Focus: Starting up during a recession - Can hard times create successful start-ups?

An economic downturn would appear to be the worst possible time to launch a PR agency. But Joe Lepper looks at some who have done so and explores whether their businesses are more efficient as a result.

More than 21,000 UK businesses failed last year, according to latest insolvency figures.

The figures, compiled by Experian, show an increasingly bleak outlook for UK firms battling to survive during the current economic downturn, with 1,200 more businesses failing in 2011 than in the previous year.

But despite this grim picture many comms professionals who started agencies during previous downturns claim that a tough economic climate may actually be the best time to launch a business.

Former CIPR president Kevin Taylor jokes that he is a 'serial offender' when it comes to setting up businesses during recession.

During the late 1980s recession, he launched Thames Valley-based CC Group's technology business. During the 2009 credit crunch he formed his own agency, Robertson Taylor PR, and as the eurozone crisis threatens the economy again he has recently launched another venture, a PR and marketing network called Standing Tall Communications.

'A recession is actually the best time to start a PR agency, as the dynamics work in favour of both parties; client and agency,' he says. 'Clients are looking to cut costs and start-ups often offer them senior PR professionals with a lower cost base.'

He adds that starting during a downturn also makes agencies more likely to follow a set of golden rules for running a financially and ethically sound business (see box).

While at CC Group's emerging technology business, Taylor says the tough economic conditions encouraged the agency to focus on staff retention and grow senior staff from within. 'This gives the agency more of a family and friendly feel, and clients like that as well,' he adds.

PRCA fellow and Agincourt partner Adrian Wheeler, who set up Sterling Public Relations during the period of high inflation and unemployment of 1976, urges those considering launching in today's tough economic climate to ignore insolvency horror stories.

'The economy should not matter,' he argues. 'If a client is cutting its budget, one of its rivals will seize an opportunity around promotion. It is like the dinosaurs and the mammals.'

His key piece of advice for those setting up and managing agencies during a recession is to avoid borrowing from banks and private equity, and 'ideally save up the cash you need to get you through the first six months'.

Starting up during a recession can also help agencies understand the cyclical nature of the economy and anticipate cutbacks from clients.

Wheeler says such agencies are more likely to talk to clients about cutbacks before they are made. He says: 'You are then part of the solution and they (clients) will feel you are on their side. If you wait until they come to you, it could be very bad news.'

Because those starting in recession tend to have a tighter grip on staff costs and overheads, this can also give them an edge when tough choices around redundancies have to be made.

Taylor recommends 'cutting quickly and deeply', adding: 'If you need to cut four to five, you will probably need to lose six or seven. Try to do it all in one go. The worst thing one can do is have one round of redundancies after another.'

For those still unsure of launching a PR agency during recession they should remember that some of the world's largest firms, including General Motors, Disney and AT&T, all launched during tough times.

CASE STUDY: LANSONS COMMUNICATIONS

Tony Langham describes 1989, the year he set up financial and corporate agency Lansons Communications with former Dewe Rogerson colleague Clare Parsons, as seeming 'like the end of the yuppie dream'.

But even though shares and house prices were plummeting, the pair managed to attract ten clients, take on four more members of staff and achieve a fee income of £227, 822 in the firm's first year. By June 1991, fee income had leapt to £356, 450.

Ranked 25th in last year's PRWeek Top 150, the agency's fee income in 2010 was £8,283,000, with an 83-strong team supporting 180 clients.

CEO Langham says keeping property and staff costs down are crucial to growing the business during recession. Strategies included taking a short lease on business centre offices and ensuring staff costs were never more than 50 per cent of revenue.

Even though clients are 'not looking for a lot of experimentation with projects' during a downturn, he denies this dents creativity among recession start-ups. 'It's the reverse,' he argues. 'There is a lot of navel gazing during a recession and it makes one look closely at the business strategy. One also needs to be more creative in looking for business opportunities.'

