It was Mark Twain who joked that rumours of his death were "greatly exaggerated". It would be premature for me to pen an obituary for the marketing services supergroups. Yet questions about their present health and gloomy prognoses for their future prospects are being voiced with increasing frequency. The symptoms can no longer be hidden - growing debt, frustrated former entrepreneurs, restless clients, accounting anomalies, etc. The rumours may be exaggerated, but are they unfounded?
A wise man once told me that there is no such thing as centralisation or decentralisation; there is only centralising and decentralising. Are we simply witnessing a cyclical transition from consolidation back to fragmentation, or is there an endemic malaise in the body politic of the industry's dominant groups?
To my mind, the majors are at a point of change and facing not so much the threat of new competition but, more serious and life-threatening, that of losing relevance.
A physical examination of the species, its origin and genetic make-up, reveals that these majors are far from a pure breed. Rather they were born and have evolved mostly through tactical acquisition. Psychologically, the four alpha males seem confused about their own identities, despite their age and relative maturity. Although they all trade as "media" stocks, they describe themselves variously as marketing services or communications groups or both. Interpublic is a "global marketing communications and marketing services company", Omnicom a "global leader in advertising and marketing communications services". WPP is "one of the world's leading communications services groups". Publicis is proud to be the "fourth-largest communications group".
Common to all four descriptions is the promise of size and reach, which appears to be as important as what the groups actually do. But why such emphasis on scale when there are only a few multinational clients (Ford, GM, Procter & Gamble, Unilever et al) for whom "big and global" is the part of the proposition that really adds value? Are not the real winners in this race for scale and globality just the supergroups themselves?
Although acquisition has enabled some diversification, as well as increasing scale, the dominant gene remains -advertising. In 1996, Omnicom's revenues came 59 per cent from advertising and 23 per cent from customer relationship management, with the balance split more or less equally between speciality communications and PR. The group's most recent results (2002) show that advertising revenues have fallen back to 43.5 per cent (at WPP this figure is 47 per cent), CRM revenues have increased to 32 per cent and PR likewise to 12 per cent. The figures do indicate diversification, but 56 per cent of Omnicom's business is still derived from traditional communications activity. Less traditional areas grew their share of revenues by only 11 per cent over the six years.
I believe passionately in the power of advertising and the brilliance of many advertising people, but the continued supremacy of advertising within the supergroup mix fosters an internal culture that is unhealthily dominated by the "senior" discipline. The residual strength of the advertising gene (44 per cent of $7.5 billion is still big business for Omnicom) enables advertising to cling on to primus inter pares status. The breakthrough the groups need to make is to decouple the strategic leadership that is assumed by the advertising discipline on account of its contribution to revenues and to deliver it instead from a more objective and appropriate point of influence. No specific executional discipline should take that role because that is no longer the most effective way of addressing client needs.
As a former joint chief executive of a quoted media company, I know that public companies face two paymasters in shareholders and in clients. But which comes first and why are the two so apparently incompatible? I believe the creation of true client value ultimately results in shareholder value.
Yet looking at the composition and structure of the major groups, I find scant evidence of the methodical and deliberate organisation of their services that would be required in order to deliver customer value.
I'm afraid that the conventional structure of holding companies reveals the primacy of the shareholder, as they are little more than vehicles for financial engineering. Historically, they have been very effective at acquiring private company earnings for five to eight times, in order to trade them at the group's own, higher multiple. So the organising principle is the creation of value for the shareholder, not the client. Despite all the high-falutin' post-rationalisation of acquisitions that "anticipate and meet changing client needs", it is well known among mergers and acquisitions advisers that the major groups really only want to buy quality earnings to meet their own growth objectives.
Judged purely as holding companies, the supergroups play this game most effectively. Interpublic, despite recent questions over its financial probity, is able to boast that since 1980, "revenue has increased annually by an average of more than 13 per cent and net income has risen by more than 15 per cent, while compounded annual share price appreciation has exceeded 25 per cent". Very impressive. But what if we were to compile another scorecard designed to measure the customer value created by Interpublic over the same period?
How would that read? Such metrics are more difficult to compile, it is true, but the management consultants at least give it a go. When asked how he attains such impeccable customer service, an hotelier friend of mine replies: "You can't expect what you can't measure."
