Corporate survey report 2001 - How will the sputtering economy affect PR budgets in 2001? As James Bourne and Adam Leyland report, the news is good for in-house teams, but not so good for agencies

An ill wind is buffeting US business. The economy that soared so high in the '90s is skimming closer to earth. Consumer confidence has waned and companies whose earnings are coming up short are laying off employees. The once limitless tech revolution has left many an Internet entrepreneur, Nasdaq investor and a few too many PR agencies holding fool's gold. Oh, where are the heady days of yesteryear?

An ill wind is buffeting US business. The economy that soared so high in the '90s is skimming closer to earth. Consumer confidence has waned and companies whose earnings are coming up short are laying off employees. The once limitless tech revolution has left many an Internet entrepreneur, Nasdaq investor and a few too many PR agencies holding fool's gold. Oh, where are the heady days of yesteryear?

An ill wind is buffeting US business. The economy that soared so high in the '90s is skimming closer to earth. Consumer confidence has waned and companies whose earnings are coming up short are laying off employees. The once limitless tech revolution has left many an Internet entrepreneur, Nasdaq investor and a few too many PR agencies holding fool's gold. Oh, where are the heady days of yesteryear?

Okay, that's the bad news. That and the fact that California's electricity crunch could be the harbinger of worse national energy woes to come. The good news is that inflation is negligible and the economic slowdown is still too young to be irreversible. A recent cut in interest rates by the Fed, plus the promise of a dollars 1.6 trillion tax cut by President Bush, may spring an early revival in the economy's fortunes, or at least ensure a soft landing. Other good news: American companies streamlined during the recession of the early '90s and are now much closer to fighting weight than they were when the last downturn began. And thanks to technology, production can be stopped almost on a dime. Moreover, inventory is no longer stockpiled, so downturns are potentially shorter, and can be tackled and addressed faster. Those, anyway, are the cases for and against.

Amidst all this uncertainty, how does corporate PR view its fortunes?

At the start of the last downturn, PR budgets and staff were among the first to be cut. Where does it stand today? Where will it be tomorrow?

The second annual PRWeek Corporate Benchmarking Survey asked in-house PR execs whether their budgets have been affected by fears about the economy, and whether they've brought more control in-house or started to spend more on agencies. The survey also measures the role of the Internet in corporate communications, looking in detail at the PR functions for which the Web is used, as well as budgets and the influence of PR on Web development, strategy and content. This report includes highlights from the survey.



PR economy is still growing

Perhaps the most important fact to come from the survey is that less than 25% of in-house PR operations believe their budgets have been affected by fears of an economic slowdown (see Table 3). In some sectors, it's higher. Not surprisingly, in hi-tech, 40% admit that budgets have been affected, and 32% in the financial sector. But in others, especially healthcare (6%) and nonprofit (4%), fears are more remote. The fear of an economic downturn is also marked among companies with revenues in excess of dollars 5 billion. In medium-size companies (with revenues from dollars 100 million to dollars 1 billion), only 17% have been affected.

Of course, things are moving quickly. The PRWeek Corporate Benchmarking Survey was conducted in January 2001. But tepid economic news has continued to deflate consumer and Wall Street confidence. US companies face faltering earnings and the highest debt-to-asset ratio since the early '50s, according to Paul Kasriel, head of economic research at The Northern Trust Company, a Chicago financial services firm. Chicago research and outplacement firm Challenger Gray & Christmas says more than 142,000 people lost their jobs in January, the most in eight years. The previous eight-year high had been December 2000's 133,000 layoffs.

'I would guess that if you took the survey today, responses might change,' says Brian Murphy, PR director at the North American headquarters of French telecom Alcatel.



Budgets

This may possibly be true. But although many indicators of the economic slowdown weren't revealed until the new year, some - notably, the Nasdaq plunge and the demise of many dot-coms - have been felt for some time by the PR industry.

And crucially, many companies have taken heed, because in-house communications budgets are reflecting fiscal caution. Overall, the PRWeek Corporate Benchmarking Survey shows that budgets in 2001 will rise by 9%, an encouraging sign of the industry's resilience, but far lower than the 30% recorded by the Harris/Impulse survey for 2000.

