Après le Déluge

Jean-Michel Etienne, finance director of French-based global communications conglomerate the Publicis Groupe, has been extremely busy since joining the organisation in 2000.

First, there was the acquisition of leading ad agency Saatchi & Saatchi in 2000, closely followed by the purchase of US communications giant Bcom3 in 2003. Not to mention driving a period of strong organic growth, reducing debt, improving the cash position and obtaining investment grade ratings from Moody's and Standard & Poor's. And, as Etienne explains, there are plenty more challenges ahead.

After its recent buying spree, Publicis Groupe is now firmly positioned as the fourth largest marketing conglomerate in the world, behind Omnicom and Interpublic in the US, and WPP in the UK. But, for an organisation once described as a 'French friends and family agency', integrating two of the world's best known ad agencies into its network has been a tough task.

"The challenge has been to give an established role within the company to each new entity we add to our portfolio," explains Etienne. "What is the role of Leo Burnett? What is the role of Saatchi?"

With Saatchi the integration process was, says Etienne, comparatively simple. "There was no point changing the culture of Saatchi. If you do that you lose the people in the agency, as well as the clients. So with Saatchi it was about adding another network to Publicis Groupe worldwide."

The acquisition of Bcom3 was a more transformational deal for Publicis Groupe, as there was considerable overlap with existing elements of the group.

Throughout the integration of both Saatchi and Bcom3, however, the emphasis has been on preserving each network's distinctive culture.

"It is important to know that, compared to our competitors, we have three very different advertising networks. Each has its own culture and way of operating," Etienne says. "It has been a real challenge keeping it this way. It is very easy to harmonise everything, but that is not something we want to do."

SHARED SERVICES

One way Publicis Groupe has achieved integration and savings without sacrificing cultural identity is through the implementation of its shared services system. Etienne sees shared services as an opportunity to centralise all business support functions at a national level, including accounting, reporting, treasury, tax, legal, real estate, insurance, procurement and parts of the HR function, such as payroll.

"While we haven't implemented an ERP system - one single system for the whole group - we have taken a first step: to centralise shared services at a country level, on one single system," Etienne says. "By the end of 2006 we will have 15 countries in place."

HARMONISED REPORTING

Keeping tabs on what is happening in such a large organisation is a significant challenge. Etienne has implemented financial systems allowing him to monitor the performance of individual elements of the business. "During the integration of Bcom3, we set up a single reporting system for the whole group," he says. "This reporting system allows us to control the performance of each single unit within the group, and by unit I mean single agency."

Visibility is extremely important to Etienne, who is no fan of aggregation and demands financial transparency throughout Publicis Groupe.

"I have visibility for 100% of the organisation's activities throughout the year and have been able to measure the performance on a comparative basis, year-on-year, for the last four years," he says. "I can look at various levels - at the agency, brand, region and country level. This way I have whatever level of aggregation I need. It enables me to do the day-to-day work of pushing for changes, and driving performance forward."

PROMOTING BEST PRACTICE

As befits a creative business, Publicis Groupe under Etienne looks for innovative solutions and encourages best practice throughout the group through knowledge-sharing. He meets with his brand CFOs on a quarterly basis, describing it as his finance family meeting.

"Sharing best practice is something very important to this business," he says.

"I know that there will always be someone in the group, doing great things that I am not aware of. The challenge is finding them, understanding what they are doing well and how they are doing it, and then whether we can share that by rolling out that best practice to the other agencies."

Etienne is also able to cross-reference best practice at a country level through the oversight board of the shared services system.

"I have a lot of information given to me through the oversight board, which allows me to check with another country and say, 'Hey, our people in Holland are doing something good, check with them and see if you can do the same thing'," he says.

DEBT REDUCTION

In his time at the helm of the finance function, Etienne has steered Publicis Groupe through a period during which it has reduced debt substantially and increased cash flow. He has also simplified the balance sheet, redeeming some of the corporate bonds and warrants used to finance acquisitions, and issuing a €750m bond that matures in 2012.

It was clear that one challenge for Etienne during the Bcom3 deal would be generating sufficient cash in the post-acquisition period to reduce debt. Shareholders needn't have worried. The level of debt at the end of 2005 was one-sixth of that three months after the acquisition, at the end of 2002.

