Despite the recession, the top global agency groups show no sign of slowing down in their quest to consume and conquer the industry, Bob Willott investigates.


RANKED BY REVENUE       Achieved in 2001 (%)           Future target (%)
Omnicom Group                             15.4                Not stated
Interpublic Group                         -0.5            16.5 or better
WPP Group                                 13.7                      16.5
Dentsu                                    20.8                      20.0
Publicis Groupe                           12.1                      15.0
Havas                                      3.7                Not stated
Bcom3 Group                               11.0                Not stated
Grey Global Group                          2.8                Not stated

Operating margin is based on operating profit before amortisation but
after any reorganisation costs.


Ranked by revenue        Post-tax profit                  Revenue
                dollars million  Change (%)  dollars million  Change (%)
Omnicom Group(1)            503         0.9            6,889        11.9
Interpublic Group          -505      -220.2            6,727        -6.3
WPP Group                   385        10.8            5,381        38.5
Dentsu                      215       -33.6            2,296        -2.6
Publicis Groupe(2)          131        18.0            2,104        35.0
Havas                      - 50      -164.8            1,941        24.8
Bcom3 Group                  26      -139.8            1,917         4.5
Grey Global Group          - 24      -225.9            1,218        -2.4

Profits and revenues based on domestic accounting practices and
translated into dollars where necessary.
1. Previous year's profit benefited from $64 million profit on
sale of Razorfish shares.
2. Under US accounting rules, Publicis reported a loss of $552


Ranked by heaviest   Total borrowings(1)    Borrowings:  Interest/profit
borrowing ratio              at Dec 2001  Shareholders'  before interest
                             (dollars m)       funds(1)      and tax (%)
Interpublic Group                  2,934        142:100            -62.5
Grey Global Group                    209        121:100             -0.1
Havas                              1,008         81:100            209.9
Omnicom Group                      1,550         66:100              7.5
Publicis Groupe(2)                   922         46:100             10.8
WPP Group(3)                       2,197         42:100             14.8
Bcom3 Group                          243         18:100             16.3
Dentsu (year ended 31 March 2002)    n/a            n/a              n/a

1. "Borrowings" include only formal bank and similar institutional debt
and exclude earn-out commitments, and leasing/HP obligations, for
example. "Shareholders' funds" include minority interests.
2. Shareholders' funds adjusted to reflect full value of shares issued
to acquire Saatchi %26 Saatchi.
3. Borrowings excludes funds raised by discounting sales invoices.


CEO AND COMPANY      Age   Salary  Bonuses     Misc    Total  Options(2)
                         (dollars (dollars (dollars (dollars (dollars m)
                            000s)    000s)    000s)    000s)
Ed Meyer (Grey)       75    3,300      225       73    3,598        39.4
Roger Haupt (Bcom3)   54      950    1,425       18    2,393         n/a
John Wren (Omnicom)   49      875    1,300       15    2,190        63.8
John Dooner
 (Interpublic)        53    1,250      500       82    1,832         6.9
Sir Martin Sorrell(1)
 (WPP)                57    1,205      n/a      516    1,721        16.7
Alain de Pouzilhac
 (Havas)              56      n/a      n/a      n/a    1,361         n/a
Yutaka Narita
 (Dentsu)             72      n/a      n/a      n/a      n/a         n/a
Maurice Levy
 (Publicis)           60      n/a      n/a      n/a      n/a         n/a

1. Total for 2000 was $3.58 million.
2. Figures show value of options accumulated and exercisable to date.
Shares already owned are excluded.


COMPANY: Omnicom
Worldwide; OMD; PHD Network; Doremus.
Novelli International; Clark %26 Weinstock; Gavin Anderson %26 Company;
DM, DESIGN AND OTHER BELOW THE LINE: Rapp Collins Worldwide; Alcone
Marketing Group; The Integer Group; Tracy Locke Partnership; Interbrand;
Wolff Olins; Pauffley; CPM; Claydon Heeley Jones Mason.
RESEARCH AND CONSULTING: Smythe Dorward Lambert.
SPECIALIST MARKETS AND NEW MEDIA: Brodeur Worldwide; LEC Communications;
Live; Millsport; Radiate Group; TARGIS Healthcare Communications;
Adelphi Group; Bernard Hodes Group; Digital Marmalade; Traffic

