Editorial - Putting pressure on profitability

The latest survey from accountants Willott Kingston Smith is bound to send a slight shiver through the PR consultancy sector, at a time when figures for UK manufacturing output and retail sales indicate that the economy is slowing down.

The latest survey from accountants Willott Kingston Smith is bound

to send a slight shiver through the PR consultancy sector, at a time

when figures for UK manufacturing output and retail sales indicate that

the economy is slowing down.



The WKS report shows that income per head among the top 20 PR agencies

dropped by 2.1 per cent between October 1997 and January 1998. Average

profit margins have also dipped from 11.5 per cent to 11.3 per cent.



These findings are in tune with the figures for the whole of 1997

published in the PR Week Top 150 survey last month. This showed that the

top 20 agencies had an average income per head of pounds 74,984 in 1997,

down 1.8 per cent on 1996. Meanwhile staffing levels among the top 20

increased by 7.9 per cent year on year.



This may sound worrying, but it’s not time for consultancy owners to

step on to the window ledge just yet. The sector is still growing

steadily, albeit more slowly than in 1996. Although the total income for

the PR Week Top 150 increased by a modest five per cent in 1997, the

underlying trend is nearer ten per cent once you exclude exceptional

factors.



Of more concern is the jump in staff numbers relative to income growth,

but this is not yet cause for undue alarm. Staffing increased faster

than income in 1997 largely because many agencies were frantically

recruiting staff to service the additional business they had piled on

1996, when the Top 150 grew by an unprecedented 21 per cent in overall

fee income.



The need to recruit and retain staff remains the biggest issue facing

every consultancy at the moment. So perhaps the most encouraging aspect

of the WKS survey is that it reveals that employment costs per head have

fallen, indicating that consultancies are resisting the urge to inflate

salaries excessively in the scramble for staff.



The WKS figures also show that the average profit margin for public

relations consultancies is still higher than the 11.1 per cent average

for the sector at the height of the 1980s boom. By contrast, profit

margins in all other marketing services sectors, except media

independents, are currently more than 30 per cent below their 1985

levels.



Nevertheless most PR consultants still lag well behind other corporate

advisers, like management consultants, in fee earning power. To catch

up, the long term aim must be to lift fee levels. But PR consultants

will first have to prove the value and effectiveness of their advice

against real business objectives.



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