BUDGET SURVEY: THE BIG CUTS - PR agencies/clients address figures as downturn bites

In-depth research commissioned by PRWeek has confirmed that the economic slowdown has had an unwelcome impact on the vast majority of agencies and clients. But some crumbs of comfort were also thrown up by the PRWeek/Dynamic Markets - PR Industry Budget Report, among them the fact that more clients would prefer to cut spending on advertising, market research, marketing literature and direct mail ahead of reducing their investment in PR.

The independent market research, carried out by Dynamic Markets, took as its sample 52 PR agency directors and 61 clients. The agency directors were all drawn from companies ranked in PRWeek's annual Top 150 league table, while about two thirds of the client sample were comprised of dedicated in-house PR professionals, with the remainder mainly in the marketing field.

All were included because the selection of an external PR company was specifically their responsibility. The client sample was spread fairly evenly between six broad industry sectors: consumer, healthcare, government, technology/telecoms, financial services and 'other' companies in B2B.

The report leaves little doubt that the economic slowdown is biting hard.

A sobering 81 per cent of PR agency directors say that at least one of the industry sectors their agency serves has seen a reduction in PR spend as a direct result of the deterioration in economic circumstances. With the exception of healthcare, all sectors have seen a reduction in PR spend.

It comes as no surprise that the worst affected sector is technology/ telecoms: 78 per cent of agencies involved in this sector have been hit by a reduction in spend.

However, on a slightly more positive note, 40 per cent of PR agencies have seen cuts to just one industry sector that they serve, and only 18 per cent have been hit by three or more industry sectors reducing PR spend.

The industry sectors where reductions are happening most are consumer, technology/telecoms and 'other' companies in B2B.

'Some PR agencies have used the poor economic climate and their strong relationship with senior client personnel to re-prioritise clients' marketing budgets. Integration across the mix is the name of the game and the more PR can integrate and show ROI, the more of the marketing budget it will get. Projects seem an ideal opportunity for agencies to really make a difference,' says Dynamic Markets MD Cherry Taylor.

Intriguingly, small PR agencies do not seem to have been as badly hit as the large and medium-sized agencies, possibly because their fees are often lower - and therefore less likely to come under the client cost-cutting microscope - because they are carrying fewer overheads than bigger agencies. More of the smaller agencies have seen only one industry sector that they serve make cuts to PR spend.

Collectively, 63 per cent of the client sample say their industry sector has been affected by the economic slowdown to some degree or other, and this includes at least some clients in every sector. Again it is no surprise that more clients in technology/ telecoms think their industry has been affected, while healthcare and government/public services are the least affected sectors.

From the whole client sample, 13 per cent say their industry sector has been affected considerably. However, 28 per cent of clients have seen some sort of impact on the PR function - including a reduction in the amount the company spends with external suppliers (20 per cent), reductions to the PR budget (18 per cent) and colleagues in the PR department being made redundant (ten per cent).

On average, where in-house PR redundancies have taken place, one in four people has been laid off. Where spend with external PR companies has been reduced, the average is a hefty 69 per cent cut in spend.

All PR disciplines have been affected by the economic slowdown. The top PR discipline to be cut in agencies is B2B/trade, where 52 per cent of agencies that offer this discipline have seen a decrease. Completing the top three are the consumer and corporate disciplines, where 45 and 39 per cent of agencies respectively reported cuts. Financial PR and crisis management, at 14 and 17 per cent, were the least affected disciplines.

However, the average and median number of PR disciplines per agency to see cuts in PR spend is only two, and the largest percentage, 27 per cent, have only seen cuts to one PR discipline per agency. Unfortunately, 20 per cent have seen four or more PR disciplines affected. In most cases, cuts are between 5 and 50 per cent of PR spend per discipline, with an average of 20-30 per cent.

There are subtle contrasts in what has been cut between the agencies of different sizes: cuts to web development have been greatest for large agencies; cuts to corporate PR and B2B/trade PR, sponsorship, lobbying/public affairs have been greatest in large and medium-sized agencies; the only area where small agencies seem to have done worse than the larger ones is in investor relations.

Two-thirds of clients say they have not made a reduction to the amount they spend on any of the PR disciplines they buy from external suppliers.

Only 18 per cent have made some cuts, but an additional ten per cent have cut all of what they used to spend with external PR agencies. Cuts of 100 per cent in the last 12 months have occurred in technology/telecoms and 'other' companies in B2B categories (both one in five), and in financial services and government/public services (both one in ten).

Looking at changes to agency client base size, only a six per cent minority of agencies saw a decrease in client numbers during the fourth quarter of 2001, while 84 per cent actually saw an increase.

However, by comparing the current size of an agency's client base to that published in the 2001 PRWeek's league tables, which used 2000 data, the longer-term changes to the size of agency client bases can be analysed.

In this way the average percentage change to the size of an agency's client base is a reduction of only one per cent, and the median number is a reduction of six per cent. This suggests a slight overall reduction in the size of the industry during a 12-month period, as represented by this sample and the size of the client portfolios.

More large and medium-sized agencies have seen their client base shrink in the last 12 months, compared to small agencies. Indeed, more of the small agencies have increased the number of clients they have in the last 12 months and similarly, more have stayed the same size.

Even more striking than changes to the size of the client base is the effect of existing clients reducing the amount of they spend with an agency: 78 per cent of agency directors say at least one of their clients reduced the amount they spend on PR during Q4, 2001. But the average percentage of clients within an agency's client base that have cut PR spend is 13 per cent and the median is ten per cent. Some agencies were hit far harder than the average: 16 per cent saw more than a quarter of their clients reduce spend during the last three months of 2001.

The majority of agency directors, 67 per cent, think the amount of project work versus retainer work will increase as a result of the economic slowdown.

Advertising, according to 44 per cent of clients, is the first marketing activity to be reduced when marketing budgets come under pressure. This is followed by market research, literature and direct mail. PR is fifth on the list, cited as the first activity to be cut by a mere five per cent. Unfortunately, 20 per cent of companies would put PR second on the list of activities to be cut and a comparable percentage would place it third.

Some 88 per cent of PR agencies are involved in some sort of activity to encourage existing clients to spend more on PR - but only 50 per cent of clients say the agencies they use are doing this. Indeed, a significant proportion of clients in all industry sectors say their agencies have done nothing to encourage them to spend more on PR. The most common activity mentioned by 48 per cent of agency directors is trying to demonstrate ROI on PR, which includes measures like payment by results, using PR evaluation methods, increased reporting and selling activities focused on tangible outcome - but none of the clients mention this.

In only two per cent of client organisations is marketing the last functional discipline to see budget cuts as a result of the company coming under pressure - however, PR fares slightly better, being last for seven per cent of companies. The most protected functions are finance and operations, IT and sales and production.

Looking to the future, opinion is quite mixed, although similar between clients and agencies: 30 per cent of agency directors think that growth has already started again but almost as many, 28 per cent, think it will not start again until the second half of this year. Interestingly, the smaller the agency, the more positive the agency director is about the future of their business.

Only the large and medium-sized agencies think times will continue to be bad for them for the first six months of 2002 and more of the small agencies - half, in fact - say their businesses have already picked up and growth has resumed.

When examined by industry sector, the most pessimistic clients - i.e. those who think things are going to be bad for another six months - are in technology/telecoms and 'other' B2B companies. The level of confidence in the PR world at present can be described as fragile.

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