Headline operating margins

1
vs peers %
2008 2009 2012 2011 2010
WPP
IPG
Omnicom
Publicis
Havas
WPP including
associates
WPP gross
margin margin
2
5
10
15
20
Our six specic objectives
Here are six objectives which represent our key
performance indicators (KPIs). For an assessment
of how we performed against them in 2012,
read on.
1
Continue to improve
operating margins.
2
Increase exibility in
the cost structure.
3
Use free cash ow to enhance
share owner value and
improve return on capital.
4
Continue to develop the value
added by the parent company.
5
Emphasise revenue growth
more as margins improve.
6
Improve still further the
creative capabilities and
reputation of all our businesses.
1
First, to continue to improve operating margins.
In 2012, we achieved a margin of 14.8%, a new
high. We continue to believe a margin of around
18% or more is a tough, but realistic, objective
given that our best-performing companies in each
services sector have already demonstrated they can
perform at a combined Group margin of 17%. It may
well be that headline PBIT as a percentage of gross
margin is a more accurate competitive comparison
and we achieved 16.1% in 2012, the highest level
inthe industry.
The Group has embarked on a number of
programs to improve operational effectiveness
including shared service centres and offshoring
certain tasks away from high-cost markets. We
areconsolidating IT infrastructure and centralising
systems development and applications to create
effciencies and focus investment. These programs
are projected to deliver a 1.0 margin point beneft
over the course of the next three to fve years.
1
Based on headline operating prot as dened on page 227, excluding share of results of associates, and sourced from relevant public lings, adjusted
to a comparable basis to WPP.
2
Gross margin margin is dened as headline PBIT as a proportion of grossmargin.
WPP ANNUAL REPORT 2012
How were doing
Letter to share owners
32
Distributions to share owners
1
m
12 11 10 09 08
4.3% Buy-backs
Dividends paid
4.5% 3.0% 3.4% 4.7%
4.3%
0
150
300
450
600
2
Second, to increase fexibility in the cost
structure. In 2012, fexible staff costs
(including incentives, freelance and
consultants) remained close to historical
highs of around 7% of revenues and continue to
position the Group extremely well, if current market
conditions change.
Change in variable costs %
2012
2011
2010
2009
Variable staff costs
as a % of staff costs
Variable staff costs as
a % of revenue
0
3
6
9
12
15
7.8 9.7 6.7 7.2 5.7 12.2 11.4 13.4
3
Third, to enhance share owner value and
maximise the return on investment on the
Companys substantial free cash fow of
almost 1.1 billion (or over $1.7 billion).
There are broadly three alternative uses of funds:
Capital expenditure, which usually approximates
the depreciation cost. Pressure here has eased as
technology pricing has fallen, although we have
increased investment in our digital- and technology-
based service offering, in line with our strategic
goals. The Group has actively assessed its IT
infrastructure in 2012 and consequently accelerated
its overhaul of centralised IT services, although the
pace of process simplifcation, offshoring and
outsourcing needs to be quickened. We have been
tooslow. We have also invested signifcantly more in
real estate following lease renewals to secure greater
effciencies. A large part of the proceeds from the sale
of the freehold of 285 Madison Avenue in New York
have been reinvested in relocating the headquarters
of Young &Rubicam Inc. to a more modern,
effcient facility at 3 Columbus Circle.
Mergers and acquisitions, which have historically
taken the lions share of free cash fow. Here we have
raised the hurdle rate on capital employed so that our
return on capital may be increased. There is a very
signifcant pipeline of reasonably-priced small- and
medium-sized potential acquisitions, with the
exception of Brazil and India and digital in the US,
where prices seem to have got ahead of themselves
because of pressure on our competitors to catch up.
This is clearly refected in some of the operational
and governance issues that are starting to surface
elsewhere in the industry, particularly in fast-
growing markets like China and Brazil.
