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Operational Leverage

Founder of WPP and Founder, Executive Chairman S4 Capital

IP Interview
Published on December 27, 2020

Why is this interview interesting?

  • The operational leverage of traditional analog agencies versus a pure digital agency like S4
Executive Bio

Sir Martin Sorrell

Founder of WPP and Founder, Executive Chairman S4 Capital

Sir Martin Sorrell is Founder and Executive Chairman of S4 Capital plc, which is building a purely digital advertising and marketing services business for global, multinational, regional, local clients and millennial-driven influencer brands. Sir Martin was CEO of WPP for 33 years, building it from a £1 million “shell” company in 1985 into the world’s largest advertising and marketing services company. When Sir Martin left in April 2018, WPP had a market capitalisation of over £16 billion, revenues of over £15 billion, profits of approximately £2 billion and over 200,000 people in 113 countries. Prior to that, Sir Martin was Group Financial Director of Saatchi & Saatchi plc for 9 years and worked for James Gulliver, Mark McCormack and Glendinning Associates before that. S4 Capital plc merged with MediaMonks, its content practice, in July 2018 and MightyHive, its programmatic practice, in December 2018 and has added eight further content programmatic and data companies to both practices in 2019 and six in 2020. It is listed on the London Stock Exchange under SFOR.L and after a little over two years, S4 Capital plc has over 2870 people in 30 countries, with a market capitalization of over $2.7 billion. Sir Martin supports a number of leading business schools and universities, including his alma maters, Harvard Business School and Cambridge University and a number of charities, including his family foundation.

Interview Transcript

Is there more operational leverage in the digital business at S4 versus traditional agencies?

Probably a little. We were talking about it with an institution yesterday. I think, when we add an account like Mondelez – Mondelez is an existing client, but we add in the area of content – or when we add BMW and MINI, in Europe, each one is going to add more than 10% to our revenues. We are 3,200 people at the minute and we’ve hired around 300 people and, in that number, a few are the hiring for BMW MINI, but we’ll probably be at about 3,600 - 3,700, in fairly short order, excluding deals, which will drive us over 4,000. I would say, when we add an account like BMW MINI, we are adding people at pretty much the same rate.

Within BMW MINI and Mondelez, in addition to the scope of the business we’ve won, we’ve already added, in a few weeks, additional assignments and in that, that’s where you get the operational leverage. Your operational leverage is better when you do land and expand, which is win a project, add a project – you have to add people – add a project, add a project. Our revenues are around $400 million, trending upwards, obviously, from that level. A whopper, to us, is about $20 million, about 5% of our revenues. The biggest whopper we have is Google; our second biggest is a major tech communications company. You can guess who it is; one of the most valuable companies in the world, but we can’t say because of an NDA. Third and fourth would be BMW MINI and Mondelez; they would be vying between one another, I would think. The fifth is Facebook.

Facebook has come through land and expand. Win a project, grow it. Apple has come through that and Google, to some extent, has come through deals but has, principally, been driven by land and expand. That’s a much healthier way, I think. In terms of big pitches, Mondelez took nine months and BMW MINI took a year and a week. These are great drains on resources. For the bigger agencies, they’ve got more resources, but we’re getting there; we’re getting able to do it. We very carefully assess the likelihood of us winning, before we get involved.

On the operational leverage point, if you just look at Omnicom’s or WPP’s EBIT margin, for the last 20 years, it’s very sustainable between 11% to 13% margin, so very little operational leverage.

We were targeting 20% when I was at WPP. I think we got up to the heights of 17%, 18%. In this plan today, they’re talking about 13% to 15%, I think.

That’s their high end?

It’s not, historically, the case. For gross profit on net revenues, 15% seems to be where they are all aiming for. I think that indicates, to some extent, a commoditized business. I think a “good” professional services business should be doing 20% plus. There was one account that WPP actually won recently, where they basically offered guarantees on $160 million of media and they offered 120 days payment terms. Any mug can win or keep pieces of business if you offer those sort of trading terms. Finance and procurement do well in these sorts of environments. I was talking to our companies in Australia, just now, and they were saying how 2020 was the year of the CFO, because the CFO managed to exercise tremendous control over what was going on. I think the margins should be 20%, 20% plus.

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