Sectors: Corporate

Following the profit warning at S4 Capital, Green Square’s Nick Berry warns growing agencies not to ignore the necessary work of building support systems and infrastructure. The revelations about ‘chaotic accounting’ at S4 Capital last month not only dampened its share price and future growth forecasts, but also delivered a timely reminder to businesses of all sizes that it is worth holding up a mirror to your own systems and operations and asking if they are fit for purpose. S4 has since hired Colin Day as chair of its audit and risk committee and promoted Chris Martin to chief operating officer – the first of several appointments that Sir Martin Sorrell has stated are the first steps to rebuilding confidence. As a youngster building my first company, I was once told ‘business is easy except for the clients and staff.’ This is pretty much spot on, but I would add a further challenge to the mix in the form of systems. Edwards Deming, a renowned American engineer and businessman from the 20th century, claimed “94% of problems in business are systems-driven, but only 6% are people-driven.“ I would argue that is possibly over the top for the people-centric, service-focused marketing sector, but it still highlights that people are often restricted by the systems and processes they are bound by. Within Green Square we are heading toward a hundred years of combined C-suite experience in the hot seat. We all have war stories regarding system implementations and how poor process has inhibited growth at certain stages. This experience is vital as we assist with businesses in considering their M&A options and aiming to attain maximum value. Most businesses work hard to preserve a swan-like appearance, where serenity on the surface is upheld by frantic activity below the water. Things were even more stretched at S4, as the auditors discovered when assessing their finance operations. Consequently, the failure of systems and processes to evidence a robust audit trail and reporting resulted in the late filing of accounts. Many marketing and creative agencies focus all their attention on being brilliant at what they do while ignoring the back-office platform. This can be foolhardy as the former can only scale and blossom based on the latter being robust. Systems and the ability to scale become critical in businesses approaching 50 staff and above. This is when small business finance and resource management tools become inadequate. In The Drum’s recent Independent Agency Census 2022, there are six financial factors on which they assess performance: turnover, turnover growth, turnover percentage growth, turnover per head, gross profit and gross profit growth. These factors are clearly fundamental to the underlying health of any business, but on their own don’t necessarily allow for a view of how sustainable and scalable a company’s operations are. This is often linked to sales processes, account management, service delivery, client experience, commercial practice and staff churn. These factors and many others are all inherently linked to systems and processes being strong and unified from the front to the back of house. As agencies get momentum and start to scale, they often fall into the trap of seeing the solution to every problem as more people. In the words of Michael Gerber, the American Author who is evangelical about processes in businesses, “systems run the business and people run the systems” – so throwing more bodies at a problem as opposed to investing in the underlying systems is rarely the right approach. Entrepreneurs often by their very nature hate the detail and complexity required for building operational systems. They get frustrated and see it as a waste of time and money. But effective process not only reduces reliance on people and removes single points of failure, but it also relieves stress levels and increases the time available for creativity and innovation. From an M&A perspective, strong systems mean the knowledge and ability to ‘get things done’ are not tied up within a few people. This is a huge value driver in the eyes of an acquirer. People are essential, but when blended with quality operations, you achieve a secret sauce that is attractive to buyers and can often differentiate you from the competition. As an example, it is reasonable to expect a business to have access to key management data that ultimately helps to drive decisions and profitability. This includes being able to assess the profit margin of individual clients, projects and service lines. But it is surprising how few businesses have this readily to hand. When analyzing this for due diligence, it often becomes apparent that there are significant imbalances and certain commercial relationships or services that add limited value. Other processes around recruitment, onboarding staff and ongoing management of HR matters should also be systemized in a way that supports your culture positively and makes you stand out from the competition, attracting and keeping the best talent available. There is strong evidence to prove that haphazard approaches to hiring and inducting staff, along with ongoing employee engagement, will reduce the longevity of tenure and increase staff churn. A buyer won’t expect you to have the same systems or approach as they do, but if they see a culture that is underpinned with robust process and data to support effective decision-making, they will view you as a mature outfit with a growth-focused management ethos. On the other hand, when there is a fundamental process issue as with S4, it can take a long time to fix and rebuild reputation. Sorrell has not only admitted the slump in S4’s share price will affect acquisition activity, but also conceded “that clients and potential clients might be less inclined to work with the company in the future, given the chaos,“ according to The Times. Further to this admission and following the new appointments, Sorrell said: “In a way we’re starting again, not from where we were at the beginning, which was zero, but we’re starting again to build that trust and confidence having gone through an unacceptable event.” This proves that internal systems can be as important for success as being on the bleeding edge of a new trend or having a great sales strategy, so investing time and money in systems can yield great returns in the long run, as well as being a powerful lever to pull on when considering M&A. Investment in operations needs to be driven from the top, and those that don’t will suffer in the long run. In the words of the American author Orison Swett Marden, “a good system shortens the road to the goal.