COMPANY: Interpublic
ADVERTISING AND MEDIA BUYING: McCann-Erickson Worldwide; Lowe %26 Partners
Worldwide; Foote Cone %26 Belding; Bozell; Initiative Media; Universal
McCann; Hill, Holliday; Campbell-Ewald.
International; DeVries Public Relations.
DM, DESIGN AND OTHER BELOW THE LINE: DraftWorldwide; The Hacker Group;
MRM Partners Worldwide; Momentum Worldwide; Marketing Drive; Zipatoni;
FutureBrand; Luxon Carra.
SPECIALIST MARKETS AND NEW MEDIA: Jack Morton Worldwide; Kaleidoscope
Sports and Entertainment; Octagon; FCB Healthcare; ISO Healthcare
Consulting; Lowe Healthcare; Torre Lazur McCann Healthcare; Zentropy

ADVERTISING AND MEDIA BUYING: Ogilvy %26 Mather; J. Walter Thompson; Y%26R
Advertising; MindShare; Mediaedge:CIA.
PUBLIC RELATIONS AND COMMUNICATIONS: Hill %26 Knowlton; Burson-Marsteller;
Ogilvy Public Relations; Cohne %26 Wolfe; Robinson Lerer %26 Montgomery;
Finsbury Buchanan Communications; Carl Byoir %26 Associates.
McBride; Warwicks; Landor Associates; Addison; BDG McColl; Black Cat;
The Partners; Coley Porter Bell; The Brand Union.
RESEARCH AND CONSULTING: Millward Brown; Research International; Center
Partners; Goldfarb Consultants; MB IntelliQuest; Lightspeed;
Glendinning; Added Value Company.
SPECIALIST MARKETS AND NEW MEDIA: Outrider; CommonHealth; Sudler %26
Hennessey; Shire Health Group; MarketForce Communications; Transart
Marketing; Geppetto Group; Pace Communications; Syzygy (UK).

ADVERTISING AND MEDIA BUYING: Dentsu; cdp-travissully (UK); Dentsu Young
%26 Rubicam; D'Arcy Australia; Starcom Worldwide (Australia).
PUBLIC RELATIONS AND COMMUNICATIONS: Dentsu has operating divisions
throughout these markets.
DM, DESIGN AND OTHER BELOW THE LINE: Dentsu has operating divisions
throughout these markets.
RESEARCH AND CONSULTING: Dentsu has operating divisions throughout these
SPECIALIST MARKETS AND NEW MEDIA: Dentsu Fuse; Event sponsorship and

COMPANY: Publicis
ADVERTISING AND MEDIA BUYING: Publicis Network; Fallon Worldwide;
Saatchi %26 Saatchi Worldwide; Zenith Optimedia Group.
DM, DESIGN AND OTHER BELOW THE LINE: Publicis Dialogue; Frankel; The
Triangle Group.
SPECIALIST MARKETS AND NEW MEDIA: Nelson Communications; Media System;; Medias et Regies Europe; Burrell Communications.

Planning Group.
Lancaster Euro RSCG; Leedex Euro RSCG; Noonan Russo Presence; The
Maitland Consultancy.
DM, DESIGN AND OTHER BELOW THE LINE: EHS Brann; Contact 24; Bounty Euro
RSCG; Ellert Field Marketing; KLP Euro RSCG; MBO; AIS Group.
Communications; Euro RSCG Life.

ADVERTISING AND MEDIA BUYING: Leo Burnett; D'Arcy Masius Benton %26
Bowles; Starcom MediaVest Group; Magellan.
DM, DESIGN AND OTHER BELOW THE LINE: Cartwright Williams Direct; Clarion
Marketing %26 Communications; IMP; D'Arcy Direct; Highway One.
SPECIALIST MARKETS AND NEW MEDIA: Medicus Group; International;
Williams-Labadie Advertising; Capps Digital; Leonardo; Neo Ideo; Bromley

ADVERTISING AND MEDIA BUYING: Grey Worldwide; MediaCom Worldwide.


COMPANY        Performance measures for operating units
Omnicom        Not stated.
Interpublic    Revenue growth; revenue conversion; operating profit;
               operating margin.
WPP            Pre-bonus operating profit growth; operating margin
               growth (after redundancy costs); operating profit after
               bonuses; improved ratio of staff costs to revenue;
               revenue conversion.
Publicis       Organic growth rate; ratio of staff costs to revenue;
               ratio of general and admin costs to revenue; ratio of
               pre-tax profit to revenue.


COMPANY          Financial reports per annum         Return
                 Budget      Accounts    Cash        on capital
Omnicom          n/a         n/a         n/a         n/a
Interpublic      3           12          12          15%
WPP              6(1)        12          12          9%-20%(2)
Publicis         4           12          1           n/a

COMPANY          Executive incentives
                 Annual       L/term       % of basic
Omnicom          n/a          n/a          n/a
Interpublic      n/a          n/a          200
WPP              Half         Half         100(3)
Publicis         n/a          n/a          100

1. Includes "Qtr 0" and full year reforecasts as well as at end of Qtrs
1, 2 and 3.
2. 9%-10% on capital, but 20% on incremental new projects greater than
£100 million.
3. Sir Martin Sorrell may earn more than 100%.


