WPP's Sorrell Confirms Layoffs; Jobs in "Mature Parts" to Be Cut

(MoneyWatch)  WPP chief Martin Sorrell confirmed there will be layoffs in his agencies soon. Speaking at the UBS Global Media and Communications Conference, Sorrell listed all the usual reasons: weakening economy, reduced adspend, and the collapse of the big western car companies.

While layoffs are likely to occur at any agency in the U.S. and Europe over 2009, there's a specific reason why this storm is coming early to WPP shops. Sure, there have been some unfortunate client defections. JWT lost Knorr in Europe. Ogilvy lost Wachovia in the U.S. But the real driver of layoffs at WPP is that, in the third quarter of the year, with the crisis gathering strength, WPP was at best only moderately efficient at turning its expenses into revenue. For every dollar spent on salaries and office supplies, WPP got back just $1.13 in revenue, its earnings statements show. By contrast, Publicis got back $1.21 and tiny, nimble Alloy Media & Marketing earned an eye-popping $1.74. WPP's productivity is actually in decline. A year ago it was earning $1.17 on its expenses. Now, it is roughly equal with Omnicom and Aegis. WPP only looks good when you compare it to Havas or Interpublic, which earn $1.11 and $1.07, respectively. Sorrell said as much in his speech:

In the first nine months of this year and through October and November, head count grew faster than revenues. In our business that always means trouble. ... In the developed areas of our business, the mature parts -- that's the polite phrase for them -- there will be pressure on head count. In other words, there will be cuts.

So there are real reasons why those January layoff rumors are making the rounds.

Lastly, remember that at networks like WPP, compensation is about 62 percent of agency expenses. Thus reducing staff faster than your revenues decline will boost the productivity of each remaining staff member. It just means that those of you who keep your jobs will be working longer hours for fewer clients. Happy New Year.