Compounding the sense of prudence, communications budget decreases for 2001 - though fewer in number - are significantly larger than budget increases.

The average decrease for all companies in the PRWeek survey is 21.4%, while the average increase is 14.5%. Only in the nonprofit sector does the increase (13.3%) exceed the decrease (11.2%). In the consumer/retail sector, the average budget decrease (29.3%) is two and a half times greater than the average increase (11.6%). In view of the gloom imparted by the poor Christmas selling season, it's interesting to note that PR budgets in this sector are expected to rise by 8%, but, on the other hand, more than 60% of companies say they will either reduce budgets or keep their levels the same.

The situation is similar in the finance/investment sector, where a third of budgets have tightened because of the economy, although a cut in interest rates at the end of January has improved the prognosis considerably.

Hi-tech provides perhaps the most intriguing picture (and perhaps the most important one for PR agencies, since so much PR revenue is now derived from this source). Hi-tech budgets will actually rise more than any other sector, up an estimated 14% (see Table 1).

By contrast, things seem positively sunny in the nonprofit sector: a statistically negligible 4% of nonprofit entities report that the economy has dampened PR budgets, and nearly two-thirds in this sector say there's been no effect. Public companies feel the bumps and ruts of a faltering economy before the nonprofits that are their main beneficiaries, says Dean Kruckeberg, professor of Public Relations at the University of Northern Iowa in Cedar Falls.

Even in the worst-case scenario, PR experts agree that PR departments are more resistant to the vagaries of the economy than they were 10 years ago. 'The standing of the PR profession has grown substantively,' says Jack Bergen, president of the Council of Public Relations Firms. 'The new breed of CEO recognizes the importance of communications to the bottom line. Ten years ago, at the back end of an incredible advertising boom, it was just an afterthought to advertising.'

Another ironic advantage of PR in a recession is that while budgets have grown, they are still, relatively speaking, minuscule. When CEOs are looking for cuts, multimillion dollar ad accounts will most likely be the first ones for the chopping block. And a balky economy will force in-house PR to show its mettle, argues Dan Sondhelm, partner and VP at Morrison/Carlisle, an IR and marketing consulting firm in Alexandria, VA. Sondhelm says companies are already starting to pull back on communications and marketing costs: 'They're going to fewer trade shows, dropping fancy junkets with suppliers and customers and, most significantly, slashing advertising budgets.' He thinks curtailed corporate spending is an opportunity for PR, with its quieter budget, to step up and show its worth. 'It doesn't get much more cost-effective than that,' he says.



Real impact

Where the impact will most certainly be felt, however, is on PR agencies.

The PRWeek Corporate Benchmarking Survey shows a distinct move away from the use of agencies, reversing a five-year trend which had seen several firms recording organic growth of 100% (see Table 4).

Overall, average in-house spending is expected to increase from slightly less than 50% in 2000 to more than 60% in 2001, while average spending on agencies will shrink from 43% to 37% (the rest is made up by freelancers).

The biggest turnaround is in tech. In 2000, tech companies spent twice as much (66%) of their PR budget on agencies as they did in-house. In 2001, the expenditures are even (49% for both).

This pronounced swing could exacerbate an already tough situation for PR firms, and for tech firms in particular, which are hurting from the crash of the tech industry and the disappearance of some of their formerly high-flying clients. Already, several high-profile agencies, including Alexander Ogilvy, Citigate Cunningham and Middleberg, have announced job cuts.

Charles Lubbers, a professor of public relations at Kansas State University, speculates that some tech companies are moving PR spending in-house after hiring away tech pros from PR agencies or training their own in-house staff. He likens corporations to the human body, which draws blood from the extremities to its core when under duress. Similarly, says Lubbers, when the economy tightens, corporations scale back external spending to preserve internal operations. PR agencies are among the first to feel the pinch. 'It's easier to lay off an agency than it is to lay off your own people,' he says.

Rick Gould, CEO of Gould Eisele Crombie in New York, an accounting firm for PR agencies, says he expects corporate clients to tighten their belts in response to the economic rough patch and pass the squeeze on to PR agencies. He's advising his clients not to reduce their fees, however.

