Top 150 PR consultancies 2006: Overview - Caution is urged after bullish year

After strong performances in 2005, many agencies are looking to consolidate, but most senior managers are counselling close assessment of the market. Robert Gray reports

While this year's Top 150 Consultancies table is most notable for the return of group-owned agencies last seen in 2002, the majority of the UK's leading PR agencies are still riding a wave of growth that has continued from last year. The market remains intensely competitive but in total only 14 agencies saw their fee income fall in 2005. This is a different story from two years ago when 12 of the top 20 posted diminished PR income.

Growth seems to be consistent throughout the table and especially at the lower end. The presence of the 23 Sarbanes Oxley-affected (SOA) agencies has edged down the smaller agencies, meaning that consultancies now need £891,904 of fee income to appear (compared to £381,000 last year). However, this year, 140 have a fee income of more than £1m compared to 99 last year. Even without the SOA agencies there would still have been 118 PR firms above £1m. Next year could see the first 'all £1m-plus agency' league table.

Another finding is that the number of £3m-plus agencies has grown to 59 (up from 30 last year). There would still have been six more even without the SOA agencies. Fifty-ninth placed Penrose Financial - the last of the £3m agencies - has grown by 19 per cent. MD Gay Collins believes it is reaping the rewards from promotion of its specialist attributes. 'We recently worked out that 98 per cent of our business came from referrals. When you're a specialist, you're part of the industry; people talk about you.'

Last year's findings painted a picture of recovery and returning client confidence. This momentum has continued and even accelerated during 2005, with 90 per cent of the Top 150 registering PR income growth.

But, although the figures tell a fairly bullish story, agencies remain cautious rather than cocky. 'It has been a challenging year for many,' says AAR head of public relations Alex Young. 'There are still stories of incredibly long pitch lists, and budgets are being tightened. Fully-integrated briefs going to a single agency are less common than a  few years ago.'

Bell Pottinger Group, owned by Chime Communications, made top spot again this year, boosting its fee income by 11 per cent. The group made several acquisitions in 2005, with the most notable gain being financial specialist Grandfield. 'Last year saw our corporate and financial brand returned to form,' says Chime chairman Lord Bell. 'With Charles Cook coming in as deputy chairman from Grandfield and Stephen Benzikie arriving [as managing director] from Edelman, the brand has prospered.'

Bell cites the work handled for Dubai Ports' bid for P&O as further evidence of this renaissance, adding that the company had not had a major bid of this kind to work on 'for a couple of years'. Healthcare and life sciences specialist De Facto was acquired because the group expects to see continuing strong growth in this sector, while technology brands Harvard and Insight have surpassed expectations, says Bell.

While the financial sector has been strong, growth on the consumer PR side was somewhat flat, which Bell attributes to rising consumer debt placing limitations on spending power. Organic growth across the group was seven per cent.

Weber Shandwick CEO Colin Byrne describes 2005 as a 'mixed' year in which consumer PR growth was 'steady' with public affairs 'flat'. In contrast, technology performed 'very strongly', healthcare reportedly grew by 40 per cent and public sector work was buoyant.

For Hill and Knowlton, one highlight of 2005 was securing the London 2012 Olympic bid, and other wins included Intel and HSBC. But, a major disappointment was loss of the long-standing consumer brief for Kellogg's. To ensure growth, H&K's consumer division was reorganised under Richard Miller; David Ferrabee, formerly head of internal comms at  Towers Perrin, joined in 2005 to head up the change and internal comms practice, working with clients such as HP, Tetra Pak and Microsoft; and an IT analyst relations offer was launched.

Financial Dynamics returns to claim second place having absented itself last year. The agency has followed a new strategy, since its 2003 MBO from Cordiant, of broadening its business interests both internationally and into practice areas beyond its traditional financial PR heritage. Last year the agency made three UK acquisitions, among them public affairs consultancy LLM.

'CEOs are less concerned about how their share price is doing,' says FD group chief executive Charles Watson. 'We have to be able to advise them on broader brand and reputational issues.' Watson describes last year as 'good' and says that 2006 has begun very positively.

Corporate and financial agency Citigate Dewe Rogerson, which came under new ownership last year as part of Huntsworth's acquisition of Incepta, enjoyed a 21 per cent income increase to £19m.

'We started to see a substantial increase in retainer income that reflected a growing confidence among big companies to do more PR,' says CDR CEO Jonathan Clare. 'We also saw a substantial increase in IPOs, which reflects the strength of the equity market.'

Among the major deals involving CDR were drinks business Pernod Ricard's successful takeover of Allied Domecq and cement group Holcim's acquisition of Aggregate Industries. In both cases, CDR acted for the purchaser.

Clare remains confident about business levels going forward but also acknowledges that it is hard to look more than six months ahead with any degree of certainty.

Although CDR is recruiting, Clare says it is doing so cautiously. 'People are smarter about keeping costs under control. Our business is about bringing in the skills you need, not just gearing up in numerical terms.'