Our acquisition focus in 2012 was again on the
triple play of faster-growing geographic markets,
new media and consumer insight, including the
application of technology and big data, totally
consistent with our strategic priorities in the areas
ofgeography, new communication services and
measurability. In 2012, the Group spent 500
million on initial acquisition payments, net of cash
acquired and disposal proceeds. Net acquisition
spend is currently targeted at around 300 to
400million per annum and we will continue
toseize opportunities in line with our strategy.
Dividends or share buy-backs. We have
increasingly come to the view, based on co-operative
research with leading investment institutions, that,
currently, the markets favour consistent increases in
dividends and higher maintainable pay-out ratios,
along with anti-dilutive buy-backs and, of course,
sensibly-priced strategic acquisitions.
Following the strong frst-half results in 2012, your
Board raised the interim dividend by 18%, around 5.0
percentage points higher than the growth in headline
1
Sum of share buy-backs and dividends paid divided by average shares
inissue for the relevant period, as a percentage of the average share price
for the relevant period.
WPP ANNUAL REPORT 2012
How were doing
Letter to share owners
33
diluted earnings per share, a pay-out ratio in the frst
half of 34%. For the full year, headline diluted
earnings per share rose by 8.4% and the fnal
dividendhas been increased by 15%, bringing the
total dividend for the year to 28.51p per share, up
15.9%, 7.5 percentage points higher than the growth
in headline diluted earnings per share. With a
dividend pay-out ratio of 39% in 2012, and having
largely achieved the objective of a 40% pay-out ratio
set in 2010, your Board will give consideration to the
merits of increasing the pay-out ratio further, in the
range of 45-50%. Dividends paid in respect of 2012
willtotal almost 360 million for the year.
On 2 January 2013, the Scheme of Arrangement
between WPP 2012 Limited (formerly WPP plc) and
its share owners, inrelation to the introduction of a
new Jersey incorporated and UK tax resident parent
company, became effective and new WPP, which
hasadopted the same name, WPP plc, became
thenew parent company of the WPP Group. As a
consequence of the Group returning its tax residence
to the UK, the dividend access plan and scrip
dividend have been terminated.
Share buy-backs will continue to be targeted to
absorb any share dilution from issues of options or
restricted stock, although the Company does also
have considerable free cash fow to take advantage
ofany anomalies in market values, as it did last year.
Share buy-backs in 2012 cost 135 million,
representing 1.3% of issued share capital.
4
Fourth, we will continue to develop
thevalue added by the parent company
andbuild unique integrated marketing
approaches for clients. WPP is not just
aholding company focused on planning, budgeting,
reporting and fnancial issues, but a parent company
that can add value to our clients and our people in
theareas of human resources, property, procurement,
ITand practice development, including sustainability.
Wewill continue to do this through a limited group of
400 or so people at the centre in London, New York,
Tokyo, Hong Kong, Shanghai and So Paulo. This does
not mean that we seek to diminish the strength of our
operating brands, but rather to learn from one another.
Our objective is to maximise the added value for our
clients in their businesses and our people in their careers.
Many of our initiatives are possible because of
thescale on which we now operate. In the optimum
use of property, in information technology and in
procurement generally, we are able to achieve
effciencies that would be beyond the reach of any
individual operating company. But it is also clear
thatthere is an increasing requirement for the
centreto complement the operating companies in
professional development and client coordination.
Itisa relatively recent development for certain
multinational marketing companies, when looking
tosatisfy their global communications needs, to make
their initial approach not to operating companies,
butdirectly to holding or parent companies.
Such assignments present major, and increasingly
frequent, opportunities for the few groups of our
size. It is absolutely essential that we have the
professional resources and the practice development
capability to serve such clients comprehensively,
actively and creatively. Initiatives involving some
ofthe worlds largest marketers continue to gain
momentum. The worlds largest advertiser is itself
integrating its efforts around brands, in the areas of
advertising, media investment management, market
research, packaging design and public relations. Our
largest client is seeking a seamless model, effectively
a one-client agency within our Group. All our clients,
whether global, multinational or local, continue to
focus on the quality of our thinking, coordination
ofcommunications and price. In response, we focus
on talent, structure and incentives.
