How to Figure Out Whether You're About to Lose Your Agency Job

(MoneyWatch)  One way to understand the wave of layoffs that is running (or about to run) through IPG, WPP, Publicis and Omnicom is to look at how effective ad agency employees are at making money for their companies. The answer is often "not very," especially when you compare them to their counterparts in the much less glamorous direct marketing business.

The context: Omnicom's John Wren has hinted at layoffs to come; IPG is losing cash and has also hinted at cuts; there's a hiring freeze at WPP; and Publicis is bracing for "contraction." Although the holding companies have as much as 50 percent of their business "below the line" (i.e. in direct marketing activities), they still have plenty of increasingly inefficient folks making TV commercials and doing high-concept corporate branding that doesn't, on its own, get people to buy stuff. Those are the folks that get all of the attention in the business -- the ones who see themselves when they watch AMC's Mad Men.

The below-the-line people get much less attention, because there's not a lot of glamour in direct mail, customer relations management and loyalty programs. However, in the ad biz, that's increasingly where the real money is.

Take a look at what the major agency holding companies earned in revenue this quarter compared to what they spent to get that revenue. IPG got a feeble $1.07 in revenue for every dollar it reported in "total expenses." Omnicom got $1.13, and WPP gets about the same.

When you're only making between 7 and 13 cents in billings on every dollar you spend to get it -- those margins are slim.

(IPG helpfully provides the amount it actually spends on salaries. This quarter it was about $1 billion, which earned $1.7 billion in revenue. That means that for every dollar spent on your pay, IPG receives back about $1.59. The "total expenses" number includes all the other stuff, such as paper clips and office rent.)

But look at a company that only does pure direct marketing activity -- Alliance Data Systems. ADS does some terrifically boring work -- email programs, loyalty cards and data mining -- none of which will get anyone laid at the Cannes ad festival. Its income statement, however, makes the big boys look like they don't know what they're doing. For every dollar in expenses, ADS earns $1.29 in revenue. Put another way, ADS is about 14 percent more productive than WPP or Omnicom.

So, if you're trying to figure out whether you're on your agency's layoffs list, you might want to ask yourself whether your activity generates more or less than the holding company standard of just over a dollar earned for every dollar you cost. If you conclude that your work is expensive and your clients sales are going nowhere ... then I'll bet that Alliance Data Systems is hiring.

Photo by Flickr user Reverend Andy, CC.