The corporate-agency relationship often follows a strange but predictable cycle when times get tough, adds Bergen. Reflecting on lessons from the 1991 recession, when he was GM of Hill & Knowlton's New York office and then CEO of the GCI Group, Bergen says that corporate communications departments that rein in their budget for external agency activities, then tighten their belts further with layoffs, eventually find that they've thinned out so much internally that they have to turn again to agencies to get work done. When they do, he notes, agency fees are as high or higher than they were before. He counsels agencies to serve their corporate clients in lean times by offering to be extra efficient and help find ways to save money.



Hiring

While budgets are now being slashed or rising only cautiously, corporate communications staffing is so far proving largely immune to jitters about the economy. The small size of communications staffs could be one reason.

Nearly half (45%) of the companies responding to the PRWeek Corporate Benchmarking Survey say their communications departments have three or fewer professionals.

This resilience is also springing from the reallocation of budgets.

For the first time in years, in-house PR teams will increase, up by 6% on average. The growth is most pronounced among small companies: the 2000 staff of 2.3 at a company with revenues of less than dollars 10 million will grow to 4.2 in 2001. There's also a significant bump for PR departments in the financial sector, which are expected to grow from 8.7 practitioners to 10.1. Only in tech will in-house teams remain the same.

As a rule, communications departments that don't fear tighter corporate purse strings are those that are already at fighting trim. Jeff Prescott, director of media relations at Nashville, TN-based healthcare provider HCA, says his is 'a lean company;' its six in-house professionals handle employee communications and media relations, as well as communications with the company's 270 facilities, but do no marketing or advertising.



There's little fat to cut away.

Alcatel's operations in North and Latin America have cut back on costs such as travel in order to avoid laying off employees, says PR director Murphy. The Plano, TX-based department includes four PR executives and an ad pro, and could expand, he says, as France-based Alcatel develops a campaign to increase its market share and meager name recognition on this side of the Atlantic.

Meanwhile, Lucent and Nortel, Alcatel's telecom rivals, have already announced layoffs, and another competitor, Cisco, fell short of Wall Street earnings estimates for the first time since the mid-'90s and said it will cut spending.

The American Red Cross is also hiring. The nonprofit giant's 93-person PR department is short a handful of pros, says SVP of communication and marketing Bill Blaul, who calls the department the Red Cross' 'agency of record.' (It also uses Hill & Knowlton, Cohn & Wolfe and Paul Werth Associates, but external spending is limited to spot projects.)

And at medical technology company Baxter International, VP of corporate communications Matt Gonring says his company has been unaffected by the economic slowdown, and predicts mid-teens growth in 2001. He expects to add up to eight communications execs to his 40-person staff by the end of March. 'We're growing pretty aggressively,' he says, adding that healthcare providers as a group should perform well in 2001.



Consolidating or in-house

The number of firms used by an in-house department continues to shrink, from 2.1 agencies in 1999, to 2.0 in 2000, and 1.9 in 2001. Only in the healthcare sector is there any evidence of a reversal in this trend, with in-house healthcare departments reporting that they will use 2.3 agencies on average (versus 2.2 in 2000).

True to the prevailing sense of caution, some companies are looking closely at external expenditures. HCA, for example, which owns 270 hospitals and surgery centers nationwide, hires agencies for projects such as media tracking or general training. Prescott won't reveal how much of HCA's approximately dollars 1 million corporate communications budget is for outsourced work, but, he says, 'We're conscious of these kinds of costs because they're something we have the ability to affect.' Healthcare, Prescott notes, is always in demand, which means revenues are largely immune to national economic conditions; but costs, which fluctuate with the vagaries of the economy, can be controlled to some extent.



Responsibility

Media relations is, not surprisingly, the most common responsibility for all in-house communications departments (see Table 11). Overall, 97% of companies responding to the PRWeek survey say their corporate PR team handles media relations; in the healthcare and nonprofit sectors, 100% handle media. Media relations also usually represents the largest chunk of the communications budget - it's a full third of the budget in the tech sector, and a quarter of the budget in consumer/retail and nonprofit (see Table 10). And there's evidence to suggest that the focus on media relations will intensify, with a third of departments reporting that media relations spending will increase. Other functions which are expected to see the highest budget growth are product/brand communications (27%) and employee communications (22%). (On the other side of the coin, media relations spending will be cut at 9% of in-house PR departments.) The biggest loser in terms of PR responsibilities is special events, with 12% of corporate communications departments reporting that they intend to decrease spending in this area.

