Enfatico to Lay Off 8% of Staff; Dell Gave Agency the News Back in January

Last Updated Feb 24, 2009 2:14 PM EST

Enfatico, Dell's captive ad agency, has begun a round of layoffs, the agency said. The cuts are the latest in a chain of bad news for Enfatico, which began with the exit of Dell vp marketing Casey Jones, and later CMO Mark Jarvis. The pair were Enfatico's main clients at Dell.

You can read Enfatico's press release on the 8 percent jobs cut here. And CEO Torrence Boone's letter to his staff here. Enfatico had about 1,000 employees at one point, which would mean about 80 people have lost their jobs.

Perhaps more interestingly, Dell telegraphed to Enfatico that layoffs at the agency would be on the way back on January 28, with this statement:

... the company's fiscal fourth-quarter 2009 results will include expenses related to continued improvement in its competitive position, part of $3 billion in planned cost reductions by the end of fiscal 2011.
That's right, Dell is trying to cut $3 billion out of its operating expenses. And that will include advertising. Which is Enfatico.

A while ago, BNET suggested that WPP's creation of Enfatico was a strategic misstep because building a new global agency from scratch with a single client executive as its boss has built-in inefficiencies, an insurmountable conflict of interest at its heart, and leaves the agency vulnerable to a single revenue stream. But as the months pass, it seems that WPP boss Martin Sorrell's real mistake may have been to set up this agency just as Dell began a dramatic reduction in its sales and marketing spend.

Dell's spending on SG&A has declined 12 percent over the last year. In Q3 it spent $1.6 billion. That was down from Q2 when it spent $1.8 billion. And that was down from Q1 when it spent $1.9 billion.

It's a pretty good bet that Dell's Q4 earnings, out in a couple of days, will show another decline in the budget.

This also explains why Enfatico CEO Torrence Boone (pictured) appeared in public to give an extensive video interview with DMNews recently, in which he advertised that he was looking for new business and even detailed his team's pitching style. Boone needs clients to supplement his declining billings from Dell.

Can Boone pull this thing out of the fire? Right now he's in the worst of all worlds -- he must reduce his own costs as Dell reduces its. Any delay, and his margins will be squeezed out of existence. Boone said as much in his memo to the (remaining) troops:

It also means an aggressive drive to win new clients and diversify our portfolio. We have several new business pitches in the works, and we are hopeful to announce some positive news on this front soon.
Only new clients will give him the revenue cushion he needs to stabilize the shop. The one-client experiment is over.

Side note: DDB's promise to Blockbuster to form a special unit to handle its $12 million account will carry all the same risks as Enfatico's. Blockbuster is, arguably, a less stable client than Dell given the move toward online video streaming and downloading. But the account is so small the risk to DDB as a whole is minimal. One suspects that the "new unit," DDB Entertainment, will simply be a regular account team with its own letterhead. That, after all, would be the smart way to handle this bizarre new client trend of demanding your own dedicated shop.