Managing talent is the priority
Talent and its management therefore remain at the
heart of our reason to be: that is what our clients
payus for. Development of our people and the way
we manage that talent is a critical determinant of
performance and on that critical dimension,
wecontinue to make signifcant progress.
WPP ANNUAL REPORT 2012
How were doing
Letter to share owners
34
In developing highly competitive incentives
combined with extremely attractive working
environments, we increasingly differentiate ourselves
from our competitors and improve the attractiveness
of WPP companies as destinations for talent. Our
quarterly reviews with the operating companies have
been structured to give more time and attention to
talent and to clients. Our recruiting efforts throughout
2012 were especially fruitful as we successfully
targeted and recruited top talent within and beyond
our industry, often competing with investment
banking, management consulting, new media and
private equity offers. The war for talent is ferce and
will intensify further, and there is more to be done.
The blueprint for our executive development
curriculum has been completed, and our fagship
client leadership training program, Maestro, now
inits 10th year, is being continuously developed. The
parent company and each of our operating companies
have installed their own approach to performance
assessment and succession planning, aimed at
developing the careers of their people, improving the
quality of feedback, coaching and mentoring they
receive and providing for orderly succession. A senior
management mentoring and development program,
The X Factor, run by Charlotte Beers, the former
chairman and CEO of Ogilvy & Mather and
chairman of JWT, continues to prepare women
forthenext level of leadership in the Group.
In 2011, your Company teamed up with the
Shanghai Art & Design Academy (SADA) to
establish the WPP School of Marketing and
Communications. This jointly run school offers
Chinas frst professional marketing and
communications three-year diploma program. This
initiative continued in 2012, with the second intake
of 88 students. After 18 years, the WPP Marketing
Fellowship program remains (sadly) the only multi-
disciplinary and multi-geographical recruitment
andtraining initiative in the industry.
We continued to scrutinise and modify our
compensation practices, both to offer competitive
and appropriately based rewards to our people and
to attract outstanding talent from elsewhere. This
isa key strategic priority for us. Our competition
is,sometimes, not so rigorous in evaluating and
rewarding performance for example, taking
advantage of sharp falls in share prices to re-price or
issue options or giving limited disclosure to investors
of compensation plan details. A failure of external,
as well as internal, audiences to understand the
importance of globally competitive incentive-based
compensation will undermine the Companys
leadership position. After all, we invest almost $10
billion a year in human capital, as opposed to only
$500 million in fxed assets 20 times more.
Communications
Of all businesses, a communications services
company must be a model of excellent external and
internal communications. To that end, we accelerate
understanding of the Groups vast resources with
araft of regular communications through our
websites, our social media channels and in print:
ourmonthly public online news bulletin, e.wire; our
consistently-awarded global newspaper and eBook,
The WIRE; our annual Atticus Journal of original
marketing thinking; the WPP Reading Room, an
extensive online library of think pieces (both public
and original) from WPP professionals worldwide;
our online Fact Files profling Group resources/
companies/products; regular communication on
Group initiatives such as the WPP Worldwide
Partnership Program and the WPP Marketing
Fellowship Program; our annual award-winning
Sustainability Report and this consistently award-
winning Annual Report, both in print and online.
As part of the increased focus on horizontality,
WPPs award-winning public website is being
refreshed to highlight the scope and scale of the
Group as well as enhancing the overall user
experience. The Group intranet is being redeveloped
to facilitate further internal strategic alliances and
cross-company co-operation.
WPP ANNUAL REPORT 2012
How were doing
Letter to share owners
35
Property management
In 2012 we again reduced our core property
portfolio. While overall square footage rose by
1.4%from 23.2 million sq ft to 23.5 million sq ft,
this was less than half the 2.9% increase in revenue
attributable to acquisitions, and considerably less
than the 5.8% growth in constant currency revenues.
Average square foot per head dropped from
211sq ft to 207 sq ft, but this was partly offset by
a1.6% increase in cost per square foot to 29.50.
Asaresult, we held the establishment cost-to-revenue
ratio at 6.7%, fat with prior year and ahead of our
long term 7% run-rate target.