Only at the very largest companies is media relations not considered the most important function: at organizations with revenues greater than dollars 5 billion, 96% of respondents report that the PR department is responsible for crisis communications, whereas only 94% tackle media relations.



Web

Given the importance of media relations, it's surprising how many companies don't have dedicated media areas on their Web sites. Tech firms do - more than 90% of them, according to the PRWeek survey. But only about two-thirds of healthcare and consumer/retail companies have dedicated media sites, only 62% of finance companies and 59% of nonprofits (which is doubly surprising, given that 100% of nonprofit communications teams are responsible for media relations, and 79% for reputation management).

Sondhelm says he hears various reasons from some of his clients for their lack of online media places - not enough money, not enough calls from reporters, not enough time to make it happen.

But the PRWeek Corporate Benchmarking Survey also reveals that even the largest in-house PR departments, with the largest budgets, are no more likely to have a dedicated media site than at smaller companies. And there's no sign this will change. The Web site typically accounts for 4% of budgets.

It's predicted to go up by just 0.1% overall, and 0.3% at companies with budgets over dollars 5 billion. No market sector shows evidence of a marked swing, either. 'Companies are missing out,' concludes Sondhelm, 'and reporters have to leave five messages until somebody returns their call.'



Healthcare rules in Web PR

Many PR departments do not even have a PR budget for the Web site. More than half the respondents (52%) to this survey reported that corporate PR budgets include no money at all for Web site management or development.

Considered by industry, corporate communications is overwhelmingly not in the Web business - with healthcare the exception, where two-thirds of companies budget PR resources for Web sites.

It's not that PR is not involved: 88% of in-house departments are heavily involved (see Table 5). For example, at Baxter, Gonring is not only responsible for in-house PR, he is also riding a trend toward greater strategic use of the Intranet, as companies learn to design and manage messages for their employees the same way they do for external audiences. Gonring says Baxter has a dedicated media site online, but considers internal relations and investor relations to be on an equal footing with media relations.

And the American Red Cross doesn't have a dedicated media site - but it will. The agency, which responds to disasters worldwide and also manages half the US blood supply, is adding an online press room for the first time as part of an overall Web site retooling to dovetail with Red Cross Month in March. Until now, says SVP Blaul, the organization used its site mostly for brand management activities and to solicit donations of money and blood; in January, online financial donations exceeded phone donations for the first time, including dollars 500,000 in one day. (The Red Cross's entire annual Web budget is dollars 976,000, a little more than 10% of its communications budget, which is on the high end of the average range. On average, nonprofits spend 4.9% of their PR budget on their Web sites.)



Agency involvement and the Web

Blaul says the Web site improvements are being handled exclusively by his department. The Red Cross rejected proposals by outside firms that averaged dollars 1 million. In its determination to keep Web site refurbishment in-house, the Red Cross reflects the overwhelming trend among non-profits and, in fact, all PR departments, to retain control of this function.

While 97% of nonprofit PR departments and 91% of communications departments overall are 'very involved' or 'somewhat involved' in the development of company Web strategy and content, only 23% of nonprofits (and 31% of all PR departments) allow an outside agency to get involved in any significant way (see Table 6).

And there's little prospect that in-house PR departments will allow this to change. Only 25% of companies in the PRWeek Corporate Benchmarking Survey say they would even consider using a PR agency in the future to help develop Web site content (see Table 7).

Blaul's department budgets less than dollars 200,000 for outside agency work, mostly for spot projects for which the Red Cross isn't staffed. Some PR firms, he says, propose themselves right out of working for the Red Cross by insisting on comprehensive strategic and tactical roles.

'We don't over-commit ourselves and buy the entire firm when we don't need the entire firm,' Blaul says. He says the Red Cross tries to hire for its needs rather than outsource. 'We're using PR firms more consistently but at a much lower dollar level.'