COMPANY        CHAIRMAN            Executive   Non-executive     Average
                                   directors       directors         age
Omnicom        Bruce Crawford              1              10          61
Interpublic    John Dooner                 2               7          59
WPP            Philip Lader             4(1)              11          59
Dentsu         Yutaka Narita              12               2         n/a
Publicis       Elisabeth Badinter          4               9          60
Havas          Alain de Pouzilhac          7               8          60
Bcom3          Roger Haupt                 2               4          59
Grey           Ed Meyer                    1               3          70

1. Beth Axelrod has succeeded Brian Brooks as human resources director but she is not on the board.
The marketing industry may be experiencing tough times, but the global agency groups have lost none of their ambition to make more and more money.

"Double-digit percentage growth is what Interpublic is aiming for, while WPP is seeking rather more - especially from acquisitions. But WPP's finance director, Paul Richardson, expects that profit growth to come as much from improved margins as from increasing revenue.

Ask any of the majors whether they believe the oft-quoted, but rarely achieved, benchmark profit margin of 15 per cent on revenue (gross income) is still attainable and the response is a resounding "yes".

Not only is 15 per cent achievable but the top players such as Omnicom, Interpublic and WPP say they are aiming for nearer 16.5 per cent over the next five years (Table 1). Publicis is rather more cautious as it prepares to swallow Bcom3. Yet if Dentsu is excluded because of its unatypical domestic arrangements, only Omnicom achieved that 15 per cent goal last year.

Much of the margin improvement is expected to come from growing those market segments where higher margins have been more readily achieved in the past. Direct marketing is a particular favourite, while WPP also sees better margin potential in research. Not everyone would agree - there are plenty of low-margin market research companies suffering from the effects of over-indulgent intellectual researchers, but WPP's experiences in this market so far have been very encouraging.

So who is currently top dog? Undoubtedly it is Omnicom. Last year it earned more revenue, achieved the best margins and - as a natural consequence - reported the best profit (Table 2).

In fairness to any depressed executives at Interpublic, Omnicom managed to keep the losses on most of its internet investments out of its accounts by offloading them to some venture capitalists that specialise in distress purchases. By contrast, Interpublic suffered the full force of its disastrous investments in IconMedialab and MarchFirst, and compounded the damage by incurring massive reorganisation costs after acquiring True North.

Meanwhile, WPP enjoyed the first full year's contribution from Young & Rubicam and a few months of Tempus.

Apart from Interpublic, which hopefully is recovering from last year's financial thrombosis, the potential hospital cases in the sector are evidently Grey and Havas. Grey's loss followed a decline in revenue. Havas increased its revenue (with a bigger slice of MPG) but still incurred a loss. More striking still, if Publicis had been obliged to adopt US (or even UK) accounting rules it would have reported a loss of about $552 million. No-one could claim that creativity is dead in the advertising industry.

Given the recent poor performances of groups such as Interpublic and Havas, it is not surprising that they have become heavily dependent on borrowed money (Table 3) - arguably too dependent at Interpublic, where total borrowings reached $3 billion last December and lenders now have more money at risk than the shareholders.

Interest costs increased Interpublic's loss by 62 per cent and were responsible for turning Havas' meagre profit into a loss. Less commonly noticed is the fact that Omnicom relies on a considerable amount of borrowed money and would prefer that its diverse portfolio of businesses did not all hiccup at the same time.

Does the geographical spread of business affect profitability? There is no evidence to support such a notion other than in Japan, where Dentsu conducts the vast majority of its business and enjoys the special advantages of having a foot in both the marketing and the media camps. It comes as no surprise to see that Omnicom, Interpublic and Bcom3 derive more than half their revenue from the US market, but the other US company, Grey, relies far more heavily on Europe. In many ways Grey is an anachronism. It is dominated by its 75-year-old president, chairman and chief executive officer, Ed Meyer.

He owns shares controlling 70 per cent of the votes, has just extended his employment contract for a further two years and has secured the right on retirement to retain a suite in Grey's offices with two secretaries, car and chauffeur, dining facilities plus expenses of up to $100,000 a year. Depending on Procter & Gamble and a handful of other global clients, of which several have European roots, and losing money while doing so, the company seems destined to decline hand-in- hand with its chief executive.

