A battle cry from adland

Angry that consultancies have been muscling in on its patch, Martin Sorrell's WPP aims to wrest back the initiative. Christine Harper reports
ON PAPER, Martin Sorrell, the founder and chief executive of WPP Group, looks like an unqualified success. In 12 years, he's transformed WPP from a shopping basket-maker into the world's second-largest communications company, embracing the ad agency J Walter Thompson, the public relations firm Hill & Knowlton and an array of market-research units. Last year WPP posted its fifth consecutive year of profit growth, earning pounds 116m on pounds 1.7bn in sales. Its share price, which closed on Friday at 314p, has more than trebled since 1993.

But Sorrell sees a problem: management consultants. They get paid to give advice that Sorrell thinks WPP should itself be giving - and getting paid for. In recent years he has become vexed that WPP clients like Unilever ask the likes of McKinsey for advice on marketing strategy. "They get paid millions for doing things we could do better,'' the 53-year-old executive says.

Sorrell, who has flouted conventional thinking before, now wants to build a separate consulting business at WPP, a plan that others say is risky - and unnecessary. WPP has bought three small consulting firms this year, and the chief executive said more may be in the offing.

Consulting firms like McKinsey do not produce ads, as WPP's agencies do. Instead, the "rapacious management consultancies", as Sorrell calls them in his latest annual report, sell clients advice on how to position products and win customers. Sorrell bristles at an incident that took place four years ago. Unilever, a WPP client and the maker of such well- known brands as Ragu pasta sauce and Dove soap, hired McKinsey to determine whether supermarket brands were cutting into the Anglo-Dutch consumer- goods company's sales. "[WPP's agencies] have got billions of man hours invested in those brands and know more about them than anybody else," he says. "It seems incredible to me that we did not have a role in that.''

Unilever spokesman Stephen Milton said the company, which spent $5.9bn (pounds 3.5bn) on advertising and promotion in 1997, would use McKinsey or whatever firm it felt had the most to offer. In a speech to European ad agencies last October, Unilever's chairman, Niall Fitz- Gerald, warned of an "alarming discrepancy" between what his brands needed and what agencies could provide. Several of WPP's businesses, including its advertising agencies, already offer strategic advice.

"We have a lot of knowledge that we can bring to bear," Sorrell says. By building up WPP's consulting business, Sorrell hopes to persuade some of his firm's clients, which already include 300 of the Fortune 500 companies, to turn to WPP for advice they now seek from consultants - how much to spend on advertising, and how best to spend it.

The consulting business, of which Sorrell wants a bigger share, is forecast to generate revenue of $16bn by 2000, up 55 per cent from $10.3bn in 1996, according to Consultants News. Strategic consulting is also more lucrative than advertising. Marshall Cooper, the executive vice president at Consultants News, estimated that top firms like McKinsey and Boston Consulting Group earn profit of at least 20 per cent of revenue. By contrast, WPP's first- half operating profit was 11.5 per cent of revenue.

Sorrell knows marrying consulting with advertising won't be easy. That's why he wants to set up a separate unit, one he thinks won't be tainted by the rap that agencies are only good for making 30-second television commercials.

Then there's the problem of the "McKinsey mafia", the network of contacts that high-priced consultants have among their former business school colleagues at many of the world's leading companies. "The advantage that the management consultants have is that they tend to talk to the higher reaches of the company," Sorrell says. "If McKinsey made a call to me, I would take the call."

Until recently, Sorrell was trying to expand WPP's presence in strategic consulting through the Henley Centre, part of WPP's specialist communications division, which accounted for a fifth of WPP's 1997 operating profit. But Sorrell concluded that Henley was too focused on economic forecasting and not focused enough on consulting. So he looked for consulting firms, focusing on those specialising in retailing, technology, entertainment and media, financial services and health care.

In February, WPP bought Management Ventures, a Massachusetts-based company that provides marketers with information about the world's biggest stores and retail chains. WPP didn't say how much it paid for the firm, whose net assets were $538,740 at the end of 1997.

In March, WPP bought two US marketing consulting firms that specialise in research for technology companies: MSI Channel Research LLC of Seattle and Charles River Strategies Inc of Boston. Buying the companies, the net assets of which were $2.5m at the end of 1997, boosted WPP's hi-tech billings in its communications division by $70m to more than $250m.

Sorrell says any more acquisitions he makes will be "small-scale and very specialised". He declines to say how much he's willing to spend. He insists he won't repeat the mistakes made by his former employer, Saatchi & Saatchi, in the 1980s. Maurice and Charles Saatchi bought a string of firms that specialised in everything from employee pay to litigation research as part of a drive for "world market leadership" in consulting.

Sorrell was the finance director at Saatchi & Saatchi when it bought Hay Group, its first big consulting firm, but he said he wasn't influential in the decision to move into consulting. He said the Saatchi brothers got sidetracked by not sticking to firms that specialised in marketing advice.

Sorrell says he's not about to try to buy McKinsey or any other big strategy shop. He's worried that the partners of such a firm, reluctant to work for a big company, would pocket their share of the takeover price and leave. Besides, he adds: "I don't think we'd be very good at running a consultancy.'' Instead, he says WPP might just take a stake in a consulting firm - although he does not say if he has one in mind.

That approach could backfire, says Jim Kennedy, the founder and former editor of Consultants News. Kennedy says he's studied consulting firm acquisitions since 1984. He says 95 per cent of the combinations have ended in failure, often because key employees quit. Some advertising industry executives wonder if Sorrell might be better off in the business he's already successful at.

One problem is pay. Advertising companies pay entry-level workers with BAs about $25,000 a year, while consulting firms tend to hire people with MAs and are willing to pay more for them - as much as $100,000 a year. "Even if we wanted to challenge management consultants, we don't have the financial structure to do that,'' Pringle says.

Sorrell says WPP recruits from top schools, pays competitively and gives young MBAs a chance to work with some of the biggest companies. He has defied the sceptics before. In 1987 he shocked the advertising world with the industry's first unsolicited takeover, for J Walter Thompson, then the US's fourth-largest advertising company. He won that fight by paying $566m, then won a $864m hostile takeover of Ogilvy Group. The purchases coincided with recession. Falling revenue and the high cost of its debt caused WPP's share price to plunge from a record high of 629p in September 1989 to a record low of 23p three years later. By 1993, Sorrell rescued the company by restructuring its debt, converting $271m in debt into equity, and eight months later by issuing $125.5m in new stock.

Helped by a decade of growth in the US and the UK, Sorrell achieved the final target this June; the share options were then worth pounds 27.2m, though they have slipped to about pounds 20.4m as WPP stock fell with the rest of the UK market.

"We have a tremendous role to play in the strategic marketing consulting business. Everything in life is an opportunity, but if you don't do anything about it, it turns out to be a threat.''

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