“ Read more  

Mergers and acquisitions can be messy affairs. And if you’ve been following the saga of M&C Saatchi you’ll have noticed almost daily alerts on the two suitors chasing it for acquisition. The creative agency, which seems not entirely keen on the possibility of a sale, currently has bids from two companies—with no conclusion in sight after eight months of dealings. M&C Saatchi was founded in 1995 by brothers Maurice and Charles Saatchi, Jeremy Sinclair, Bill Muirhead and David Kershaw—following an acrimonious split with Publicis-owned Saatchi & Saatchi. It currently has a client list that includes Adidas, PepsiCo, Disney, Heineken, the Commonwealth Bank and Uber—not to mention a lucrative contract with the British government. A hostile reception Since January, the agency has been the subject of a hostile takeover attempt by AdvancedAdvT Limited (AdvT), which is led by Vindoka ‘Vin’ Murria. At the time, Murria was M&C’s deputy chair. AdvT argued the acquisition would be “an opportunity to build a data, analytics and digitally focused creative marketing business with a strong balance sheet and additional management expertise.” In June, M&C directors felt it was “not appropriate” for Murria to be re-elected to the board. She was removed from her position as a result. Murria and AdvT together own 22.3% of M&C Saatchi, valued at around $307 million (253.6 million pounds). But that number was eclipsed when another competitor entered the fray: Next 15 Communications. Fresh off the merger with Engine Group, Next 15 set its sights on M&C Saatchi. An offer of $375 million (310 million pounds) was agreed upon as the preferred offer by the board. But Murria continued her fight: “Our final offer has greater potential to deliver shareholders and employees faster growth and significant value creation,” she said, adding that Next 15 was “a credible buyer of M&C Saatchi.” In its investor presentation, Next 15 said it would create an “opportunity to build a global growth consulting group that can offer a compelling alternative to the big four consulting and marketing services groups. A group that leverages top-flight creativity, technology, data, business consulting and digital marketing to deliver meaningful change.” A slide from suitor Next 15’s investor presentationNext 15 Next 15 said it would offer complementary client bases, an “enhanced” public sector offering and clearer focus on data and analytics. It would also invest across EMEA and APAC, as well as strengthen eCommerce, paid media, demand/lead generation and strategic consulting services. Unlike AdvT, which during the last AGM voted against the reappointment of Gareth Davis and non-executive Lisa Gordon as directors, Next 15 has placed “great importance” on retaining existing management and employees—and revealed that it had already held some initial “high level” planning and post-merger discussions. The future business would be led by a team featuring key people from both Next 15 and M&C Saatchi, the investor proposal revealed. Stalling the outcome But in June, another wrench was thrown into the deal. M&C Saatchi directors argued the deal shouldn’t go forward. “The M&C Saatchi Directors, who have been so advised by Numis and Liberum as to the financial terms of the Next 15 Offer, no longer consider the terms of the Next 15 Offer to be fair and reasonable solely on the basis of the deterioration in value of Next 15 Shares since the Announcement Date.” “We reached agreement with the board and executive team of M&C Saatchi after extensive negotiation and believe our offer is full and fair,” said Next 15 CEO Tim Dyson. “We do not believe that the recent market volatility undermines the fundamental proposition of this transaction.” “We are focused on our very successful strategy of delivering meaningful change for our clients—and accelerating our journey of simplification, digitization and connection.” Moray MacLennan, chief executive officer for M&C Saatchi The two parties were then set to meet August 19 to vote on the bid. But following M&C’s strong half-year results and the tumble in Next 15 shares, another disparity emerged. M&C Saatchi reported a 10% growth in revenue year-on-year with an anticipated pre-tax profit of around $37.5 million (31 million pounds) by the end of 2022. The better-than-expected results are anticipated to continue through 2022, with heightened demand for M&C’s specialist services in the U.K., Americas and Asia. “We are focused on our very successful strategy of delivering meaningful change for our clients and accelerating our journey of simplification, digitization and connection,” Moray MacLennan, chief executive officer for M&C Saatchi, told Adweek. “Our recent client wins, including PepsiCo, Barclays, and Samsung, reflect the strength of our approach. We remain confident that we will continue on this trajectory.” So that leaves three potential outcomes: AdvT wins. Next 15 wins. Or M&C Saatchi remains independent. “I suspect Murria wanted to get it cheap, shift out the old guard and bring new people in, reorganize, make some acquisitions and then flip it on or potentially list it again,” explained Barry Dudley, a partner at media and marketing consultancy Green Square. “Meanwhile, Next 15 sees it as a business that is performing very well, that perhaps needs a little help to take it forward—but wants to largely keep it going with the plans existing management have in place.” So, more time is added to the clock. Read more

