The answer can be summed up in a single word: Debt.
The state of WPP's credit has been a burning issue all year (see related stories below), and one way to improve its rating on Wall Street -- and keep its stock up -- is to cut costs. At agencies, 70 percent of costs are jobs. So those newly jobless Ogilvy staff may be losing their livelihoods not because Ogilvy's client billings are being hammered but because Sorrell needs to keep the price of his access to credit down.
Here's Seifert's memo:
Despite recent new-business wins, and an uptick in our fourth-quarter financial performance, we are taking this action in response to our clients' latest guidance and a cautious outlook for our business generally in 2010...Seifert (pictured) also blamed procurement, the ad biz's catchall devil du jour:
We continue to experience delays -- and some significant cuts -- in client spending across all business sectors. We also face continued pressure on pricing, where client procurement departments are challenging every aspect of our industry's economics, including: salaries, overhead rates and acceptable profit margins. Even incentive compensation on superior performance results is being squeezed.Ad Age points out that Ogilvy has lost some business this year. But compare those to the wins mentioned by Seifert:
- Losses: Yahoo, Kraft, Barclays iShares
- Wins: UPS, CDW, Sara Lee, Pfizer, Bayer, Kimberly-Clark
It's the debt picture. WPP is loaded up with it after the acquisition of market research/measurement firm TNS. (Adscam's George Parker reminds me that Ogilvy won CDW from another WPP shop, JWT, and therefore it had no effect on WPP's income to debt ratio.) BNET noted in September that WPP's debt was ranked at the brink of junk status. The Independent recently noted that:
... both Standard & Poor's and Moody's switched the outlook on their respective ratings for WPP to negative ...The other way to raise your credit rating is to lower costs and thus improve cashflow. Hence job cuts. Expect the ratings agencies to react in the next few months.
... management may consider cutting back on capital expenditure or on the dividend instead of issuing equity.
- WPP Is at "the Brink of Junk," Says Moody's; Sorrell Pushing Debt Envelope
- Is WPP at Risk of Breaching Its Debt Obligations?
- Fitch Cuts WPP's Debt Rating; Suggests Pay Reductions
- Sorrell Between Rock, Hard Place as He Balances Debt, Stock and His Own Pay
- Wall Street Downgrades WPP on Debt Fears; Has Sorrell Reached His Credit Limit?
- WPP Q1: Debt Doubles; "It's All Lehman Brothers' Fault"