Despite the worst global recession for 80 years, we’ve seen a doubling of client spend during the past eight years. PRWeek’s Top 150 PR Consultancies reported overall fee income of £878m in 2012, more than 100 per cent growth on the £400m billed in 2004.
So you would think that all would be rosy with agency finances. But this growth in spend has not resulted in a significant growth in margins, which, according to the PRCA’s latest Benchmarking Survey, languish at just 10.6 per cent on average. This is half the 20 per cent most agency heads believe is a fair return for their expert consultancy and services.
Although, if you’re looking for a bonus, head to a small agency (billing less than £500,000 a year) or a very large one (billing more than £5m a year). They lead the margin race, delivering 13 per cent and 14 per cent respectively.
So why haven’t margins grown, as fees have more than doubled? Let’s start with over-servicing (see the Business feature, PRWeek, November). On average, agencies give away 20 per cent of their time. With office and people costs relatively fixed, this impacts the agency’s productivity and ability to grow margins dramatically. It also has a detrimental impact on how the service agencies provide is perceived by clients. After the initial thrill, no one values something they get for free.
Accounts frozen in time
As a result, many of the core services that agencies offer are not valued in the same way as they were in the past. Media relations – one of the hardest services to deliver successfully and consistently – is moving more and more to a commodity service. Monthly fees of £3,000 are not unusual for national campaigns, the same size accounts I was working on 25 years ago.
Matthew Freud drove the point home in PRWeek’s October cover story (PR’s Six Degrees of Separation), when he said his first record industry clients paid £800 a month and 30 years later they are paying £750 a month. With staff, office and operational costs all rising annually, it is no wonder that firms struggle to improve margins.
This drive to commoditise media campaigns may well have been accelerated by the growth of social media, but it would seem to point to an underlying reduction in PR’s perceived value. This shift in attitude is counterintuitive to me, as we are operating in such a highly fragmented media world where 24-hour news, citizen journalists and instant social commentary make professional management all the more vital.
It may well be that we are not arguing the value of what we do as well as we could. While I do not wish to go into the ins and outs of the need for evaluation, it is clear to me that as a sector we lack confidence in the value we bring to clients. Do clients see us as expert at connecting the outcomes of our work with strategic business, commercial and operational value?
I would say on the whole, no. Would a broader understanding of corporate strategy and risk, business models and operational processes improve our chances of being taken more seriously when discussing the value we deliver? Yes.
Overall, I fear that a good proportion of PR consultants do not believe PR delivers what it promises. This makes them less than keen to argue their case for higher fees or to be paid for the bulk of time they spend on client campaigns.
Alongside attitudes towards the value of agency services are competitive pressures. New technologies have, and will continue to, lower already low barriers to entry, resulting in an explosion of new agencies. The recession has also added many more freelancers to what was already an overcrowded market. All of this results in pressure on fees and margins.
Good people are still hard to find, especially with cuts in training spend during the recession, resulting in what some have described as a "lost generation" of account managers. So the upward pressure on salaries outstrips the growth in fees, creating further pressure on margins.
By now you may feel that I have painted an unfairly negative view of the agency world, but I am not pessimistic about the ability of the sector to double its margins.
There are many examples of tightly run agencies that deliver margins above 20 per cent year after year, but for the vast majority it will require dramatic change. A change in how consultants perceive the value they deliver. A change in how much of the work that is done is paid for. A change in how we demonstrate the value we deliver for each client. And finally, a change in mindset from creative to commercial.
Richard Houghton is associate partner, Agency People