Our aim for 2013 is to improve on this level in
spite ofsharp increases in Asia property costs and
the impending end of a number of signifcant below
market leases in the region.
Procurement
In procurement, our goal is to make savings and
addvalue across all of WPPs external spend, with
particular emphasis on opportunities to leverage our
scale to the beneft of our clients and our companies.
In 2012, we completed a three-year
implementation of a procurement spend analytics
system which now provides supplier-level visibility
ofclose to $5 billion of external spend, across
oureight largest markets the US, the UK,
Germany, France, Spain, China, India and Brazil.
Access to data of this detail is now driving supplier
cost reduction and value improvement targets across
the Group. At least one further market will be
addedin 2013, and others in subsequent years.
Asaconsequence of better data, 2012 alsosaw
there-organisation of procurement into four spend
teams with global/regional reach.
For 2013, we will continue our focus on the key
drivers of supplier cost. Specifcally for technology and
indirect procurement, our goal is to have a minimum of
50% of supplier spend in each major country, covered
by WPP preferred suppliers and contracts, and for these
preferred suppliers to work with us to deliver year-on-
year value improvement. Specifc targets will be set for
the newest areas of procurement focus, following
detailed opportunity analysis which began in 2012.
Information technology
In 2012 we initiated a major review of the Groups
IToperations to make them better co-ordinated,
moreresponsive to changing needs (both internal and
external) and more cost-effective. Core to this strategy
will be greater centralisation and consolidation of
theGroups IT infrastructure and services, with
theobjective of delivering savings of around 10%
(or50million) on current delivery cost. We estimate
implementation will take two to three years and
wehave engaged PwC to assist with the project.
As mentioned previously, these initiatives were
accelerated in the fourth quarter of 2012 following the
devastation caused by Hurricane Sandy. The signifcant
loss of power in New York and subsequent fooding
had some impact on the operational effectiveness of
certain of the Groups IT infrastructure and back-offce
systems, making the overhaul of our centralised IT
services all the more important.
Additionally, the rapid and continuing convergence
of mobile, voice and data communications has
allowed us to take advantage of new offerings in
thetelecommunications sector to increase effciencies
and to provide enhanced support to our increasingly
mobile workforce.
Practice development
In practice development we continue to develop
horizontal initiatives in a focused set of high-
potential areas across our vertical operating brands:
in media investment management, healthcare,
sustainability, government, new technologies, new
markets, retailing, shopper marketing, internal
communications, fnancial services and media and
entertainment. Specifcally, we continue to invest in
WPP ANNUAL REPORT 2012
How were doing
Letter to share owners
36
Organic revenue growth vs peers %
Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412
WPP
IPG
1
Omnicom
1
Publicis
1
Havas
1
WPP organic
gross margin
margin
-2
0
2
4
6
8
10
12
14
sharing insights and developing initiatives through
WPP Digital (in digital marketing and media) and
The Store (in distribution and retail).
In key geographic markets we are increasingly
coordinating our activities through WPP Country
Managers. We continue to believe that increasing
coordination is required between our brands at
thecountry and global levels, as the arguments for
investment in regional management become weaker,
largely because of improved technology. In addition,
we have increased the number of WPP Global Client
Leaders to co-ordinate our efforts onbehalf of clients
and to ensure they receive maximum beneft from
their relationships with WPPoperating brands.
Furthermore, we continue to encourage internal
strategic alliances and promote co-operation.
Practice development initiatives have therefore
beenreinforced in such areas as healthcare, retail,
internalcommunications, corporate sustainability
and media and entertainment. This has been
especially important in developing our portfolio of
direct investments in new media under WPP Digital
and where our investments are working with our
agencies and people to bring newtechnology
capabilities and understanding to our clients.
All these initiatives are designed to ensure that
we, the parent company, really do (as well as being
perceived to) inspire, motivate, coach, encourage,
support and incentivise our operating companies
toachieve their strategic and operational goals.
