ANALYSIS: Signs suggest yet another tough year ahead for firms

Bright hopes for recovery in the PR industry are only getting darker as winter nears. It'll take general and consistent economic growth first, finds John N. Frank.

Bright hopes for recovery in the PR industry are only getting darker as winter nears. It'll take general and consistent economic growth first, finds John N. Frank.

Summer is traditionally a time of optimism. Attribute it to sunny skies and the end of winter's icy doldrums. So it was this summer for the PR business. The US economy seemed to be moving along despite recent economic weakness. Consumers were still spending and, according to this year's Harris/Impulse PR client survey, corporate PR departments were planning to spend considerably more than they did in last year's tech-wrecked and terrorist-shattered world. But as warm, sun-filled summer days have given way to the cool, shadow-filled days of fall, the summer optimism the PR business felt is fading right along with the flowers. The signs are that the PR recession will continue. Major firms such as Fleishman-Hillard and Porter Novelli have announced new layoffs in recent weeks. Last week, MS&L announced it was cutting 30 positions, or 3.5% of its employees, and integrating its New York tech staff with its healthcare group. The Council of PR Firms, which earlier this year had been predicting 4%-6% industry growth for 2002, has revised its forecast downward to a flat year for the business, says Kathy Cripps, president. And while some major agency heads still contend they feel optimistic, even they are tempering their optimism with the realities of a US economy that shows no signs of a full recovery in the foreseeable future. Some might be tempted to call it a double-dip recession for PR. But the reality is that what has dipped is the optimism felt about the recession being a brief one. Hopes for that have faded and, with them, agencies have had to make more cuts and other adjustments to reflect reality rather than the positive expectations they once had for the second half of this year. "I'm quantifying 'upbeat' in today's world," says Harris Diamond, CEO of Weber Shandwick Worldwide. "I'm not upbeat the way I was in 2000." Adds the Council of PR Firms' Cripps, "I don't see the rainbow yet. I know it's out there, but I don't see it yet." Indeed, most don't see that rainbow emerging for the US PR business until some time after the first quarter of 2003. Predictions of a short recession now seem ill-founded. Perhaps people had become too accustomed to good economic times to remember what recessions are like. Major business publications are filled with stories about huge over-capacity in the telecommunications and software sectors. Such conditions take time to work their way out of the economic system. Or perhaps there are simply still too many uncontrollable elements like terrorism to make solid economic progress possible. Whatever the reasons, the US economy is not growing at the rate people had hoped before now. PR is a service business whose growth comes as a result of overall economic strength. In economist terms, PR is a lagging indicator of economic health, not a leading one. That means the economy as a whole needs to show sustained and consistent growth before corporate PR spending faucets are turned full open once again. "The question is where are things going from a macroeconomic perspective, and that is an open question," says Gary Stockman, president of Porter Novelli North America. "The question is at what point do things start turning decent, and somewhat consistently?" Last week, Porter Novelli announced 40 US layoffs, yet Stockman notes that "we also are selectively hiring in particular areas as we're being forced to fire in others." Other firms, such as Fleishman-Hillard, have been doing the same. Stability for smaller firms The PR recession this year has hit with uneven results. Small and midsize firms generally say they're finding business. They look for smaller assignments that the mega-firms often can't handle, and those smaller jobs seem to be out there this year, particularly in areas such as consumer goods, nonprofits, and local-government work. Another advantage for smaller and midsize firms is that they tend to be privately owned and run by their owners. That means they don't have corporate boards to answer to, and can be more flexible in looking for alternative ways to rein in their costs - other than layoffs. The major PR firms seem to be bearing the brunt of this recession. That's because they need major corporate work to sustain their overhead and produce the rates of return their corporate parents - and stockholders - are demanding. They're part of major multi-national communications conglomerates that are seeing all segments of their businesses hit by the recession, and so are trying to cut expenses wherever possible as a result. "When you talk to large agencies owned by advertising conglomerates, they're asking for cuts across the board, and it may not reflect on the PR firms they own," says Tom Harris, cosponsor of the Harris/Impulse study. "There's much more pressure on them to be profitable" than there is on independent PR shops, Harris contends. The Council of PR Firms' Cripps explains, "When you're part of a holding company, you have a different experience. It's a different business model. Midsize firms have been entrepreneurial in reshaping their businesses, but it's still a challenge." The difficulty for all firms has been gauging where the US economy is headed. This summer, the forecast seemed rosy. The Harris/Impulse survey, released in September but done during the summer, reflected that, noting that the average PR budget was up 21% compared to last year. That number shocked large PR firm bosses who weren't seeing it reflected in their daily efforts to maintain their business levels. Even Harris admits that he was taken aback by the survey numbers. "I was surprised by the result myself, because all I hear about is staff cuts and budget cuts and big agencies competing for business they wouldn't have touched before," Harris says. "The results don't seem to square with what you hear." Harris attributes the disparity to the optimism of the summer. Others agree that the industry mood was more upbeat in the summer. "It depends on the point in the year at which you put the thermometer out the window," says PN's Stockman. "In April, May, and June, the trend was up." But by the third quarter, signs of weakness were emerging, says Cripps. "Things got a little softer toward the end of the third quarter and the beginning of the fourth quarter," she explains. The business reality seems to be that though companies may have budgeted more for PR, when times are tough, there can be large differences in what's budgeted and what's actually spent. With the economy in the doldrums, companies have been cutting expenditures. Lorraine Thelian, senior partner with Ketchum North America, says, "Clients stayed very conservative for the fourth quarter; they're trying to make their numbers." Agencies were finding new business, but at the same time, clients more concerned about the economy were putting other work on hold. "There was a little of the 'two steps forward, one step back' going on," says Fred Cook, president of Golin/Harris International. Stockman agrees: "As you bring in new clients and grow work with existing clients, there have been other clients where budgets have been cut." Long reviews equal high costs Cook also notes another change: The time it's been taking potential clients to pick agencies has grown dramatically. That means higher costs than agencies were anticipating this year. "The agency reviews have lasted for months and required enormous resources from the participating agencies," he explains. Cook is among a group of agency heads predicting a better 2003. "I think there are indications it could be a better year than this year, but I don't think anyone thinks it will be off the charts," he says. Susan Silk, managing director of Citigate Communications (whose parent group, Incepta, reportedly laid off 150 people the week before last), says her business is up because she's concentrated on association and government work, areas not hit as hard as corporate PR. Thelian says Ketchum's new business pipeline is "probably as robust as we've seen. Client budgets are firming up. I think they're ready to start spending again." She's predicting 5%-7% growth for her agency next year. PN's Stockman says his agency is bringing in an average of five new client wins a day. "There are some good things happening," he says. The industry will be watching closely in the first quarter of 2003 to see if those good things spell recovery, or another tough year for the PR business.

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