Run your PR firm as if you were going to buy it

In a time of rapid change and an ever-competitive landscape, staying the same is to fall behind.

The industry has seen an exceedingly high level of merger and acquisition activity in the last 18 months. In fact, almost 90 transactions involving public relations firms have been publicly announced since 2015, with almost 40 of those transactions involving U.S. firms as either the buyers or sellers.

In light of the robust environment, my law firm and I recently analyzed the trends affecting independent public relations firms. Here are the best practices among the surveyed firms, whether or not these firms were interested in entertaining a possible sale in next year, in three years, or never.

Our analysis found noteworthy trends in three separate areas: specialization and strategy, financial and administrative management, and incentive compensation. Here are the highlights:

Specialization and strategy
Firms reported a broad array of specialty areas. However, there was a pronounced 20% decline in the number of firms describing themselves as "full-service PR firms" from the survey conducted by my law firm last year, with only 52% of respondents this year describing their firms as "full service." This decline indicates that the marketplace regards specialization and strategic focus as being more important than ever, as more firms seek to demonstrate category leadership.

Public relations firms that were purchased in the last 18 months similarly reflected this growing desire for specialization. The highest concentration of sellers focused on technology and digital (29%). The second-highest concentration of specialty areas among the sellers was health (11%), which was followed by strong showing in consumer (8%), financial services (8%), and public affairs (6%).

Financial and administrative management
More than 75% of North American firms reported an increase in revenues this year over 2015. However, only 16% of the North American firms-a very significant drop from the prior year-reported they were able to maintain a compensation expense to revenue ratio of less than 50%. This decline suggests that many firms had lower profitability caused by pressure to raise compensation to retain talent.

Continued pressure to increase overall salaries and compensation is likely to increase in 2017, with the new Department of Labor overtime regulations going into effect on December 1. For this and many other reasons, well-run firms are more proactively managing compensation expense and utilization rates by and among various categories of their employees.

Savvy firms are also paying more attention to protecting their existing client relationships and the revenues they represent. Almost 90% of North American firms surveyed require their employees to sign some form of a restrictive covenant or non-compete agreements. Further evidencing the importance of these agreements, 17% of surveyed North American firms reported updating their restrictive covenant agreements to provide maximum protection in the last 12 months.

Another area of more proactive management for public relations firms relates to their real-estate needs. More than 70% of surveyed firms have structured their real-estate leases to provide flexibility to either terminate their leases early, extend their leases, or assign a lease to an affiliated party.

Employee incentive arrangements
Firms experiencing more than 20% of revenue growth both this year and last have all but abandoned discretionary year-end bonuses for their mid-level and senior employees. In addition, there was a high correlation (70%) between North American firms that increased revenue this year and firms that had a long-term incentive plan in place. These incentive plans are typically three to four years in length and were made based on a series of criteria, including year-over-year revenue growth and year-over-year profit growth.

Sixty of the North American firms surveyed have also implemented a program to award an equity equivalent, such as "phantom stock" or "contract" equity, to key employees. Many firms implement these programs both to retain talent as well as to prepare for the possible sale of the firm. The data, along with the high correlation of firms that experienced high levels of revenues growth with those that had enacted long-term incentive plans, demonstrate dramatically the adage that "economics drive behavior."

Click here for the full Davis & Gilbert’s industry survey highlights.

Michael C. Lasky is a senior partner at the law firm of Davis & Gilbert LLP, where he heads the PR practice group and co-chairs the litigation department. He can be reached at mlasky@dglaw.com.

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