Supplement on Public Relations: Payments survey - Rethinking the rules/Flat fees, retainers, hourly rates, payment by results - just how do clients pay for their public relations these days? To answer this important question, Marketing held a survey among

The ways in which marketers pay for public relations are

changing.

Hints that this was the case emerged during the compilation of

Marketing’s annual league table of PR consultancies earlier in the year.

Those thoughts have now been followed up by specific research, which

leaves little doubt that the payments pattern is evolving.

There is a move away from work paid for mainly by long-term retainer

(usually an annual fee). Instead, clients are opting for:

Reduced, or possibly stable, retainers, with more projects on top.

More totally ad hoc projects, with no retainer.

And there are other trends. A growing number of clients are becoming

reluctant to pay a mark-up or handling charge on goods or services

bought by their PR agencies. There is also growing pressure to introduce

an element of payment by results.

All of these developments have major implications for the consultancies,

aside from whether this means allocating a more tactical role to PR.

More ad hoc projects make it more difficult for an agency to project its

cash flow. It could result in it choosing to run with a smaller

permanent staff, augmented by freelances to cope with fluctuations in

the workload.

There is the possibility, also, of undermining media relations, which

remain the core element in most PR campaigns. The media tend not to be

impressed when they telephone an agency for information, only to be

told: ’Sorry, we were on a short-term contract. I don’t know what

they’re doing about their PR now.’

In such a fragmented sector, the picture is complicated. Some agencies

claim to have experienced none of these trends. Among those who have,

some welcome them, others are resisting - and not just out of

self-interest.

But the changes should not come as a surprise in a climate where

marketers are increasingly seeking transparency in their relationships

with suppliers, as well as effectiveness and evaluation.

It is worth recalling that several other marketing services sectors have

had to come to terms with similar upheavals in payment methods.

Setting the trend

In the 80s, client companies, led by major retailers such as Woolworths

and B&Q, rebelled against paying their advertising agencies a fixed

mark-up on the media they bought. This led to the rapid expansion of the

media independents, and to a major rethink on how agencies should

charge, not just for creative work, but for other important functions

such as account planning.

Similarly, the rapid spread of computers in design studios meant that,

for example, a new pack design could be tweaked with a few key strokes

in response to client comments or research findings. This ended an

important revenue stream, on which many studios relied, based on

charging high fees for creating new artwork by hand every time a change

was requested.

Last month’s Marketing Technique featuring the annual league table of

sales promotion agencies (October 9)

contained an article on changes in that sector, too. These include a

major swing toward fees and away from reliance on commissions and

mark-ups on goods and services - traditionally very important to SP

agencies - as well as the emergence of client calls for payment by

results.

For this PR survey, questionnaires were sent to almost 150 consultancies

known to have a fee income of more than pounds 500,000. By the deadline,

56 completed forms had been returned - a 40% response rate. In addition,

a large number of thoughtful comments were submitted, both on and off

the record.

Snapshot of the sector

The public relations industry, like all the marketing service sectors,

has a distinct pyramid structure, with a few large companies at the top

and many small ones at the bottom. This is reflected in the responses

received, which fell into three distinct groups.

Sixteen came from large companies with a fee income of more than pounds

3m (some more than pounds 10m). Twenty were from companies in the pounds

1m-to-pounds 3m bracket, which we can call mid-sized. And 20 fell into

the pounds 500,000-to-pounds 1m category. For the purposes of this

survey, we are calling them ’small’, while recognising that there are

probably hundreds of PR companies which are even smaller.

The results are summarised in the main panel (right), allowing us to

concentrate here on why some of the trends have emerged, and what the

implications are.

The most controversial issue, at least in the eyes of some agencies, is

clients’ interest in payment by results. This was also the area where

there was the greatest distinction between the experiences of big and

small consultancies - and it could reflect the different types of

clients and projects they work with.

In total, about two-thirds (68%) of agencies have been on the receiving

end of pay-by-results proposals from clients, but the figures ranged

from half of the smaller firms to four out of five of the biggest. And

while only 15% of the small companies had worked on a results basis,

half of the big agencies had experience of it (see chart).

Speaking from the point of view of a business-to-business and media

relations specialist, Martin Loat, a founding director of Propeller,

says he finds the concept of payment by results both difficult and

dangerous ’because PR companies do not, and cannot, control the

media’.

