The Squeeze Is On as Agencies Cut Budgets

NEW YORK The news already feels old: The process of agencies crafting their budgets is being complicated by the broader collapse in financial markets. But the ramifications are just beginning to crystallize.

Holding companies and their agencies are freezing or cutting spending on everything from new hires and temporary help to travel and entertainment. Layoffs also have been common and most holding companies are reexamining bonuses.

WPP Group perhaps has been the most aggressive at cost cutting. It instituted a freeze this month on all hiring — regardless of salary level — including replacing individuals and filling open positions, according to an internal e-mail from worldwide CFO Paul Richardson. The freeze also applies to offers made but not accepted. In addition, WPP ordered its agencies to stop using outside headhunters, causing some in that field to branch out beyond advertising.

Omnicom Group also is asking its agencies to leave positions open “where it’s sensible,” as CEO John Wren told industry analysts two weeks ago. It’s also asking that they trim discretionary and non-essential expenses in travel and entertainment. As a result, some agencies are relying more on teleconferencing, particularly for inter-office meetings, said sources. For client meetings, however, OMC shops will continue to travel, although the size of their contingents may shrink. OMC also stopped buying back shares of its stock due to instability in the capital markets.

Such moves come despite three of the top four holding companies (WPP, OMC and Interpublic Group) recording revenue or profit gains for both the third quarter and the first nine months of the year. At the same time, however, big clients such as PepsiCo, Yahoo and Motorola this month announced thousands of layoffs.

Holding companies that previously reported no signs of major pullbacks in client spending are now sounding notes of caution, saying they have limited visibility into the fourth quarter, let alone 2009.

“We’re obviously in a very unusual capital markets environment,” said Omnicom CFO Randall Weisenburger in an Oct. 21 conference call with analysts. “That environment has created economic softness and widespread caution at least for the near term. While our businesses have performed well through the third quarter, we have far less visibility going into the fourth quarter and into next year than we’ve historically had at this point in the year. … But our agency management teams are highly focused on managing their staffing levels and creating as much flexibility as possible in their cost structures to better manage through whatever economic conditions develop.”

OMC’s net income climbed 6 percent for the third quarter and 10 percent for the first nine months of 2008, compared to the same periods last year. Its revenue growth in the same periods amounted to 7 percent (4 percent of which was organic) and 10 percent (5 percent organic), respectively.

WPP also reported revenue gains, of 16 percent (3 percent organic) and 15 percent (4 percent organic), for the third quarter and first nine months, respectively. Still, in its “third-quarter trading update” last Thursday, the company said that the “disintegration” in the financial markets “has had and will continue to have a significant negative impact on consumer and corporate confidence. As a result, 2009 will be a very tough year.”

Publicis Groupe CEO Maurice Levy echoed that sentiment last Tuesday in a statement accompanying his company’s latest numbers. Levy, whose company saw revenue decline 1.5 percent for the quarter and 1 percent for the first nine months, said that Publicis Groupe “finished better than we might have feared, given the turmoil in the worldwide financial system. These disturbances pushed the mature economies into a zone of turbulence, of which it is difficult to foresee either the intensity or the duration. In this context, we believe our industry will face a difficult end of 2008 and a marked slowdown in 2009.”