Ben Bird, Partner of Consumer Practice shares his thoughts on the company’s plans to ‘simplify’ its business model, at The London Economic.
The largest ad agency group in the world, WPP, has announced plans to simplify its business model by closing or merging offices and cutting 3,500 jobs worldwide. The move has led to a sharp rise in the company’s share price (currently872.0), giving it a market value of around £11 billion. Should other agencies follow its lead?
The announcement comes at the end of a tumultuous year for WPP, with a change of CEO and some disappointing third-quarter figures, which led to a 40 percent drop in the company’s market value earlier this year. The group has also been hit by some major client losses, including the Ford account following a global creative review. The advertising industry is also shifting rapidly in response to digitalisation and whilst marketing budgets are growing, corporate brand owners are increasingly spreading their spending across more channels and taking creative work in-house.
Recognising the need to restructure the business to fit the needs of clients now and in the future, CEO Mark Read is proposing to reduce costs and reposition the business as a ‘creative transformation agency’. In fact, the cost reduction programme is already under way and the group has disposed of 16 non-core investments since the start of the year.
The starting point for any successful transformation lies in a granular understanding of the cost base, followed by the development of an action plan, which is designed to bolster cash reserves and facilitate re-investment. As Mark Read identified, the size of the group was weighing it down and preventing it from making the adjustments necessary to stay aligned with clients’ needs.
With about 400 branded businesses, based in more than 3,000 offices, operating in 112 countries, it is easy to understand why the group’s incoming CEO reached the conclusion that the group had become ‘too unwieldy’, and there was ‘too much duplication’. Of course, realising this is one thing, but the real challenge lies in reducing complexity and cost in a way that will drive improvements for clients, whilst ringfencing value.
In a fast-changing industry, identifying value-generating activities that are worthy of ongoing investment requires both current market insight and foresight. In media publishing, businesses have approached this by looking for opportunities to standardise processes and offerings, whilst positioning value-generating brands as untouchable. For ad agencies, outputs tend to be more fluid and geared to the delivery of a creative brief. For this reason, value generators may be harder to pin point. The only way to address this is to take a forensic approach to understanding what clients value most, and if this turns out to be low-yielding activities, the business needs to respond by finding a way to make these pay.
The success of WPP’s transformation will ultimately depend on the strength of its data-based insights and industry appeal for its vision of the creative industry of the future. The company has set its sights on returning to low single-digit revenue growth by the end of 2021, but if this proves difficult, there is always one more jewel in the crown to divest. Valued at around £3.5 billion, the group’s research arm, Kantar, could yet provide the key to a sustainable future.
With the rest of the ad agency world looking on, it is likely that many are working on their own transformation plans. If market sentiment is anything to go by, a strategy based on solid data-based insights and client understanding is a good place to start.
Read the full article here.