CLOSE-UP: LIVE ISSUE - OMNICOM. Will Omnicom's drive for profit return to haunt it?

Could pressure to perform send Omnicom the way of Interpublic?

How can Omnicom report consistently improving profits while all its competitors are moaning about declining revenues and profits in the wake of the current recession?

Admittedly, profits for the first quarter of this year were up by only $18,000 on the same quarter last year, but that compares with a $68 million slump into losses at the beleaguered Interpublic. Omnicom's revenues were up by a mighty 12 per cent compared with the same quarter last year, while they fell by 4 per cent at WPP and remained static at Interpublic.

By any standard, Omnicom's financial performance is a remarkable achievement, with net profits climbing by 130 per cent to $643 million over the past four years when revenue grew by 48 per cent. Only a year ago this meteoric rise led to some highly critical, if not wholly justified, press comment about its accounting practices.

And some of that circumspection about its financial reporting remains.

Current and former insiders recall how senior executives of operating units have occasionally found themselves wondering how the group seems to do so well when there is little evidence of it in their own backyards.

Those concerns will have been fuelled still further by BMP DDB's recent loss of the British Gas account to Clemmow Hornby Inge and even Abbott Mead Vickers BBDO - the darling agency of the 80s and 90s - is no longer such a dazzling star in the Omnicom firmament.

How does Omnicom do it? And can the impressive profit trend continue?

Part of the reason must lie with the diverse spread of companies in the group. No single business dominates and so there will usually be enough good performers to compensate for any weaker units. Also, the group has not been involved in any massive acquisitions recently, so it has been less exposed to the type of rationalisation costs incurred by Interpublic following the expensive True North deal, or to the pressure to earn good returns on pricey purchases, such as WPP must have experienced after acquiring Tempus Group and Young & Rubicam.

But that is not the whole story. Those who know Omnicom well say it has been good at motivating the top management of its operating subsidiaries to take responsibility for delivering improved profits, and historically they have been well rewarded financially for doing so.

The danger is that the pressure to deliver becomes so great that it becomes counter-productive. Having done everything that's obvious by way of weeding out unnecessary costs and maximising income streams, managers may start making decisions that harm future prospects in order to achieve short-term financial gains. At worst those managers become susceptible to the type of dubious business practice that eventually brings the entire corporation into disrepute. We need look no further than Interpublic to see how easy it is to fall into that trap.

For example, it would become harder to resist the offer of a "special deal" for committing a substantial volume of advertising to a particular media owner irrespective of whether that will deliver the best advertising benefits to the clients. More likely, agency bosses may be tempted to compromise on terms of trade either to buy off any dissatisfied clients or to win some new ones. That may boost (or at least preserve) revenue in the short term, and may even add to profits, but it is very hard to persuade a client to revert to more profitable terms later. "Buying business on the cheap is the start down a very slippery slope," one agency executive commented. Let us hope that this is not the main reason why Omnicom's first quarter profit margin fell to 11.5 per cent from 13.2 per cent in the same quarter last year and from the 14.7 per cent achieved for the whole of 2002.

Insiders concede that there has been a noticeable change in the Omnicom culture in recent years. Now the delicate balance between creative quality and financial returns seems to be at risk. "It's more and more financially driven," one former executive observes. "The group used to be renowned for asking 'what' rather than 'how'. Now it's more about the 'how'."

This shift in emphasis is also reflected in the recent trend towards stuffing US boardrooms with financial folk in the name of improved corporate governance. In reality, it will simply force short-term financial returns up the corporate agenda in the misguided belief that this can be done without harming the heart of a creative business.

As another observer commented, it's difficult to reconcile zero economic growth with improving shareholder value and attracting talented employees.

In such a climate, the best talent may begin to drift away to more appealing environments - environments where doing good work still seems to be the primary means whereby both job satisfaction and the long-term financial success of the business are achieved. Among the global groups, financial inducements to perform today may become the seeds of tomorrow's financial decline.

If nothing else, the fact that the heads of some operating subsidiaries are prone to ponder how the New York headquarters manages to deliver such splendid results highlights the financial acumen of its group management. They have shown a shrewd ability to minimise interest costs and an imagination rarely attributed to bean-counters by taking potential losses on internet ventures off balance sheet, and they have so far resisted any argument that the book values of their many acquisitions deserve closer scrutiny and possible goodwill write-downs.

So the chief executive, John Wren, and his finance chief, Randall Weisenburger, may still deserve to score highly in the investment community for their financial astuteness. Whether that community will live to rue the day it sought consistent short-term financial growth without contemplating the longer-term consequences remains to be seen.

- Bob Willott is the editor of Marketing Services Financial Intelligence (www.fintellect.com) and a special professor at the University of Nottingham Business School.

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