WPP Q4: Lower Profits Increase Likelihood of More Layoffs

It is often said that WPP chief Martin Sorrell takes accounts at lowball rates and figures out how to make a profit later.

That notion is writ large in WPP’s 2008 full year earnings report, out today. Revenues were up 9.7 percent to $13.5 billion but profit was down 9.9 percent to $934 million.

How did WPP manage to make less profit on more business? By failing to keep its operating costs under control. Those costs went up 10.8 percent.

About two thirds of all operating costs at large agency networks are salary and compensation costs. This means that, for WPP avoid a further reduction on profitability in 2009, it must either grow its revenues by more than 10 percent or cut staff costs. That will require layoffs or pay reductions.

That’s Sorrell’s only choice, because in order to grow revenues at a pace that would avoid layoffs he’d have to win an extra $6.7 billion in new billings in order to keep up with operating costs (at the rate of growth in 2008). That won’t happen in this economic environment.

WPP’s staff are also becoming less efficient at earning their revenues. In 2007, every dollar spent on salaries, office rental and all the other stuff that makes an agency tick produced $1.15 in return. In 2008, that slid to $1.13. (The expense of setting up Enfatico for Dell, a client with declining billings, probably didn’t help.)

We also know that Sorrell will swing the ax again because it is telegraphed in his press release:

… variable staff costs provide a “shock absorber” to operating margins as revenues come under increasing pressure. We estimate that at least half of these variable staff costs can be reduced in the course of a recession.

(By “variable” staff costs I guess he means bonuses and freelancers, because there is no way that full-time salaries are only the 6.6 percent of operating costs that Sorrell says his variable staff costs are.) WPP also admits that despite recent layoffs (or “recent actions,” as Sorrell coyly refers to them), WPP’s headcount nonetheless went up:

At the end of 2008, staff numbers were 112,262 compared with 110,869 at the end of 2007 on a like-for-like basis, an increase of 1.3%.

WPP says this is now more “balanced” with its revenues, but the real truth is there for all to see in the operating costs line and the lowered net profit.

So … operating costs going up, staff efficiency going down, profit going down … more layoffs likely on the way.

• See BNET’s previous coverage of WPP’s finances:
• Video: Why WPP Does Not Run Strip Clubs
• WPP to Lay Off “Several Thousand” on Accounts Where Staff Cost More than 60% of Revenue
• Ogilvy Cuts 150 Jobs; First of “Thousands” Expected at WPP
• Sorrell Used WPP Stock as Collateral for Personal Loans
• WPP Leaves U.K. for Ireland to Avoid Tax
• IS WPP at Risk of Breaching Its Debt Obligations?
• Fitch Cuts WPP’s Debt Rating; Suggests Pay Reductions