WPP beats Q1 forecasts but what next after Sorrell?

According to Reuters, the world's biggest advertising group WPP has beaten its forecasts in its first results without founder Martin Sorrell, who left the company two weeks ago.

In my capacity as CIPR President, I'm heading over to the BBC later to be interviewed on what this means for WPP and what the future may bring for holding companies.

I'm not a market analyst but can speak to the general results and trends. Here's my summary. 

 

WPP after Sorrell

Martin Sorrell has been a hugely positive force for the ad industry - perhaps its greatest pioneer - but is known to be a strong, autocratic leader. We are likely to see a very different style of leadership at WPP from now on under Andrew Scott and Mark Read, its co-chief operating officers. The role of chief executive is currently being recruited. 

Sorrell was seen as the glue holding WPP together which could increase the risk of parts of the business being sold off. That said:

  • It's no easy feat to restructure a business this big and complex
  • WPP may choose during this transition period just to hold tight and continue with its integration strategy dubbed ‘horizontality’, aimed at simplifying its operating structure (basically where its agencies offering different disciplines work together to offer a one-stop-shop type offer to clients)
  • Another possible option is for it to start to merge agencies to achieve integration and claw back margins through back office savings
  • Many market commentators believe the way WPP accounts is outdated. In the first instance would make sense to see a move from Sorrell’s micro-management, to agencies within the WPP holding group being given greater autonomy over their P&L and future direction.

 

The future of holding companies

Holding companies were created to achieve economies of scale, negotiating power and avoid conflicts so agency groups could have multiple clients in similar sectors.

While they’ve enjoyed extraordinary success and their introduction and growth were particularly shaped by Sorrell, this has to be seen as an alarm bell.

For a client, if the promise of using an agency within a holding group to achieve integration of services and cost efficiencies doesn’t follow through, the offer becomes a lot less appealing, which will ultimately lead them to invest less or go elsewhere.

WPP has clearly made all the efficiencies it can and the only way to now make money is to put prices up, which is unlikely to be seen as a viable option. 

A serious issue is a militant focus on margin. Ultimately while you can try to productise everything, the advertising and comms business is about people and relationships, especially at a strategic level.

Weak to flat growth across the board suggests that holding company agencies perhaps need more leeway and flexibility in how they work with clients, not least with the rising trend for zero-based budgeting where all activity and spend has to be rationalised for each new budgetary period.  

 

What’s happening to other holding companies?

WPP results are not unique to the industry – other holding companies (take Publicis and Omnicom) are also reporting relatively weak growth although they performed better in quarter one than WPP.

While Sorrell has always downplayed the impact of Google, Facebook, Amazon and management consultancies on the agency model, this was perhaps disingenuous.

Conventional advertising is in decline and clients are investing their money into other services.

There are two particular areas of change:

  • Retail and consumer clients have been cutting advertising spend
  • Investment has moved into digital advertising over traditional print and TV ads

Management consultancies in particular are snapping up digital marketing work from brands wanting to cut out the advertising agency middle men.

In the PR industry, sector growth has increased 22% in four years, with growth from clients buying digital and paid media services.

 

What’s the answer?

It's not quite the end of the line for holding companies but it looks like a new business model may be needed.

Scale and aggregation are no longer driving growth and companies of this size are struggling to deliver agile, cost efficient solutions. Some decentralisation could be beneficial.

Ultimately, speaking to WPP’s situation, better management and much stronger (and faster) integration between its businesses could be the key to its turn around. It has to break down siloes.

Looking at its gender pay reporting and fixing anomalies there could also potentially deliver growth.