Agency Business Report: Weathering the storm

By all accounts, 2008 was a year filled with both good and bad financial performances. Now, in the midst of a recession, agencies are working harder than ever to make the best of 2009.

By all accounts, 2008 was a year filled with both good and bad financial performances. Now, in the midst of a recession, agencies are working harder than ever to make the best of 2009.

The best way to describe 2008 is that it was a tale of two halves. The first six months of last year provided many firms with unprecedented growth and opportunity, as companies and organizations looked to the PR industry for a confluence of social media, green marketing expertise, and strategy insight. Agency leaders marveled at the new business pipeline and the rampant growth both at their shops and at others. The fact that many firms reported solid financial performance for the year, considering what lay ahead in the second half, only confirms how well they did in the first six months.

But it was that second half of the year that has bled into 2009 – as agency CEOs talk by rote about “flat being the new up” and layoffs have hit firms of all sizes.

Fleishman-Hillard CEO Dave Senay says the agency delivered record revenue and profits last year. He adds that the first half of the year demonstrated huge opportunities, but “growth definitely slowed towards the back half.”

Spark PR grew 24% in both 2008 and 2007. It ranked 76th in 2008's PRWeek Agency Rankings, and now ranks 52nd. CEO Alan Soucy says that 2008 was a record year.

“We have certainly seen a slowdown [this year], but all things haven't come to a halt,” he notes. “If I think about the economy, it's been a real train wreck; I don't know if we've missed a collision, or are just in the caboose.”

Although Coyne Public Relations had a great 2008, CEO Tom Coyne says he is looking toward 2009.

“We're focusing on our existing client base and making sure that our service levels have never been higher,” he says. “We're being as proactive as possible; going to them [to give] solutions for their business problems, not just their PR problems. This is about helping them do better business.”

Focus on retention
Industry leaders interviewed note specifically the need for client retention – as new business pitches have seemingly stalled – employee communications, and a well-defined new business strategy.

“First and foremost, we must focus on client retention and deepening relationships,” suggest Andy Polansky, president of Weber Shandwick. “You always have to start with your existing client base.”

Steve Boehler, founder of consultancy Mercer Island Group, says agencies should stress three major efforts – focus on client retention rather than traditional new business pitches; initiate third-party, 360-degree evaluations of their client work; and figure out how to market their services better. “They need to get help on learning how to sell themselves,” he explains.

If companies focus on serving existing clients, Boehler adds, they will not have to spend as much time chasing new clients to make up for existing business that went out the back door.

Regarding client service evaluation, Boehler says, “Once that forum is in place, clients will give you leeway to fix what's broken.”

While the overall economy has dampened expectations for most agencies, executives say a way to stay successful is to focus on the healthy markets.

“European and Asian networks continue to perform exceptionally well,” Senay says. “If you're heavily weighted in the US, generally you are going to suffer a bit more” in this environment.

Media entities and beauty, which Coyne calls an “affordable luxury,” are doing well. He also sees some surprising opportunities in the auto market.

“They're starting to come back and market [themselves] again in recent weeks,” Coyne says.

Different agencies are seeing different things in the same sector. Polansky points to healthcare, along with public affairs and crisis work, as WS' strongest practice areas, while Senay sees a slowdown in spending in the healthcare space.

However, Senay concurs that public affairs and government relations are major growth areas.

“There is so much concern on the effect of government on business, that many coalitions will be formed,” he says. “There is a lot of new legislation that will force new ways of communicating.”

Within 18 months, Senay predicts “a remarkable comeback in financial communications. The market is ripe for a new wave of mergers and acquisitions, and cries for companies to distinguish themselves as stable, healthy entities.”

Agencies are not only looking at sector strength when considering opportunities; they are also looking to broaden their service offerings beyond the traditional PR realm. With the media establishment undergoing massive challenges, traditional tactics like media relations have less value in a fragmented environment.

“What does being a PR agency even mean today?” asks Jen Prosek, partner at CJP Communications. “Fifty percent of traditional outlets are either going out of business or going online. The channels are going to change dramatically, and the more diversified you are, the better off you'll be.”

Senay adds that PR agencies should push for marketing integration, and then make the case for leading that charge.

“We need to integrate across communications silos – the opportunities in this respect are endless for PR to take the lead,” he says. “As one reshapes [his or her] agency around those drivers, you will see not just recovery, but explosive growth. We are very bullish on the future of this industry.”

“Our industry is changing at such a rapid pace. It makes sense to pitch solutions to a communications problem,” based on the needs of the client, Prosek says. “A lot of agencies think the solution to everything is a press release.”

