Alloy Beats WPP, IPG et al in Network Efficiency Ranking

Alloy Marketing & Media generates more revenue from the cash it spends on salaries and general expenses than most other public agency networks, according to a comparison of Q3 earnings. By contrast, direct mail giant Valassis least-efficiently deploys its cash resources. Alloy makes back $1.74 for every dollar it spends on salaries, rent, and office supplies, etc. But Valassis made just $1.03 on every dollar -- a number that suggests the business is barely profitable.

Those results are a surprise because for years agency chiefs have pursued greater efficiencies through consolidation and the creation of ever-larger agency networks. Alloy is a relatively small ad agency network with only $54 million in quarterly revenue. The big networks -- Publicis, WPP, Omnicom and Interpublic -- are clustered in the middle of the table. The yield on their operating expenses is thinner: $1.21 for Publicis, the most efficient of the four; and just $1.07 for IPG, the laggard of the group. Along with Valassis at the bottom of the table is MDC, another small agency network. Thus, there seems to be no correlation between size and efficiency.

The comparison was made by taking the revenues generated by each network and dividing them by the total operating expenses, giving a revenue yield per dollar spent. In the ad agency business, total operating expenses are a good guide to how profitably management deploys its staff, because those expenses are mostly composed of staff salaries. (At Publicis and IPG, the two networks that break out the number, salaries are about 62 percent of expenses). The comparisons are not scientific -- nine agency networks were chosen at random, and Lamar Advertising (a billboard provider, not an agency network) was thrown in just for comparison.

Similarly, InVentiv is a bundle of ad agencies that all specialize in healthcare and pharmaceuticals. But that niche focus has not left them more efficient than their general-market brethren -- InVentiv got only $1.11 back for each dollar it spent to earn it. Alloy is also a specialist, it concentrates on yourth marketing, and it is at the opposite end of the table to Valassis.

So why is Alloy magnitudes more efficient than its rivals?

Here's one guess: Unlike all the other agencies in the sample, Alloy is both an agency and a media provider. It owns Channel One and a number of websites, such as Teen.com. Usually, clients hire agencies for unbiased advice on questions such as, where should I purchase my media? Agencies then negotiate the best deals they can by pitting media providers against each other. At Alloy, however, there's an interesting conflict -- the agency owns the very media it is recommending. It is almost as if Alloy is successfully profiting from the very conflict that frugal clients seek to avoid.

Whatever the answer is, Alloy's agency-cum-media system seems to be working.

Sources: Numbers were taken from networks' Q3 or Q2 earnings statements. Numbers are in thousands, except for Publicis, WPP, Omnicom and InterPublic, which are in millions.