Danny Rogers: Employment costs threaten agency profits

At this time of year management consultancy Kingston Smith W1 produces an annual survey of the financial performance of PR consultancies. Although this covers the previous calendar year - in this case the year-ending December 2010 - and comes six months after PRWeek's own Top 150 PR Consultancies report, it nevertheless provides valuable insight.

Danny Rogers: Employment costs threaten agency profits
Danny Rogers: Employment costs threaten agency profits

Kingston Smith's survey is taken largely from Companies House data, and therefore includes director-level remuneration and profitability figures for the 40 biggest PR consultancies in this country. What bosses earn is always intriguing, but the latter is of most concern in this year's report.

Although the aggregate gross income of the top 40 UK PR consultancies grew by five per cent during 2010, more than half (22) actually reported a drop in gross income. And, more strikingly, more than half showed a decrease in operating profit.

This was largely down to the fact that the aggregate increase in employment costs for these PR agencies was 9.29 per cent, almost twice the level of aggregate income growth. In other words their wage bills were growing faster than client fees.

This seems surprising at a time of increasing unemployment in the wider economy and when cost control seems to be the order of the day. But we should remember that this wage cost rise was for 2010; a year which saw a noticeably better business climate than in 2009. And crucially, it probably felt better than it does today.

Kingston Smith is in effect warning that many PR consultancies have become too sanguine about their wage bills.
Of course all this may have re-adjusted during 2011. Since the summer, UK businesses have been hit by the euro crisis and a new wave of economic pessimism. But equally, revenues are also likely to have taken a hit, which means that wage bills may still represent too large a proportion of agency outgoings.

In an interesting parallel to the glamorous world of Premier League football, the proportion of employment costs to gross income in British PR agencies is now the highest ever reported, standing at 62.3 per cent. Thankfully, this is still short of Premier League clubs: in 2010 the proportion of their income spent on wages hit a record 68 per cent, according to Deloitte.

Both football clubs and PR bosses need to adapt to the ongoing pressure of the financial environment, taking cost control seriously, and making their star performers even more productive.

Also read: Kingston Smith W1 report finds PR profit margins lowest for seven years

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