5
Fifth, to emphasise revenue growth more as
margins improve. One legitimate criticism of
our performance against the best-performing
competition is our comparative level of
organic revenue growth, although the methods
used to calculate rates of organic growth vary
tosay the least and we may have put too much
emphasis on margin improvement. In 2012, our
like-for-like revenue growth of 2.9% was at the
leading end of our competitors, although not in
thelead. Our margin performance is consistently
atthe top end of the pack. We continue to believe
increasingly that proftable growth is preferable to
sacrifcing margins.
Estimated net new business billings of 3.9 billion
($6.2 billion) were won in 2012, up almost 21% on
2011, placing the Group frst in all leading net new
business tables. The Group continues to beneft from
consolidation trends in the industry, winning
assignments from existing and new clients. These
wins continued into the second half of the year and
the frst three months of 2013 with several very large
industry-leading advertising, digital and media
assignments, the full beneft of which will be seen
inGroup revenues in 2013. There have been several
recent signifcant gains, for example, particularly
inthe pharmaceutical and healthcare industry.
Our practice development activities are also
aimed at helping us position our portfolio in the
faster-growing functional and geographic areas.
1
Peer data sourced from company presentations.
WPP ANNUAL REPORT 2012
How were doing
Letter to share owners
37
TheGroup completed 65 acquisitions in 2012; 28
acquisitions and investments were classifed in new
markets (of which 20 were in new media), 27 in
Consumer Insight, including data analytics and the
application of technology, with the balance of 10
driven by individual client or agency needs.
Specifcally, in 2012 acquisitions and increased
equity stakes were completed in Advertising and
Media Investment Management in the US, Germany,
the Netherlands, the Slovak Republic, Turkey, Israel,
Jordan, Brazil, Colombia, Mexico, Australia, China,
South Korea, Thailand and Vietnam; in Consumer
Insight in the US, France, Germany, Turkey, UAE,
Chile, China and Pakistan; in Public Relations &
Public Affairs in the US, Canada, the UK, Denmark,
Finland, France, Russia and Australia; in direct,
digital and interactive in the US, the UK, Germany,
Hungary, Russia, South Africa, Turkey, Australia,
China, Indonesia, Pakistan and Singapore; and in
Healthcare Communications in Hong Kong.
So far in 2013, the Group has made acquisitions
orincreased equity interests in Advertising and
MediaInvestment Management in Australia, Canada,
Colombia, Myanmar and Thailand; in Consumer
Insight in Cambodia and Myanmar; in Public
Relations & Public Affairs in China and Vietnam;
and in direct,digital and interactive in Latin America,
China, the Philippines, South Africa, Turkey, the UK
and the US.
These acquisitions continue to move us forward
to our previously described strategic priorities;
expanding the share of revenues of our businesses in
Asia Pacifc, Latin America, Africa and the Middle
East, and Central and Eastern Europe to 35-40%;
innew media to 35-40%; and in Consumer Insight,
direct, digital and interactive, to over one-half.
Expansion plans
We intend to expand our strong networks Ogilvy
& Mather, JWT, Y&R, Grey, United, CHI Bates &
Partners, Mindshare, MEC, MediaCom, Maxus,
tenthavenue, TNS, Millward Brown, Kantar Media,
Kantar Health, Kantar Retail, Kantar Worldpanel,
Hill+Knowlton Strategies, Ogilvy Public Relations,
Burson-Marsteller, Cohn & Wolfe, OgilvyOne
Worldwide, Wunderman, OgilvyAction, G2,
POSSIBLE, 24/7 Media, AKQA, Ogilvy
CommonHealth Worldwide, Sudler & Hennessey,
ghg, The Brand Union, Landor and FITCH in
high-growth markets or where their market share
isinsuffcient. Indeed, we recently announced the
merger of OgilvyAction and G2 to form the largest
and most geographically complete activation agency
in the world. Together they will be uniquely placed
toexploit the intersection of the worlds brands
anddistribution systems.