Like the others, IPG's consistent accretion in earnings has been accomplished primarily through acquisition.
This frenetic purchasing of non-organic growth can also be viewed as a mass aggregation of talent. The great missed opportunity, however, is the end to which this talent, once acquired, is put. It is not enough any longer to acquire earnings cheaply and feel pleased for beating the competitors to a best-of-breed target. That alone only satisfies the shareholders and the corporate ego. There has to be a greater purpose than this, and not just because the talent itself is demanding it but because clients need it.
Here's why. We are moving from a supply-side to a demand-side economic era. Until recently, businesses could increase earnings by riding market growth. To improve margins, they concentrated on supply-side efficiency and effectiveness techniques sold to them by the management consultants. As cost-cutting ran its course, companies were able to exploit inflated paper to buy growth with the promise (rarely delivered) of unlocking value through post-merger "delayering". But there comes a point where you can't cut any further, where there is nothing left to outsource and when analysts realise that mergers fail to create value.
Since leaving Chime, I have debated these issues with chairmen and chief executives of FTSE 250 companies, agency and media chiefs, journalists, City analysts and other opinion formers. From my conversations, it is clear that clients' requirements are changing. They confirm this as a response to the shift from being able to release wealth from their companies to having, once again, to create it by increasing demand. Quoting Tom Peters, they recognise that they can't "shrink their way to greatness".
They have to earn growth, and that can only come from identifying customer insights, developing ideas and delivering innovation. Harvard's Michael Porter made this observation of British industry in his recent report to the Department of Trade and Industry: "Now the challenge (is) to create higher-value products and services, to be more innovative, to come up with more unique strategies and ways of competing."
WPP's homepage leads with the same point: "Our clients all live in competitive worlds. To compete successfully, they need access to high quality information, strategic advice and specialist communications skills."
But here's the rub: saying isn't doing. I know that Sir Martin Sorrell passionately believes what he says, but the majors are not optimally structured or configured to deliver what he correctly identifies as the client need.
Their issue is history. The groups were simply not born to the purpose that's now required of them. The legacy organisation of these groups is characterised by a series of businesses each encompassing brilliant execution strategists but a paucity of business strategy acumen. Their ownership by a "passive" holding company that is unwilling or unable to orchestrate their services to a single strategic score is inappropriate to today's client needs.
All of this must be frustrating for Sorrell, Wren, Bell (David) and Levy because there does exist, within their supergroups, most of the requisite skills. But just owning them isn't enough. They have to be deliberately organised to become relevant. Owning a socket set doesn't make you a plumber. You have to know how and when to apply the tools. In marketing services, people and skills need to be orchestrated at the right time and placed by credible, senior business partners (who can be really trusted as advisers) and not by educated "suits" who are really salesmen of downstream solutions. Until the supergroups are reconfigured expressly to deliver innovation, more unique strategies and new ways of competing, they are selling themselves short and will not realise the potential of their talent. Influence with clients will be further diminished and the margins on rapidly commoditising transactional services will continue to be depressed.
It appears to me that the first group that can reconfigure and reorientate itself to satisfy these issues will gain significant competitive advantage.
If one of the majors doesn't do it, then maybe it's an opportunity for one of the smaller groups or even a new entrant.
Either way, the outlook for the holding company supergroups is gloomy if their existence can only be justified on a financial basis. Facing their own double-digit growth targets and static or declining revenues, this growth can only come from margin improvement or what is euphemistically referred to as the "use of free cashflow to enhance share owner value". That means more acquisitions or increased dividends and share repurchases - yet more engineering. How many significant acquisitions are left? Can smaller operators be persuaded to sell to the majors in the present climate? Share buybacks are hardly a sustainable proposition.
If the groups fail to grow in line with investor expectations, the prospect of disintegration increases, as the object lesson that is Cordiant illustrates.
Disintegration is an interesting concept. It means, of course, breaking or decomposing into constituent elements. But it also means destroying unity or integrity. Perhaps the supergroups' ultimate problem is that, beyond financial interest, unity and integrity has never really existed. Either that unifying purpose is quickly discovered and real customer value delivered, or the threat of disintegration is inevitable.