Senay says that, today, intellectual capital, strategic insight, and creativity are just the base requirements to get to the table.

“The future is being driven by those taking advantage of the whole network model,” he says. “Our industry is uniquely qualified to bring together all of the forces in play to the advantage of our clients. There is no industry better qualified to bring it all together.”

The current environment rewards dialogue and conversation, Senay says. “The challenge is that ad agencies control the high ground.”

Working together
Lisa Sepulveda, CEO of Euro RSCG Worldwide PR, says PR is also more involved in integrated pitches, even if it isn't a major component of the business.

“Something that was really notable last year was our ability to work within the network to provide fully integrated programs,” she says. “When there is an advertising pitch in the health space, we'll get called in – even if the ask isn't for PR – to [provide] broader thinking.”

When clients are asking for broader thinking, Senay says the opportunity arises for PR agencies to diversify their service offerings. This, he adds, could add to a reshaping of the industry.

“If everyone attacks the market that way, in a few years, we will not recognize ourselves in the manner we did one or two years ago,” he explains.

Drastically affecting agencies' ability to make dramatic strides on behalf of the industry is, of course, the fact that clients are cutting their marketing spend.

“Clients are putting big pressure on agencies to cut costs,” Boehler says, adding that one large client company of his is cutting budgets across the board by 20%.

“This leads to the big dance between the agency and the client as to what the scope of the work will be” with those reduced budgets, he notes. “Clients can't absorb a 20% budget cut and maintain the same level of staffers.”

It is during these times, Boehler says, that agencies can truly learn if their clients view them as partners or as contractors.

“The more enlightened companies are working with agencies” on a solution, he points out, adding that corporate entities, however, usually don't want to hear the agency's pains regarding cuts.

“All agencies are worried about budget cuts and the fear that we have to deliver the same level of service,” Prosek says.

In the case of cuts, she adds, agencies will most likely have to favor prioritization over the ability to offer the same level of service. She suggests that firms not shy away from speaking candidly to clients about their bandwidth.

“Agencies are afraid of communicating these challenges, but I would argue that when you have a relationship with your client, you can communicate what those budget cuts are doing to your agency,” Prosek suggests. “You need to be overly communicative with your clients on how you need to run your business.”

Of course, agency leaders realize that clients still expect exceptional service.

“We're already a couple months into a [challenging year],” Sepulveda says. “The bar is getting set higher, the demands are probably greater, the pressure is coming from all ends, and [is trickling] down in different ways. I think that everyone has to be completely on their game.”

Polansky says that his agency has also seen some budget cuts, but nothing that he would characterize as being “severe.”

“We're still seeing organic growth from some clients. Some companies are adding more funds to PR, as it's seen as efficiency play,” he explains. “It speaks to the vibrancy of this industry; this reflects that more marketers are turning to PR agencies to deliver creative ideas.”

Polansky adds that any budget cuts now being made are more related to the particular company's market position, rather than any industrywide trend.

Mercer Island's Boehler says procurement is becoming more of an issue, especially in this economy.

“Procurement has taken a lead over the years,” he notes. “There are more and more expectations that procurement can get in and force costs throughout the system.”

Employee matters

Coyne says the agency's stated goal for this year was to maintain its staff head count, with the philosophy that it would rather cut pay raises and bonuses before having to lay off any employees. He adds, however, that with revenues and profitability holding steady, he was able to give full bonuses to the firm's staff. The agency is also focused on keeping employees in the loop.

“Everyone needs to be fully informed on a month-to-month basis,” Coyne explains. “We tell people what we're billing, our expenses, and what's in our new-business pipeline.

“[Knowing some negative news] makes them nervous at first because no one wants to hear challenging news,” he adds, “but people also don't want to guess.”

Employees are understandably nervous about current economic conditions. Polansky says that WS handles its internal communications with the same approach it advises clients to take.

“We have a lot of face-to-face meetings and we overcommunicate,” he says. “We're specific in terms of the overall trends in the business and with respect to the new business pipeline.”

Despite budgetary pressures – or, in some cases, because of those constraints – some agencies report that the new business pipeline is still relatively healthy. While budgets might be decreased and decisions might be delayed at present, some nonetheless say they are very active in pitches.

“We have a philosophy – he who wins in the downturn, wins,” Spark PR's Soucy says. “We're aggressively going after new business. We can pretty much create our own reality.”

Coyne points out that agencies should be ensuring their various stakeholders that they are using every opportunity to promote their services.

“In the new business world, we've never marketed more before,” he adds. “We're seeing a lot of people cutting back in their marketing. To us, that is a mistake.”

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