None of the top chief executives earned more than Meyer's $3.6 million last year. Most of that was his salary, so Meyer clearly does not feel the need to be incentivised to produce the level of financial performance that his peers strive for.

By contrast, chief executives of most other top groups need to achieve performance targets to qualify for at least half of their total reward packages (Table 4). For example, Sir Martin Sorrell earned $3.58 million in 2000, but $1.85 million of that was in bonuses. No bonus was paid for 2001.

Apart from Grey, US groups seem inclined to allocate a bigger part of remuneration to performance incentives than European groups. For example, Interpublic's John Dooner can treble his basic pay by achieving performance targets and Omnicom's John Wren almost did so last year. At Bcom3, Roger Haupt added bonuses of $1.4 million to his basic $950,000, including a special reward for his role in consummating the merger.

Leaving aside Sorrell himself, executives at WPP can expect to earn no more than half their income from performance-related schemes. And, of the performance-related element, half is geared to long-term (three-year) performance and the rest is available annually. Under the long-term plans, both Interpublic and WPP provide some scope for "catch up if cumulative performance reaches target but an individual year's performance falls short.

But while US executives may be able to earn more in incentives - including share options - local regulations impose a heavy penalty on how they account for such benefits.

In the case of share incentive schemes, the US rules require the value of such benefits to be calculated by reference to the share price when the award has been earned. In the UK and elsewhere, the practice tends to be to value those awards by reference to their market price before the performance period starts. So unless the share price deteriorates during the incentive period (which would rather undermine the purpose of the incentive), the cost to US companies is considerably greater.

While on the subject of financial reporting, the biggest prizes to be won for permissive accounting are found in France where Publicis was able to book the cost of Saatchi & Saatchi at next to nothing, when the true cost was in the region of $1.9 billion.

So are all the major global players organised in the same way, without a unique market position, and simply busting a corporate gut to exploit their corporate brands and expand their corporate profits for their insatiable shareholders?

In reality there is little to choose between the range of services on offer, and virtually everyone pursued the same "specialist markets - such as healthcare and hi-tech - a few years ago because they were thought to be high margin growing sectors. No more.

But in two respects there are differences - first, in the quality and breadth of coverage, and, second, in how the groups have tried to organise delivery. And just occasionally there is something unique in the range of services too.

As one industry observer said of WPP: "They have such a diverse range of companies within the group, from advertising to research and brand architecture. They are mostly high quality companies. Research is the area that really stands out in comparison with its rivals."

But others see a danger in owning prestigiously named brands if the quality of the creativity begins to slide. And some see a contrast between that scenario and the situation at Omnicom, where creativity is at the heart of the business. "Everything is done with a creative orientation, one admirer commented, and, judging by the financial results, that philosophy has paid off. The growth at BBDO is widely applauded and attributed to a deliberate policy of hiring the best creative talent.

So how does the investment community view the positioning of the global groups?

The top three are noted first and foremost for their sheer market clout.

As one analyst put it: "They can go to big clients and say, 'Give us all your business and if we don't have what you want already in the group we'll just go out and buy it.' Nevertheless, Omnicom is regarded as the most creative of the three and Interpublic is thought of as a good solid business (despite its recent $505 million loss).

By contrast Dentsu is regarded as a second-tier group with little real global capability of its own. And by its own admission only about 10 per cent of its profits come from activities outside advertising. Havas has positioned itself as the least focused on conventional advertising and places greater emphasis on other marketing services.

But that is a false distinction. In reality, only Interpublic (and Publicis, which is coy about its business breakdown) derive more than half their revenue from advertising and media buying. Havas derives 49 per cent, WPP derives 46 per cent and Omnicom derives 44 per cent.

A less charitable interpretation of Havas' positioning is that it has failed to achieve the global stature in advertising it needs and has therefore looked for another way of positioning itself. It seems that its management will have to think again. But at least Havas is in a marginally better predicament than Grey which, in the eyes of the investment community, appears to have no positioning at all other than waiting to be gobbled up.

As a lone operator, Bcom3 also had found little favour with analysts, but all that changed with the appearance on the scene of sexy Publicis.

Investors like nothing better than a daring go-getter and Maurice Levy is nothing if not that. So the merged group is expected to become a serious global player alongside the "big three and use its size as a major selling point.

To the limited extent that the global groups have any distinguishing features in the mix of their activities, Publicis shares one common characteristic with Dentsu, namely the ability to sell advertising space as well as to buy it. Dentsu is renowned for its close links with the media (two media groups are major shareholders) and Publicis owns the advertising sales house Media et Regies Europe. This intimate relationship has benefited profit margins in the past and may continue to do so in the future.

