No mystery why, as firms are currently running as lean as possible. Performance varies by sector, of course. Healthcare has stayed strong for most firms operating in that market, particularly pharmaceuticals with a winning product. Government RFPs and new business in areas like managed care, says one CEO, have also provided momentum. Consumer marketing is growing for many, though a few say that it has been stagnant, with some clients awaiting budget for projects long promised. Financial practices have languished due to absent IPOs, M&As, and despite recent stock-market momentum. Corporate work did not live up to its promise of generating new business, despite the seemingly rich well of paranoia that resulted from numerous financial scandals. Companies that may have been expecting to institute corporate reputation programs as a proactive measure instead became risk averse, even insular. "What happened was some companies pulled in and decided they wanted to keep tighter control over messaging and execution," says one CEO. Another agency head says that cost pressures are the problem, as corporate departments and budgets have shrunk, and companies are postponing long-term reputation programs in exchange for short-term plans related to specific business objectives. "Corporations see these kinds of broad-based reputation initiatives as long-term." Hiring and M&A A recruitment boom does not appear to be on the horizon. "We have a plan in terms of investing in some key disciplines," says one agency head. "But outside of that, we will hire in lockstep with our growth." Senior investment hiring is still going on, but most agencies say that they plan to staff up as new business demands it, or not at all. "You can forecast staffing up when you know it's strategically important for the company," one CEO offers. "But do I think, going into 2004, that we'll have plans to increase staff by X amount? You simply do not make that kind of commitment now because you're focused on the margin." Few say that they are currently looking to acquire any new firms, though there are isolated deals brewing both domestically and abroad. Hiring for expertise, rather than acquiring, appears to be the norm. Holding-company issues Many of the CEOs interviewed head agencies that are part of holding companies, and represent a range of viewpoints on the benefits and complications of the accountability and resources that go with that relationship. A few say that they're seeing more integration of programs across disciplines, and that their holding companies are providing a valuable platform for sharing information and new-business leads. Marketing partners within holding companies are showing a little more respect than they did in the past, says one. "We've moved from saying, 'We have a pitch in three days, send some slides,' to 'We have a pitch in three weeks, let's talk about it.'" But pressure from holding companies to increase margins is still significant, says another CEO. "You're balancing the outside world, which is fairly slow to view contracting with agencies in the wake of some kind of turnaround, with the impatience of holding companies," says a CEO. "Margins have been low for a long period of time, and the patience of holding companies will be limited." Biggest worries Not surprisingly, one of the biggest concerns these CEOs have is the unknown. One terrorist attack on the US could have huge consequences for morale, and for business. More pragmatic worries also abound. Conflict is becoming a more contentious issue, as clients are taking a harder line than ever in defining their territory. One firm cited two recent examples of unprecedented conflict issues. One client, working with multiple agencies, unexpectedly redefined the terms of the contract to extend the definition of a regional territory, preventing the agency from seeking competitive business in those areas. Another company prevented the firm from pursuing an RFP on a competitor's product line, though the agency didn't represent the client in that area. The agency executive attributes this tougher stance to the fact that clients simply have all the power now, and also to the enormous pressure companies are under. "They are angry, scared, and feel a more critical need to protect information and their place in the market." One of the biggest concerns is simply how to grow the business, especially now that cost control is the order of the day. "You have an industry that over three years has basically been a declining industry," one CEO says. "The concern is, have we reached the point where we are flattened?" One CEO fears PR may be a victim of the Wal-Mart syndrome. "Wal-Mart changed the retail environment, but in doing that it has also changed the way many companies are forced to behave," the agency head says. "Everything becomes about price and efficiency. In a consulting business, you can always get more efficient, but you can't do it the way manufacturers do it." There is also a fear that the recovery can stall under the smallest pressure. The comfort that CEOs are finding is in surviving thus far, and preparing for the worst. "My biggest worry is that the recovery may not be for real, and we may reach a point where we start to slip and slide backwards once again," one CEO says. "But we are more prepared for it now than in the past four years. We were a little spoiled before." Keeping the staff motivated throughout the unease has been an enduring strain. Even in the firms that say their revenues are up over last year, it has not come easily, as a general weariness is pervasive throughout the ranks. Many believe there will be a massive shuffle if and when the recruitment market picks up. "How can we make our people feel they are part of a winning team?" asks one CEO. "That this is an exciting, challenging climate in a company that's going somewhere? How do you instill that in people?"

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