And so, it seems, is everyone else in 2001. In the end, the US economy will have a lot to say about the direction and activities of in-house communications in 2001 - how free companies are to hire agencies, and how much time and money they'll have to devote to staying on the technological cutting edge through Internet and Intranet sites. Economists disagree on the exact color and thickness of the economic clouds overhead. If the clouds break, corporate PR is well positioned to continue to grow in influence. If things turn stormy, those childhood lessons still hold: when the weather turns bad, it's better to be in-house.

This article is based on highlights from the PRWeek Corporate Benchmarking Survey 2001. The survey was conducted in January 2001 by Impulse Research, an independent research firm in Los Angeles, and results are based on 1,405 responses to a questionnaire mailed to approximately 7,100 US corporate communications executives, representing a nearly 20% response rate. The data has an accuracy of +/- 3% at a 95% level of confidence.

More than three-quarters (76%) of respondents are vice presidents or directors of PR; 10% are senior VPs. The most respondents were from the consumer/retail sector (23%); other industries represented include technology (21%), finance (14%), healthcare (13%) and nonprofit (9%). Responses from other sectors, including transportation (5%) and utilities (5%), were considered too small to be considered representative, although breakouts are available.



A copy of the full Corporate Benchmarking report is available for dollars 300.

Please contact Talya Meyerowitz at (212) 251-2600 or by e-mail at Talya.Meyerowitz@prweek.com.

1. CLIENT PR BUDGETS BY INDUSTRY

                                       HEALTH- CONSUMER/    FIN-    NON-

CATEGORY              AVERAGE  HI-TECH    CARE    RETAIL  ANCIAL  PROFIT

Company revenues 2000

 (dollars millions)     2,167    1,109   2,910     2,591   2,765     349

Number of in-house PR

 pros 2000                  8        6      13         7       9       8

PR budget 2000 (dollars

 thousands)             4,823    3,094   6,829     5,844   3,648     958

Predicted increase in

 2001 PR budget (%)         9       14       8         8       9       8

Number of PR agencies

 employed 2000            2.0      1.8     2.2       1.9     1.7     2.3

Number of PR agencies

 employed 2001            1.9      1.6     2.3       1.7     1.7     2.2

PR budget % spent on

 external agencies 2000  43.3     66.3    34.6      39.4    43.1    38.6

PR budget % spent on

 external agencies 2001  33.6     49.8    26.1      31.4    33.9    31.0

2. CLIENT PR BUDGETS BY REVENUE

                                             UNDER

CATEGORY                         AVERAGE       10M   10M-100M  101M-500M

                                         (dollars)  (dollars)  (dollars)

Company revenues 2000 (dollars

 millions)                         2,167       5.7       53.6      307.1

Number of in-house PR

 pros 2000                             8         2          5          5

PR budget 2000 (dollars

 thousands)                        4,823       335      2,239      1,489

Predicted increase in 2001 PR

 budget (%)                            9        13         12         10

Number of PR agencies

 employed 2000                       2.0       1.1        1.6        1.4

Number of PR agencies employed

 2001                                1.9       1.0        1.5        1.5

PR budget % spent on external

 agencies 2000                      43.3      47.3       46.3       43.3

PR budget % spent on external

 agencies 2001                      33.6      42.2       39.6       32.4

---------------------------------------.---------.----------.---------R

                                                         OVER

CATEGORY                         501M-1B     1B-5B  5 BILLION

                               (dollars) (dollars)  (dollars)

Company revenues 2000 (dollars

 millions)                         706.3     2,203     11,800

Number of in-house PR

 pros 2000                             6         8         24

PR budget 2000 (dollars

 thousands)                        2,378     6,429     15,534

Predicted increase in 2001 PR

 budget (%)                            9         7          8

Number of PR agencies

 employed 2000                       2.2       2.1        2.9

Number of PR agencies employed

 2001                                2.0       2.0        2.6

PR budget % spent on external

 agencies 2000                      48.3      43.3       39.3

PR budget % spent on external

 agencies 2001                      32.9      31.6       31.4





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