Growing Pains

The surviving handful of publicly owned agency-based companies have all now published their annual reports. As in most years, WPP’s is the most expansive and provocative. Perhaps CEO stands for chief essay officer, since the top guy uses the report as a soapbox for sharing his view, if not of the whole planet, at least of the biz-o-sphere.

And the picture for the year ahead isn’t very good. Normal cyclical problems, like excess inventories, are colliding with structural flaws (typified by overcapacity in such industries as automobiles, which can turn out 75 million vehicles a year for a world that needs 55 million), and the resulting kinks may take more than a year to untangle. Meanwhile, the marketing communications industry will remain under pressure.

Still, WPP makes a good case for its long-term prosperity, despite the problems of the moment. Its size, spread and service menu are potent weapons. But the consequences of size, particularly in a creatively driven business, are not all virtuous, the report notes. Why, it wonders, aren’t there more agencies in between the Biggies, which become sluggish and are geared toward big clients, and the Minis, the one-city shops with a handful of clients? In recent years we’ve seen Deutsch, Hill, Holliday, Mullen, Riney, TBWA and other midsizers sell out by selling “up.”

Where are the scrappy, idiosyncratic iconoclasts of tomorrow, or at least the entrepreneurs who will create the next generation of agencies?

The answer is important for the WPPs of the world. The big public companies are on a treadmill that offers no graceful egress. It’s grow or crash. The basic business’ historical growth rate is around 7 percent (it’ll be less this year), and investor ardor, which dictates stock prices, cools below 10 percent (which is why stock performance is squashy lately). The missing few points, typically made up by acquisitions, can represent a lot of money. For WPP, with $4 billion in revenue, it’s around $120 million. A company with $120 million in revenue would rank among the top 25 global marketing-services outfits.

When you think about it, it’s in WPP’s interest to spawn midsized rivals that it can ultimately acquire. That may turn out to be a result of WPP’s extensive (and the industry’s only) entry-level professional staff-development program. Take bright kids, teach them everything you can, then let them build firms that the WPPs, Interpublics, Omnicoms and other monsters eventually devour.

Is the talent pool there? In the financial and management arenas, it’s deeper than you might think. Agency profit margins this year, at the trough of the slump, will be better than they were in 1989, the peak before the last recession. And the industry is focusing on management development, typified by the sixth edition of the 4A’s financial seminar—full days of programs in Florida in June; hardly a boondoggle.

Long-term demand for agency and related services is secure. The talent to form new companies that delight clients and turn a respectable profit is there. The mechanism for rewarding successful risk-takers is also pretty well established.

Not a bad outlook from the depths of an industry in recession.