With high wage costs and competition for talent hitting agency revenues, a new study from the World Federation of Advertisers (WFA) suggests the sector is facing its “worst-ever crisis” in recruitment. In a survey by the WFA and media advisory MediaSense, 85% of agencies reported that they faced a ”high” scarcity of talent while 54% of agencies agreed that the sector was undergoing its ”worst” hiring crisis ever. The findings come after last week’s profit warning from S4 Capital, which company spokespeople blamed in part on rising staff costs. The WFA study – Media’s Got Talent? – surveyed 400 executives across media, adtech, agencies and brands, with its director of global media services Matt Green telling The Drum that the findings showed how agencies are particularly badly affected by competition for recruits. ”The talent crisis is affecting all parts of the industry and clients are feeling the pinch within their internal global media teams,” he says. ”But, as this research shows, the impact is particularly pronounced on the agency side and this is having a profound impact on the ability of clients to execute campaigns globally. ”While the industry couldn’t have predicted a global pandemic, this study also identifies intractable, but more predictable, issues that have had a dramatic impact, including training, talent management and even a perceived lack of purpose. These factors need to be addressed for the health of all our businesses and in the interest of a stronger client-agency dynamic.” Why are agency businesses in a talent crisis? The survey found that respondents blamed poor training (76%), talent management (68%), poor client behavior (61%) and competition from tech firms (58%) as the primary factors behind the crisis. Others pointed to the industry’s notoriously poor work-life balance for staff (76%), a lack of flexibility for staff (73%) and opaque career paths (72%) as barriers to swifter recruitment. 67% of all respondents reported that a lack of staff and the higher cost of hiring talent that is available were major barriers to business growth. “We know the impact this has on future growth, so it is vital that businesses start to invest in talent in a more meaningful way, ensuring they strike a better balance between specialists and all-rounders, youth and experience, expertise and attitude,“ says Gerry D’Angelo, vice-president of global media at Procter & Gamble. How does this limit business growth? The impact of the rising cost of staff (and the outright lack of staff) was most evident in last week’s profit warning from S4 Capital. The parent company of digital agency Media.Monks told investors that its wage bill had risen high enough that it needed to reassess its operating margins. In response, it has put in place a hiring freeze and lowered its profit expectations by almost $50m. According to Forrester’s global agency analyst, Jay Pattisall, agency networks and holding companies (S4 included) have been particularly exposed to fluctuations in the North American labor market. ”Digital networks, holding companies and consultancies range between 50% and 75% of their revenues from North America,” he explains. ”That does make them susceptible to the North American labor market.” Competition for skilled recruits in digital roles has been especially fierce, he notes, but those roles are key to businesses growing their digital transformation or digital media offerings. ”As agencies are competing, they’re competing for digital talent. That falls in the wheelhouse of Media.Monks and its core set of competencies.” That side of the business, he says, ”is having the most acute time attracting talent”. S4 may be more exposed to rising staff costs because the company had grown through multiple acquisitions, he says. Agencies that had recruited new staff directly, rather than absorbing teams from businesses they had acquired, would typically be able to exercise closer control over wage bills. Interpublic Group and Publicis Groupe both reported that they had hired thousands of new recruits last year, but each increased their labor costs by less than 2%. Pattisall says: ”When they grow, they’re buying or acquiring growth. But they’re also acquiring the necessity to maintain a labor force.” Barry Dudley, a partner at consultancy GreenSquare, tells The Drum that failing to keep a lid on staff costs would damage investor confidence in S4. ”It is suffering from a set of external factors that are hitting pretty much all businesses at the moment. But it has added a few self-inflicted wounds on top of that with its internal accounting and financial controls not keeping pace with its rapid growth. Perhaps this was again part of the reason for the latest share price drop – it’s one thing to see revenues shift up and down in forecasts, but your staff costs are not unknowns even if it is seeing upward pressure right now.” This could, in turn, force its leadership to rethink S4’s aggressive acquisition strategy, says Dudley. ”To date, it has ‘merged’ with businesses by paying 50% of the price for a business in cash and 50% in S4’s equity. The equity portion has just got a lot more expensive for S4 with a share price at £1.30 as I write, versus the £8.78 at its peak last October.” Read more