FIVE KEY PRINCIPLES OF A WELL-RUN AGENCY

1. Avoid top-heavy staff structures

Many start-ups can emerge from discussions among like-minded senior PR professionals. But this can make a newly launched agency top heavy with the bulk of the wage bill spread thinly among a small number of staff, says Esther Carder, partner at accountants Kingston Smith. Ideally, staff costs should not exceed half of fee income, but Carder concedes for many PR agencies a realistic aim is between 55 and 60 per cent.

2. Keep property costs under control

After staff costs, property expenses are an agency's biggest outlay. Carder encourages PR agencies to opt for frugal, simple premises to start with and ensure property costs are kept to a minimum even when they expand. 'There is no need to have a Soho address. Keep an eye on property prices in other locations when choosing an office,' says Carder.

3. Analyse your time sheets

Carder says looking closely at the time spent working for clients and projects gives a valuable insight into the profitability of the work. 'This is the golden rule that accountants will say, that time sheets are not just to bill clients, they offer so much more,' she advises. 'They can tell where exactly one is over-servicing, for example.'

4. Keep staff happy

Agencies need to invest in staff training and offer incentives even during lean economic times. Good staff retention will please clients and reduce recruitment costs. Margot Raggett, founder of PR business consultancy Naked Emperor, recommends using senior staff to run training internally. Former Lexis CEO Raggett says during an economic downturn at her former agency prizes were awarded for the best creative ideas. 'The winner also got to own a quite hideous Hawaiian shirt for the next month, which instilled an amusing sense of horrified pride in the winner,' she adds.

5. Be confident in pricing and negotiation

Raggett says even during tough financial times agencies need to ensure they do not 'give away margins in the hope that things will improve when the upturn comes because it is in the nature of clients to always negotiate down, not up'. She adds: 'If one has a great product and great people, then clients will pay for that quality.'

CASE STUDY: LAUNCH GROUP

Launch Group founder Johnny Pitt concedes the dotcom bust of 2001 may not have been the easiest time to set up a PR agency, but he was convinced his business model, focusing on projects rather than retainers, would see him through.

'We were not looking to tie clients into long retainers and this appealed to comms directors, who were looking closely at budgets,' says Pitt, who was previously new business director at Biss Lancaster.

Starting on his own and working from home, he spent much of his first year with 'an A-Z of marketing managers and calling every one'. Within his first year he achieved a fee income of £160,000, moved to a small office in Islington and took on four freelancers, who soon became permanent staff. Launch was ranked 110th in last year's PRWeek's Top 150, with a fee income of £1,481,000, a 26-strong team and 66 clients, all paying on a project basis.

A key factor for Pitt in setting up during recession has been ensuring staff training and development investment is maintained and 'acting like a big agency even when you are small'.

'Even when it was just four of us, we had external training investment, pension plans and health schemes, and an annual away day,' he says.

CASE STUDY: FRANK PR

Frank PR chairman Graham Goodkind says setting up in a recession presents a number of significant obstacles. With twins on the way, a house move and an industry ravaged by the dotcom crash, the former Lynne Franks PR MD had more than his fair share of headaches when he launched Frank PR in 2000.

Crucial to the success of the agency, which was partly bankrolled by the sale of Goodkind's own dotcom business before the crash, was keeping what he calls 'pillows' to a minimum.

He explains: 'In affluent times, some agencies can spend a lot on what I call pillows - things that make them feel comfortable, such as nice artwork and a bit more on premises. But do they ultimately help the business?'

Property costs were kept to a minimum during its first year by agreeing a deal with a client to use their office space in exchange for PR support.

During its first year, Frank PR gradually became an eight-strong team with 12 clients and a fee income of £650,000.

Now part of Australian marcoms firm the Photon Group, the agency was ranked 29th in last year's PRWeek Top 150, had a 2010 fee income of £6.8m, 60 staff and 176 clients.

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