PR agencies poised for record profitability

Agency profits are poised to exceed 25% in the next few years.

The 2013 StevensGouldPincus annual best practices benchmarking survey has just been released, and the findings of the 111 PR agencies that participated tell us one thing: agency profits are poised to exceed 25% in the next few years.

Unlike the dark days of recent economic downturns when many agencies were laboring to keep their operating profits at two digits, agency owners have learned a skill that took many years to develop: how to return a good profit from their sweat and equity.

Our benchmarking survey, created and supervised by co-managing partner Rick Gould, has been a basic tool for PR agency operational management for more than 20 years. Its annual findings reflect how agencies are doing against their peers. The well-run agencies will have operational profits in excess of 20%. The poorer agencies may break even or have losing years.

One fact has become clear over the years – you can do great public relations for clients but run a lousy business. Or you can excel at both by just following the benchmarks.

Exactly what are benchmarks? They are essentially best practices. Those best practices examine how 111 agencies that submitted their confidential financial information to us this year have fared. Benchmarks are typically the percentage of operating costs to net fee income (or net revenues).

For example, if your percentage of total payroll is around 50% of your net revenues and your overhead is 25%, you could ideally have a profit of 25%. This isn't easy to do. It requires deep planning as to how to use staff against the fees and hourly charges that clients pay. But if you're in business to make money then the planning side of your business is just as important as the development of quality client programs.

Agency owners are doing a better job of running the business side of their agencies than ever before. They're doing budgeting, forecasting, and organizational fine-tuning. They're not clinging to extra staff in the hope of getting new business soon. They respond more quickly to the changing economics – up or down. And their client billing for account staff is more accurate than ever before.

But some PR agency owners never learn. During the past few years, my partners and I have seen some longtime PR agencies quietly fold, go bankrupt, or simply close their doors. And the primary reason is that they paid no attention to tell-tale benchmarking signals that would indicate that their businesses were in serious trouble.

In one case, an agency lost its biggest account, which had become 50% of its total net fee income. The agency principals had taken new space just months before this catastrophe and suddenly their rent became a third of their revenues. The agency couldn't support this tell-tale benchmark and was forced to close its doors.

Another agency simply got old and tired and the principals decided they wanted to go fishing instead.

On the other hand, most agencies now understand that best practices can help set the tone for years to come. Agencies are learning to produce superior results with fewer people, thus eliminating one of the biggest costs in a PR agency – payroll.

The average PR agency profitability in 2012 was 18.8%, slightly more than the year before. I expect a sharp increase in 2013. One increasing trend among smaller agencies is the use of freelance resources at a rate of more than 5% of their total account costs. This trend enables agencies to be more flexible in controlling costs.

Southeast PR agencies can boast of the lowest staff turnover in the US -- 13.6%.

Public affairs agencies have the highest operating profit among all niches – 22.7%.

There are many tools available to enable PR agency senior managers to control the benchmarking categories within their businesses. But the first and foremost way to control costs is to understand what those benchmarking numbers should be. Control those costs and your agency can be among those that surpass a 25% operating profit in the next few years.

And let us not overlook the attraction that such profitable agencies will be to interested acquirers. But that is a subject for another commentary.

Art Stevens is managing partner of StevensGouldPincus.

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