Julian Speed, joint managing partner of The Public Relations Business,

says: ’We don’t work on a payment-by-results basis, although very

occasionally clients will offer us a bonus if we exceed expectations.

Like good solicitors or accountants, we don’t need a stick, let alone a

carrot, to achieve our objectives.’

Extra incentive

In fact, when most companies talk about payment by results they mean

bonuses for exceptional performance. Abel Hadden, a director of Daniel J

Edelman, suggests that payments based purely upon results could be

illegal, but success bonuses are not. And these can arise where a PR

campaign is geared towards a specific decision, such as a City takeover,

or a successful planning application.

Mark Robson, a senior partner at Ascot-based Insight Marketing Concepts,

is a one-time client marketer with Wang and Mars who jumped ship to go

into PR. He says, forcefully, that it is high time all PR companies woke

up to the fact that clients want and need results, and will not keep on

paying for the time spent on the account, irrespective of the

outcome.

Robson is trialling a new approach with one client, OpenConnect

Systems.

Part of the agency’s income from the account is a consultancy fee for a

set number of hours. Targets are set for various activities, each of

which has a monthly points value. If targets are not reached, no fee is

payable, but if they are exceeded, bonus fees are due. ’It is a win-win

situation for agency and client, assuming the activity is

successful.’

The fact that almost half (46%) of respondents agree that clients are

less willing to pay mark-up or handling charges does not seem to be of

major concern. Other marketing services have reported that bigger

clients, especially, are using their own purchasing departments to buy

print and mailing services, for example.

On the other hand, if an agency undertakes a task - it may be booking

and checking out a venue for a press conference, or commissioning a

video release - its time has to be paid for some how. Such items may be

covered in the basic fee, or a handling charge may be levied. It doesn’t

matter which, as long as the arrangement is transparent.

Much more controversial is the apparent swing away from retainer-based,

long-term contracts noted by three out of ten agencies. Almost four out

of ten (37.5%) acknowledge a move toward reduced retainers plus

projects, with three out of ten encountering more stand-alone, ad hoc

projects. The latter trend is more evident among smaller agencies than

big ones.

In the interests of balance, I have to emphasise that some agencies

agreed with all of the statements, some with one or more, and some (46%)

with none of them. Therefore, we are not claiming there has been a

wholesale shift in payment methods that has transformed the industry. On

the other hand, the questions talked about a ’significant decline’ in

long-term contract work, and ’much more’ being ad hoc, or part-retainer,

part-project. So I think the point is fairly made that payment methods

are changing.

Over the top

One anonymous doubter agrees that there is currently more discussion

about the issue, but feels that it is exaggerated - while accepting that

PR, including media relations, cannot be delivered in 12 equal

instalments over a year. But rather than switching to an unwieldy

project system, this respondent argues, it is better to accept that an

agency will deliver more than it is paid for in some months and less in

others. In an age of less trust and more measurement, clients might

disagree.

There are various interpretations, however, of what is happening and

what the implications are.

’Your sources are correct; there does seem to be a fairly fundamental

shift towards ad hoc work,’ says Tony Langham, joint managing director

of financial specialist, Lansons Communications. ’It is caused by

companies’ desire for greater accountability in their marketing

expenditure, and increased pressure on in-house teams to handle all the

bread-and-butter work.’

Like others, he argues that the trend could go too far. Great PR, like

great advertising, is often the result of a deep understanding built

over time. However, various explanations are advanced about what is

happening, and why.

The average level of retained fees is growing at Harvard PR, says chief

executive Nicholas Taylor, but ad hoc work is rising faster. ’This is a

classic symptom of being well and truly out of recession. Marketing

budgets are being adjusted upward, providing clients with an opportunity

for PR activity not envisaged at the beginning of the year.’

Appointments can be based on an initial project, and are often

accompanied by a promise that if all goes well the appointment will be

extended, says Bill Jones, chief executive of Lexis PR. ’The trend we

notice is of large-budget clients moving forward from project to

project. This is not universal, but it is a growing practice.’

He maintains that a long-term retainer works best, but working on a

project first demonstrates whether the agency can deliver, whether the

client understands PR, and, most importantly, whether the two sides get

along.

Project projection

According to Ray Hodges, of consumer specialist New Media Group, there

has been a definite trend toward more project work over the past three

years.

