Publicis CEO Maurice Levy is trying to walk a tightrope in a tornado.
After a difficult 2015 punctuated by losses of big accounts with P&G and L'Oreal, the French ad agency is embarking on a massive reorganization to better meet client demands, while racing to prove that its $3.7 billion acquisition of Sapient will lift results.
That deal is Levy's bet that growth in ad-land will come from an army of coders doing tech consulting and e-commerce projects for the likes of Heineken and Coca-Cola. It's not a vision shared by some rivals, and puts Publicis in competition with consulting heavyweights Accenture and IBM. At the same time, he must rekindle organic sales growth that lagged rivals last year, even after a decent fourth quarter:
These are big tasks even for someone with Levy's skills. So it may be time for the veteran CEO to consider a radical step. Publicis has stood apart from more spendthrift rivals by focusing on margins, but now's the time to loosen up as the agency tries so stem the loss of marquee accounts. He might want to think about dropping his goal of lifting operating margin to 17.3-19.3 percent by 2018.
Striking a balance between margin and growth isn't easy, especially in a tumultuous period where advertisers are putting accounts under review to squeeze fees. An unprecedented $25 billion or so of media-buying contracts were up for grabs in the U.S. last year, and executives think the trend will probably continue this year -- though perhaps at a slower pace.
Levy still hopes the Sapient deal will bed down well and let him deliver his promise. Publicis did manage a better-than-expected 15.5 percent operating margin in 2015, compared with 16.3 percent in 2014, despite the initially dilutive effect of the Sapient deal.
But if he dropped the 2018 target, Publicis could spend more on recruiting and keeping top talent at creative agencies such as Leo Burnett, as well as rejuvenating media-buying unit Starcom Mediavest (reeling from lost U.S. accounts last year worth about 1 percent of group sales). For all the hype around automatic buying of online ads and other digital wizardry, advertising's still a people business. Winning accounts attracts talent and begets more winning. The opposite's also true. Publicis is on a losing streak it needs to break.
Management could also concentrate more on the reorganization of its 76,000-strong workforce that Levy says will dampen growth this year. He wants to move beyond different agencies around the world pitching big advertisers for contracts, often with one hand not knowing what the other's doing. Instead each big customer, Sony say or Vodafone, will have a dedicated team run by a "Chief Client Officer," who corrals the best talent in Publicis.
Clients have asked for this for years. WPP and Havas went in this direction much earlier: WPP's Martin Sorrell has been brandishing the ugly word "horizontality" for about three years. Levy says he can do the revamp in six months.
It wouldn't be easy for Levy easing back on his margin drive, which has delivered:
It was his discipline on back-office cost that led him to believe he could extract value from the failed 2014 merger with the less rigorous Omnicom. Indeed, the U.S. agency paid Levy a compliment of sorts this week when it promised 30 basis points of Ebit margin improvement in 2016, helped by cost cuts.
But while Levy's self-control deserves credit, now's not the time for austerity. "The most important thing is to win back the confidence of clients," says Bloomberg Intelligence analyst Alex Wisch.
Although it will sting, Levy might want to look to Sorrell for inspiration. When WPP scaled back a margin target in February 2014, Sorrell said it was important not to make unrealistic demands about profitability on his agencies while they were under pressure from clients to do more for less.
Investors weren't happy, but they were wrong. WPP shares have since outperformed, rising 8 percent compared with a 20 percent drop for Publicis.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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