Why Ad Agencies Are Still Shedding Jobs Even Though "Recovery" Is Around the Corner

(MoneyWatch)  Every time I hear ad agency chiefs talking about their optimistic views for economic recovery, I cross my fingers and pray that this will be the month that I can retire the BNET Ad Agency Layoff Counter. And then reality hits. Recent job cuts include:

• 40 to be axed in the Deutsch-Lowe merger.
• 40 cut from McCann Erickson in San Francisco.
• 64 jobs gone at Comcast's ad sales unit.

If recovery is around the corner, why are agencies still dropping employees by the dozens? The answer will be found in this quarter's earnings calls. Not all the big networks have reported yet, but Omnicom and MDC Partners both declared revenue was down.

The number of employees an agency has is generally related to its billings and revenue on its accounts. A rough rule of thumb is: One employee for every $1 million in billings. The agency may claim roughly 10 percent of those billings in fees or commissions (i.e. revenues). To give a practical example, a $50 million account may employ 50 people at an agency in all capacities (yes, some people clean the bathroom, Mr. Creative Director); the agency claims $5 million in fee revenue; so an agency must pay each employee on average less than $100,000 to make a profit. (There's another useful discussion with slightly different numbers here.)

As long as revenues sink, agencies must lay off employees to remain profitable. Although prognostications by optimistic agency chiefs are interesting, you can bet there will be no actual recovery -- in which agencies hire staff back -- until you see revenue rising.

It's not all doom and gloom: If you look at Omnicom and MDC's revenues compared to Q2 instead of a year ago, they're basically flat. That may mean we're currently at the bottom, and the only way is up.

• Related:
• Omnicom Q3: Old-School U.S. Agencies Are Biggest Earners
• MDC Partners Q3: Net Income Not Noted in "Preliminary" Numbers
• Q3 Preview: Revenues, Not Earnings, Will Be Agencies' Key Measure - and They Will Be Down
• Omnicom, Interpublic Won't See Daylight on Revenues Until 2010, Say Analysts
• Recovery Ahead? Publicis, Omnicom Are Positive While WPP, IPG Stay Cautious
• BNET's Ad Agency Layoff Counter: 37,415 Jobs Lost