Agencies are finding it “somewhat easier” to recruit staff because of the recent slowdown in the US technology sector.
That’s according to Nick Priday, the recently promoted global chief financial officer of Dentsu, who said its employee churn — known as “staff attrition” — “peaked” at the end of Q3 2021. That led to “high” wage inflation and it “continued to be high” until the end of that year, he said.
Salaries jumped during the following year because of what Priday called “the annualisation of that wage inflation in 2021, as we went into 2022” but it has now settled down.
“There's still obviously pockets of inflation in particular capabilities,” Priday told analysts at the Japanese group’s annual results. “But I would say that the slowdown in US tech over recent months [with Google, Facebook and other platforms cutting thousands of jobs] has made hiring somewhat easier, particularly in data and analytics and capabilities like that.”
Despite the higher salary costs in 2022, the company delivered a profit margin that was better than forecast at 18.4%, excluding the impact of exiting its Russian operations because of the Ukraine war. Margin was 18.2% when the impact of the Russia exit was included.
Priday was speaking alongside Hiroshi Igarashi, the global chief executive, and Jacki Kelley, the CEO of the Americas and chief global client officer, who are part of the new “One Dentsu” management team, following the completion of the merger of the Japan and international operations in January. Priday was previously CFO of Dentsu International.
The group’s profit margin is already among the highest in the agency sector but it could increase further. Priday said: “Eighteen per cent is not the ceiling of our ambitions.”
Igarashi and Priday cited several factors that should boost profit margin in the coming years:
- On-going simplification of the business with the shift to a “One Dentsu” model globally, after rationalising the number of agency brands and office space.
- Adopting an “automation-first” approach and moving more jobs to cheaper offshore locations.
- Driving more revenue from customer transformation and technology (CT&T) services with an ambition of hitting 50% of turnover – a target that the company first set in 2021
All of these factors should help Dentsu to “outperform” its rivals in future, according to Igarashi.
The group reported organic revenue growth of 4.1% in 2022, which was slower than Publicis Groupe (10.1%), Omnicom (9.4%) and Interpublic (7.0%), but it had a higher profit margin than those rivals. WPP reports annual results on 23 February.
Analysts at Edison pointed out Dentsu's revenue was still “impressive” compared to a year earlier when it received a boost from the Tokyo Olympics in its home market.
An 'automation-first mindset'
Dentsu, the owner of agencies including Carat, Dentsu Creative, iProspect and Merkle, has been talking up the benefits of offshoring for several years.
Igarashi said 9,400 (about 14%) of its global workforce are now based in “offshore and nearshore locations, mainly centered around India”.
Priday said Dentsu sees “more opportunity in terms of offshoring”, which is one of the reasons why he is confident that the company could increase margin further, although the company has a slightly lower target of 17.5% in 2023 because it is investing in the business.
“We will continue to expand our global delivery network, which is our network of near and offshore centres,” Priday said. “We welcomed a new CEO to our global services network last year, ex-Accenture, who will drive an automation-first mindset to transform our processes and drive more value for our clients across the globe.”
He added “we're very focused on increased centralisation and standardisation” across the group, which has moved from about 150 agency brands to only six globally in the last few years. The profit margin of Dentsu International improved by 400 basis points or 4% during that period.
Clients have 'high expectations' of 'One Dentsu' model
Igarashi announced the merger of the Japanese and international businesses in September —a major move that led to the surprise exit of Wendy Clark, the chief executive of Dentsu International, who stepped down after only two years in the job.
He said the shift to “One Dentsu” was delivering “very strong progress, even more so than I had expected”, and he travelled to New York in January to explain the strategy to clients who have “high expectations”.
Dentsu’s biggest clients include American Express, Microsoft, Procter & Gamble and Vodafone.
Kelley, who added the role of chief global client officer in the recent restructure, described Dentsu’s client offering as at “the intersection of marketing, technology and consultancy”.
She said: “It is early days [for the new ‘One Dentsu’ model], but I think what I often talk about is how we have fundamentally changed the plumbing of how we operate. We don't rely on goodwill within our network or strong internal networks [to drive integration]. We really are focused on structured solutions that deliver growth for our clients, full stop, versus bespoke solutions.”
She added she was “confident” about the new-business pipeline, saying media pitch opportunities are 85% “offensive” in 2023, higher than 80% in 2022, and the value of creative opportunities is up 14% versus last year. Recent client wins have included Apple+ in the US.
But Kelley warned “we certainly have seen some pullback” and “some level of pause” from tech clients because of the “lay-offs” in the sector.
That has led to some brands increasing their focus on “performance media”, “B2B and enterprise relationships” and “increased personalisation”, she said.
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