Omnicom Lays Off 3,500; Are More Layoffs on the Way?

(MoneyWatch)  Omnicom is to lay off 5 percent of its workforce, or about 3,500 of its 70,000 employees worldwide. BBDO is expected to take a large hit as it is Chrysler's agency of record. The question now is, will those cuts be enough or must Omnicom agencies bleed some more to stay afloat?

Omnicom's position with Chrysler has turned from asset to liability as PHD, the Omnicom media buyer, already let go 30 people to cope with the carmaker's cuts. Ad Age suggests the agency could be on the hook for $80 million in thus far unpaid bills. To make matters worse, Chrysler has shut for the month. BBDO actually takes a double hit after it lost Pepsi a few weeks back.

And there have been little cuts elsewhere in the Omnicom business. Proximity in the U.K. just lost a piece of the BBC account. Porter Novelli lost its Humana account when the merger with FischerHealth backfired.* (So many staffers left that agency that there may be no need for layoffs there.) And Omnicom has a mixed picture facing it when it comes to its debt repayments.

Whether these job losses will be the first or last swing of CEO John Wren's ax is an open question. A little back-of-the-envelope math shows that compensation expenses at Omnicom are probably around 67% of Omnicom's total operating expenses. A reduction of 5% should equate to roughly $99 million out of the network's quarterly operating budget. That would reduce operating expenses to $2.8 billion, down from $2.9 billion. The revenue yield on those expenses would rise from a lousy $1.13 (where it is now) to a more decent $1.17. For comparison, that's the same level of staff productivity that WPP was at back in the fourth quarter of 2007, before the recession started.

These numbers assume that revenues stay flat. But as Chrysler is obviously cutting its budget and, if bankruptcy happens, won't even pay for some of the commitments it has made, then revenue will definitely not stay flat. Which means that the real level of staff productivity will be somewhere below $1.17 after the layoffs happen.

To put it more simply: Before the cuts, Omnicom's net income margin was just 6 percent. The cuts Wren has just made total about half that number, which suggests that Wren believes net income is falling by 50% down to the 3 percent level -- barely profitable.

• See BNET's ad agency layoff counter for more.

* Disclosure: the author's spouse was an employee of this agency in 2007.