We will also enhance our leadership position in
Consumer Insight by further development of our key
brands with particular emphasis on North America,
Asia Pacifc, Latin America and Continental and
Eastern Europe. We will continue our growth of
research panels and have established a Kantar-wide
operational capability. We will reinforce our growing
position in media research through Kantar Media,
which includes our investments in television and
internet audience research and IBOPE, Marktest
andCSM/CTR, which, combined, is the market
leader outside North America. We now measure
television and/or internet audiences in 46 countries
around theworld.
In addition, we intend to reinforce our worldwide
strength in direct and interactive marketing and
research through our traditional channels such as
OgilvyOne, Wunderman, G2, Blanc & Otus and
Lightspeed. We will also invest directly in new
channels through start-ups, particularly as US and
French valuations in search, for example, are still
prohibitive. Other opportunities will be sought
toenhance our online capabilities.
Lastly, we will continue to develop our specialist
expertise in areas such as healthcare, retail and
interactive and to identify new high-growth areas.
WPP ANNUAL REPORT 2012
How were doing
Letter to share owners
38
Creativity remains paramount
6
Sixth, to improve still further the creative
capabilities and reputation of all our
businesses. In pursuing these aims, the
Group is led by John OKeeffe, WPPs
worldwide creative director. Under Johns guidance
progress continues to be impressive.
There is much talk of co-ordinated communications,
horizontality, and price effectiveness.
All are important.
None is as important as the quality of the work.
Creative excellence remains and will remain
paramount. If you drew a graph plotting creative
awards (as a proxy for creativity) against margins,
for any group of agencies, there would be a very
strong correlation. The more awards, the stronger
themargins. The clients procurement department
fades into the background when the work is strong.
Of the three things we do strategic thinking,
creative execution and co-ordination creative
execution is undoubtedly the most important.
This of course means creativity in its broadest sense.
Our clients look for creative thinking and output
not just from advertising agencies, public relations
and design companies, but also from our media
companies and our research companies. Millward
Brown remains arguably one of our most creative
brands. Witness the BrandZ

Top 100 Most

Powerful Brands study published annually with the
Financial Times and its study of the BrandZ

Top
50Most Valuable Chinese Brands, together with the
recently launched BrandZ

Top 50 Most Valuable

Latin American Brands.
We intend to achieve our creative objectives by
stepping up our training and development programs;
by recruiting the fnest external talent; by celebrating
and rewarding outstanding creative success tangibly
and intangibly; by acquiring strong creative
companies; and by encouraging, monitoring and
promoting our companies achievements in winning
creative awards.
Early on in his tenure John OKeeffe identifed
Cannes as the most important arena to demonstrate
the Groups creative credentials. Results have been
very encouraging.
For the second year running your Company
wasnamed Creative Holding Company of the Year
at the2012 Cannes Lions International Festival
ofCreativity. The festival is the worlds premier
showcase for excellence in communications,
coveringall markets and all disciplines. Back to back
recognition of this kind is a real marker of progress
and consistency, particularly as our main competitors
posted record performances of their own.
Based on the collective number of Cannes Lions
awarded to WPP agencies for creative excellence,
WPP accumulated 1,589 points in the competition,
followed by Omnicom second with 1,383 points
andPublicis with 1,018 points. Awards were won by
WPP agencies from more than 30 countries across all
continents. Following 2011s advertising Grand Prix
for JWT Shanghai, in a gratifying double for WPP
China, 2012 saw another Grand Prix awarded to
Ogilvy Shanghai. And in what proved to be a stellar
year all round, Ogilvy was also named winner of the
coveted Network of the Year.
2012 also saw the sixth annual WPPED Cream
awards, our internal awards program for outstanding
work across the Group.
Having said this, we have to maintain a careful
and to some extent cautious approach. A recent
signifcant problem we had in the creative area has
made us take a long, detailed look at our creative
culture to make sure that our emphasis on creative
improvement doesnt result in inappropriate scam
ads for festivals, for example. We need to take total
responsibility for such events and make sure that
ourdrive in creativity doesnt result in totally
inappropriate behaviour.
WPP ANNUAL REPORT 2012
How were doing
Letter to share owners
39