Markets

UPDATED: Sorrell to Ax "Ludicrous" Back-Office Ops at 5 Largest Ad Agencies

By Jim Edwards

Updated on: September 14, 2009 / 4:20 PM EDT / MoneyWatch

WPP chief Martin Sorrell is planning layoffs in the back offices of his five largest ad agencies, according to Reuters. WPP has already let go 6 percent of its staff this year, about 7,800 people.

UPDATE: Reuters has published this curious correction, which suggests that the consolidation is something Sorrell only wants to see happen over the next 10 years, and is not imminent.

While the news service itself said "Sorrell did not say more layoffs were coming, but he noted that people were his biggest investment and would be a focus," it is hard to read the rest of his comments and not conclude that the pink slips are all but printed:

We have five (advertising) agencies. It is ludicrous that you don't have a common back office. It is the same business...

We aren't doing enough. There are colossal savings for our clients and ourselves ... My ideal is you have one back-office for all the brands within 10 years.

Here's the money-quote. It's almost a threat:

Those people who can't get their mentality around it, probably in the end, will have to go...

So, if you're one of those Don Draper-esque mandarins at Grey Group, Ogilvy & Mather or JWT who thinks that creatives need their time at the Soho Grand in order to function properly, you may find yourself surplus to requirements over the coming years.

BNET noted that Sorrell told Wall Street in August that layoffs were planned:

Continuation of attrition should also support savings for H2 2009 and full year 2010

If you look at the numbers, you'll see that Sorrell is actually late to the game in terms of cost-cutting inside his shops. Salary expenses at WPP were Â£2.6 billion for the second half of 2009. They were Â£2 billion in the prior period last year. Muddled in there is the TNS acquisition, but whether you factor TNS in or out, the revenue yield on each pound WPP spends on salaries declined. The actual yield declined from Â£1.67 to Â£1.61. The like-for-like declined even further.

Which is to say, TNS made WPP a less efficient network, and the underlying network was also becoming less efficient as the months went by.

There's probably little room for cutting non-salary costs because salaries are by far the majority of WPP's expenses. Total operating expenses rose by about Â£1 billion for the half, including the TNS acquisition, and about Â£700 million of that was salary budget growth alone.

The good news? Sorrell seems to think the youngsters are up for it:

... the younger the people are that you talk to, the more enthusiastic they are about these opportunities of working together.