The unusually strong presence of WPP in research and related markets is matched by a strong presence in customer relationship management at Omnicom. But WPP's own analysis shows that, to date, the best margins still come from traditional advertising and media buying.

Interpublic remains far more heavily dependent on advertising and public relations (mainly Weber Shandwick) for its revenue and, like Publicis, has a relatively small involvement in other below-the-line services.

Two years ago most of the global groups were heavily exposed to the forthcoming disasters that were to occur among new-media businesses, but most of the damage has been done and most groups now have a far more measured involvement.

However, Havas says that it derived 9 per cent of its revenue from this sector last year, principally through (now Euro RSCG Circle) and Zinc.

There can be no doubt about the importance of new media in the future, although some further consolidation is likely soon. And no-one is quite clear about the extent of Omnicom's ongoing exposure to losses following the offloading of its main investments to the venture capital outfit Seneca Investments.

Market positioning is not just about size or specialisation. It is also about delivery. Havas has recently restructured to present itself as two integrated worldwide networks - Euro RSCG and Arnold - and is attempting to channel all its different marketing services through those brands. Publicis has also projected a more integrated approach.

The success of this positioning will depend on whether there is any serious client support for the "one-stop shop concept that Saatchis advocated so enthusiastically in the 80s and then quietly abandoned. The ultimate success of this concept depends on a high consistency of quality and market knowledge within every component of the group. That's a laudable, but possibly unrealistic, aim.

Even where a more integrated approach is not being adopted, increasing efforts are being made to foster cross-selling within the global groups.

Both Interpublic and WPP include "revenue conversion from existing group clients as one of the business performance targets they set for their managers.

Having a distinctive market position is a potential advantage, but its exploitation depends on the management and organisational structure of the group. It is generally recognised that Omnicom operates in a more devolved manner than Interpublic or WPP, perhaps achieving a better balance between essential controls and the operational freedom that fosters a creative and entrepreneurial spirit. Initial appearances suggest that Publicis is also highly centralised, if not in its systems then certainly in its management style.

WPP was particularly open in explaining its financial management practices.

It seems to place more emphasis on central financial controls than its rivals, and to apply more comprehensive and stricter performance measures to its operating units (Tables 6 and 7). For example, although both Interpublic and WPP focus on profit margins, WPP expects redundancy costs to be included as a component. It's a logical approach: companies never treat the cost of recruiting staff as exceptional so why should the cost of shedding them be treated differently?

Measuring the financial performance of operating units can prove quite contentious as clients of the major groups become increasingly global.

Who decides how client revenue is allocated between delivery locations?

How much of a say does local management have on the level of management charges within the group?

Interpublic and Publicis acknowledge that they have some discretion in how revenues from global clients can be allocated among regional offices, but WPP says it has very little discretion. "Each office is compensated for staff input, Richardson, says. He is ever conscious of the need to comply with the tax authorities' rules on pricing between countries. Nevertheless, he concedes that there is a tendency to keep more of the revenue at the hub of the client's operations.

All the majors argue that there is no presumption that offices servicing inward-referred work for global clients will be less profitable than those that enjoy a large proportion of local client business. However WPP accepts that, if the mix errs too far toward inward-referred business, then local margins may suffer. This is particularly so where revenue is derived from media commissions rather than fees.

When it comes to internal management charges, there are a variety of methods in place. Interpublic believes such charges should only recover costs and not include any profit mark-up. Publicis calculates its charges by applying a percentage to staff costs, thereby having no direct link between actual costs incurred on behalf of a particular office and the amount recovered from it. WPP says it bases its charges on what is agreed between the parties on an arm's length basis, usually based on the cost of work done but sometimes including an overhead allocation. They even insist on purchase orders.

Meanwhile the composition of the boardrooms is becoming more and more divorced from the operations of the global groups, as the trend toward non-executive domination continues (Table 8). In Europe there has been a tradition of segregating the role of investment supervision from that of operational management, by creating two discreet boards. The power of the supervisory board at Publicis even includes the right to terminate the employment of management board members without notice (a similar power may be exercised by a shareholders' meeting).

The emerging US model is to establish a management committee of all the senior executives who run the business, leaving only the chief executive to account for performance to the board itself.

If the trend toward non-executive boards continues, the average age of board members is also likely to rise. That may bring the benefit of experience (assuming board members have any relevant industry experience) but it also poses a serious risk of a schism in simple communication between the executives and the supervisors. That could have damaging consequences for an industry that thrives on youthful creativity.


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