’In our case, this is mainly because most of our clients operate their

own in-house PR departments. We are supplementary to that resource,

rather than providing the mainstream PR service,’ she says.

’We are seeing a dramatic shortening of clients’ timescales,’ says Simon

Quarendon, of Words Etc. ’Most now won’t commit to 12-month contracts or

programmes, but only to six months. Equally, programmes change

dramatically on a quarterly basis. The net effect is that clients want

to move away from long-term brand-building toward a series of tactical

projects.’

The increased financial uncertainty resulting from a switch to more ad

hoc work certainly worries a number of consultancies. However, Carl

Courtney, managing director of ICAS, says that while financial

forecasting may be trickier, total income has not been affected

particularly. And clients can often find it easier to justify allocating

fees to a particular activity, rather than committing to a major

retainer.

Trevor Morris, managing director at The Quentin Bell Organisation,

believes that the trends have affected income, profitability and cash

flow less than might have been feared, but only through the very

vigorous application of management systems, such as time-sheeting and

prompt invoicing.

There is another point of view, too. ’Short-contract work is not

something the industry should fight against,’ argues Maureen Smith,

chairman of The Communications Group. ’Ad hoc contracts can greatly

enhance profitability. Since resourcing is usually planned around

retained fees, income from unplanned ad hoc projects usually goes

straight to the bottom line.’ k

Survey results in detail

Fifty-six completed questionnaires were received from 143 PR agencies

who were sent the form. Twenty had a fee income of between pounds

500,000 and pounds 1m, 20 were in the pounds 1m-to-pounds 3m bracket,

and 16 were above pounds 3m.

Of the 56, 38 were based in London, although some also had offices

elsewhere. Nine classed themselves as ’multinationals’, and 24 as

’generalists’ with clients in several sectors. There were also

submissions from specialists in consumer, business-to-business,

high-tech and financial PR.

On average, it was claimed that 80% of work was underpinned by long-term

contracts. However, 15 agencies said 90% or more of their work was on

long-term contracts, with 13 claiming 70% or less.

Overall, 46% agreed clients were now less willing to pay a mark-up on

goods and services bought (small agencies 45%, medium-sized agencies 50%

and large agencies 37.5%). Some 30% agreed that work paid for mainly via

a long-term retainer had declined significantly (small 30%, medium-sized

25% and large 37.5%).

A higher proportion (37.5%) said that much more of their work is paid

for via a reduced retainer plus project fees (small 25%, medium-sized

50% and large 37.5%). And 30% said that much more is paid for on a

project-only basis (small agencies 35%, medium-sized 30% and large

25%).

Thirty-eight agencies (68%) said they had encountered clients proposing

payment based on results (small agencies 50%, medium-sized 75% and large

81%). Eighteen (32%) said they had worked with clients on this basis

(small agencies 15%, medium-sized 21% and large 50%).

Of the agencies with no experience of payment by results, 22 said they

would consider the idea and 18 said they would reject it. A slight

discrepancy in the totals is explained by the fact that a couple would

consider the idea carefully - then reject it!

The rate for the job

Just under half the consultancies taking part in the survey claimed to

charge clients directly for the time spent working on their accounts - a

practice which involves keeping accurate records. There was little

variation on this by size of agency.

But even where time is not charged directly, agencies need to build the

figures into their fee structures if they are to keep a grip on their

finances. We asked the agencies what hourly rates they charged for

various levels of executives, whether or not the figures were revealed

to clients.

Among the small agencies, the average for an account executive was

pounds 50 a hour, and for a board director pounds 106. In the large

agencies, the equivalent figures were pounds 72 and pounds 185.

As a comparison, a 1966 inter-firm survey by William Schlackman Ltd for

the Public Relations Consultants Association identified the ’mean’

(mid-point) charge-out rates across the industry of pounds 55.18 for an

account executive and pounds 130.73 for board directors.

In considering these figures, it must be remembered that they have to

cover not just the salaries of the individuals, but other overheads,

such as national insurance and pensions, secretarial and clerical

support, rent, rates and equipment. ’The PRCA standard is 2.5 times

salary (a common figure in industries which charge for their time) and

that is what we aim for,’ says an anonymous agency.

Variations are found, with a few agencies charging a composite hourly

fee rather than different rates for different levels of personnel. Some

charge separately for secretarial and clerical support, while others

build it into the rates charged for executives.

This article was first published on Marketing