"We generate cash from operations due to the profitability of our business, plus, a significant amount has been generated between the end of 2002 and 2005 through working capital management," explains Etienne. "We generated €600m of savings through stronger working capital management." The hard work appears to have paid off. Saatchi and Bcom3 have been integrated successfully. The level of debt is substantially reduced and the group is delivering €400m free cash flow.

TWIN-TRACK GROWTH STRATEGY

So what is Publicis Groupe planning to do with its steadily growing cash pile? Give some back to the shareholders? Not at the moment, says Etienne. Publicis Groupe is fourth in the top tier of marketing conglomerates. WPP and Omnicom are double the size of Publicis Groupe. So there is still a significant upside in terms of growth potential.

"Our intention is to continue to grow through selective acquisition," says Etienne. "We want to grow in the marketing services area, where we still have to complement our existing offering in this area - in direct marketing, in PR and events - and we also want to grow in emerging markets."

"Are we going to increase our dividend policy, are we launching a share buyback? Do we consider that this sector is finished, and we cannot grow anymore? We don't think so. We think our shareholders will be better rewarded through a good acquisition policy, rather than through a share buyback."

BEATING THE COMPETITION

A combination of organic growth and growth through selective acquisition is the strategy going forward, but this may be more difficult to accomplish than imagined. In football, when it comes to buying the very best players, it is the richest clubs, such as Chelsea and Real Madrid, that have the pulling power. So what makes Etienne think that Publicis Groupe can attract the best companies ahead of its larger competitors?

"Look at what has happened just recently," says Etienne. "We made some select acquisitions and have been able to attract talent, without adding money."

"How? By preserving the entrepreneurial spirit of the acquired organisations. By making it clear what kind of culture to expect when joining forces with Publicis Groupe."

"They know when they sign, what kind of rules to expect, that we tend to centralise support functions through shared services, and that they will make some savings when we do that. Or when the savings are not there, because sometimes when you are integrating the organisation you cannot deliver savings at the same time, they know that they will have experts able to help them deal with the support functions, legal, tax matters, payroll, employment matters."

"People join us because they feel that they will be able to continue to grow the business in a way that maybe isn't possible in a more rigid organisation. The key is to be fluid."

THE CHANGING ROLE OF THE CFO

Etienne was pleasantly surprised at the level of strategic decision-making he is involved with at Publicis Groupe. "At my previous company I got the impression that the finance director in this sector was sidelined," he says. "Everything was driven by creative people, and the finance people were bean counters."

Soon after he joined, however, he discovered that the finance director is very closely involved in the business. "The CFO is sitting around the table in most of the big negotiations, in client pitches, because you need to look at the resources available, measuring the profitability of each account, implementing the cost control measures - working capital management, for example - and the client billing strategy, and of course I am significantly involved in M&A strategy."

It is part of a wider change in the role of finance directors within the group, believes Etienne. "In the big countries we have moved the processes and the technical expertise aspect of the finance role to shared services," he explains.

"Those people with the title of CFO or FD left in the agencies are effectively business partners. They work with the management team in the delivery of objectives, and their contribution is increasingly to do with business strategy. I used to say to my CFOs that the good CFOs in our organisation are those behaving more like chief operating officers, rather than purely financial officers."

MORE TO DO?

Ask Etienne what aspect of his work keeps him awake at night and he will tell you that he gets a good night's sleep. Press him on the matters that are troubling him and his fellow CFOs, and he is a little more forthcoming.

Driving conversion rates is one concern. "We have growth, and this growth has to be transformed into operating income. This is a permanent fight - turning revenue into profit - this is the obsession of CFOs in this industry. Otherwise, what is left for the shareholders?"

IT is another area likely to command his attention in the near future. "We still have a massive amount of work to do in this area, one day I hope we will have more integrated systems, which will help us to improve internal controls, and also to streamline more of our processes," he says.

THE FUTURE

If Etienne has been busy to date, his workload is unlikely to ease in the future. Right now things look good for Publicis Groupe. It won $9.8bn in new business in 2005 - a record figure. And with organic growth figures of 6.8% for 2005, and 6.3% for Q1 2006, Etienne has much to be proud of.

But the markets are notoriously fickle and the group has set the ambitious goal of reaching 16.7% operating margin by 2008 - which means there is plenty more work to be done.

"With the two acquisitions - of Saatchi and Bcom3 - we have roughly quadrupled our size," says Etienne. "People asked us, can you really grow this monster that you have created?" So far, it appears, the answer is yes.