Staff pay the price as holding companies retrench – but that’s hardly a recipe for long-term growth

What happens to the staff when there’s no growth among the agency-based holding companies?

There is some growth, of course, as we’ve reported extensively in covering the Q3 results from WPP, Omnicom, Publcis Groupe and Interpublic. But not enough to make anyone very optimistic that spending more on people is going to be returned in higher income from clients.

quarterly_earnings_agenciesOmnicom and Interpublic have seen their above average organic growth nullified by the strength of the dollar and that strength is only going to increase as the world frets about the slowdown in China and no growth at all in the hitherto booming ad markets of Latin America and Russia.

The UK’s WPP is only growing by around three per cent – on its own net sales figures – while Publicis Groupe, which has already instituted a global pay freeze, is forecasting just 0.1 per cent growth for the year.

These companies – and their smaller brethren Dentsu and Havas – account for at least half of the ad business funnelled through agencies and employ around 400,000 people worldwide. Clients are grinding down fees in the current spate of creative and media reviews while bodies like the US Association of National Advertisers are investigating whether some rebates from media owners are going into the agencies’ pockets rather than back into theirs.

Usually when an agency loses business it axes staff, some of whom will find their way to the winner. But it’s a different matter when none of them are succeeding commercially, or not by as much as they’d like or need. Do you axe people to ensure returns to shareholders (and something for an even rainier day) or is this going to weaken your pitch to clients: that you’re the only outfit big and well-resourced enough to handle the biggest global accounts?

It’s a poser for all of them and one that, according to WPP’s Sir Martin Sorrell at least, is leading to desperate business practices. He says the prices being quoted by his media agency rivals are ‘inane,’ in effect that they’re guaranteeing they can buy specified for media for unachievable prices. when they can’t, according to this reading, they have to cough up the money themselves.

For decades the big holding companies have defied gravity – cost-cutting clients chiefly – through acquisitions and expansion into new, emerging markets where adspend is growing faster and labour is cheaper. But there’s a limit to how far this can go.

Markets like China and India will produce their own national champions and the cost of talent will increase as people employed by the western marcoms companies realise, maybe, that they can do better on their own and find the sources of finance to back their ventures.

It’s an uncomfortable squeeze for the marcoms giants, one that will be keenly felt by their army of employees in more mature markets even though these, currently, are delivering the best returns.

Ever since WPP and Omnicom came into being to join Interpublic as publicly-held holding companies the common strategy has been growth by acquisition at almost any price. That’s not looking like such a credible model these days, even in a global economy that’s officially recovering, albeit slowly.

Another global recession could easily see one or more of the big marcoms companies founder completely.

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