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The Big Picture

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Report Cards are out, and the Monday-morning quarterbacking has probably begun. Here's how it all came together: Total U.S. advertising grew between 8 percent (per Zenith Media) and 10 percent (McCann-Erickson) in 2000, the best showing since 1984. The 31 ad shops that received Report Cards from Adweek in 1999 and 2000 saw an aggregate revenue gain of 12 percent—not wildly better than the industry overall, but a cut above.

The graded shops were selected based on size. Clearly, the major national ad shops benefited from the trend toward consolidation on the part of clients; many large ones—DaimlerChrysler, most notably last year—are giving more of their ad work to a smaller roster of shops. The larger agencies have a natural advantage in getting these weighty nods.

Once a company made it to the industry's platinum level, at least in 2000, there was a scant positive correlation between an agency's size and revenue growth ranks. J. Walter Thompson's $574 million in revenue made it the largest of the shops, ranked sixth (out of 31) in terms of revenue growth rate; the fastest growing shop, GSD&M, ranked 25th for sheer size.

Ideally, grades for financial performance should be biased to reward profitability. But reliable profit figures are hard to secure. Since profit equals revenue minus costs, and since the largest cost at an agency is staff (consuming between half and two-thirds of gross income—and far more than all other costs combined), a look at revenue per employee can serve as a fair proxy for profitability.

The agencies under review saw, on balance, significant gains in profitability last year. While their combined revenue grew by 12 percent, or $750 million, total staff increased by less than 4 percent, or around 1,300 people. Incremental revenue per incremental employee was $560,000, compared to overall productivity (based on $7.2 billion in revenue and 39,200 employees) of around $185,000.

Ironically, a year ago, agency managements were complaining about the lack of available talent—not enough bodies to handle the work. The sudden slowdown in business—starting sometime in last year's fourth quarter—has left the industry overstaffed. In the place of madcap hiring, we have cutbacks and layoffs.

Staff cutbacks are pretty much an agency's only big way to defend profits against downward pressure on revenue. To the extent that some recent-year hires didn't work out in terms of job performance, the current slowdown provides good cover to fire folks who probably shouldn't have been tapped in the first place.

The industry's quick reaction to the downdraft in the business climate was a surprise. Last time (in the early '90s), it took a year or so to see such a strong response. The speedy reaction, from a management point of view, is good news. The bad news is companies aren't as flabby as they were then. Therefore, there won't be as many "easy" cuts to make.

Those most likely to get axed aren't the most expensive staffers. Firing them won't save that much. If revenue softness continues into the fourth quarter, we could see serious profit declines even from the better-managed companies.