Elsewhere, Manning Selvage &Lee London made some major hires, including Duncan Hart (ex-Alliance & Leicester) to head up its financial services group and Jennifer Garratt (ex-Avenue HKM) to lead healthcare, prompting some big new business wins.

Edelman, which posted 22 per cent growth, says that healthcare has been 'explosive' and technology 'very strong'. Stuart Smith - who became sole CEO of Edelman London last year following the departure of joint CEO Nigel Breakwell - says success has partly been due to 'taking a ruthless approach to quality'. This, asserts Smith, has helped peg client losses back to less than one per cent of annual revenue.

Financial services and corporate specialist Lansons saw fee income increase by 17 per cent. Chief executive Tony Langham believes PR agencies have become polarised between companies such as his own that have relatively low staff turnover - he puts it at an annual figure of 15 per cent - and those that have to replace as many as 40 per cent of their employees every year. Business, he argues, is swinging to those who can show continuity among account handlers. To celebrate the firm's 15th anniversary last year, he spent nearly £100,000 taking 150 staff and partners out to Budapest for a weekend. 'If you want to be in the part of the industry with 15 per cent staff turnover then you have to invest and compete to keep them.'

But while there is no shortage of talented graduates vying for jobs at the UK's leading agencies, the recruitment slowdown in the tough market of 2000-2003 has led to a shortage of talented people at account manager, account director and even associate director level. Salary inflation continues to outstrip fee inflation, making it harder for agencies to make profit, argues Sarah Robinson, managing director of Consolidated Communications.

Consolidated - which is also independent and celebrated its 15th anniversary in 2005 - managed to boost its fee income by 16 per cent to £5.6m. But, says Robinson, 'the flow of new business was erratic. There were fewer big pitches. Fortunately, we seemed to win more than our fair share of business.'

Highlight account gains include taking American Express away from Hill & Knowlton and landing Eurostar after a hotly-contested pitch. At the close of 2005, Consolidated became one of two agencies appointed to a new roster by London Underground.

The agency also expanded its Scottish office, and now has a seven-strong team in Edinburgh. Hiring Ian Hagg - formerly head of Social Policy at British Gas, Issues Advisor at Shell UK, and founder of H&K's CSR practice - to lead its Public/Corporate Affairs business paid dividends. High-profile wins came from the Audit Commission and Coca-Cola Africa's CSR project.

Nelson Bostock, which posted 11 per cent growth, has developed a strong consumer business in tandem with the agency's core technology PR offering. Last year it maintained a strong focus on the entertainment and food/drink categories, with wins including champagne brand Bollinger, Kraft-owned chocolate brand Côte d'Or, and Warner Bros.

However, joint managing director Martin Bostock feels that in the battle to win clients, a handful of agencies are dangerously undercutting the market in a way that is unsustainable in the long term. 'Too many people are still too desperate and are being bullied by clients into taking jobs when at the fees being offered they should be telling them to get lost.'

Trimedia CEO Vikki Stace says organic growth within the agency's existing core business areas of technology, consumer and corporate PR, helped replace declining revenue from its Media division. In early 2005, the company decided to move out of this 'low margin' sector. Its merger with Citigate Communications at the end of 2005 - now rebranded with the Trimedia name - has added a strong public sector team. 'The effect of this will be to increase revenue by around £1m,' says Stace.

Portfolio Group was the only agency in the Top 150 to post a double-digit percentage decline, seeing its fee income fall 10 per cent to just below £4m. Director Sheila Gimson cites 2005 as a 'less-than-perfect year'.

'We've seen budgets cut time and again across marketing activities. This has hit the IT sector particularly badly. As this area is one of our strengths, we have suffered from the cutbacks. Fortunately, Portfolio's business is primarily B2B. We are strengthening our presence in new markets such as education which is showing more buoyancy.'

Consumer specialist Shine enjoyed a rather better year, upping its fee income from £2m to £2.7m and claiming to enjoy a healthy pitch success rate of 71 per cent. The agency apparently declined to follow up more than 50 new business leads, preferring to commit pitch resources to important potential clients. Wins in 2005 included Evian and AOL, while growth of 15 per cent also came from existing clients such as Unilever.

Managing director Rachel Bell says that in order to maintain Shine's 'hungry' culture, plans are being discussed to launch a sister agency that will focus on client management and staff development.

There is some evidence of growth in the stature of the PR industry. Agency salt has been working with the European and global brand teams for FMCG products such as Persil/Skip and Comfort/Snuggle, to develop PR campaigns that can be rolled out across markets as part of an integrated communications strategy. Salt managing director Andrew Last believes, 'we are finally getting to the stage where PR is being accepted and listened to at the very top. The quality of the graduates entering the industry is also getting better and better.'

But, the nature of PR means a seat at the top table is still dependent on the skills, quality and tools on offer. Results Business Consulting managing director Jim Surguy says that in the 'remorseless drive' by clients for greater accountability and evaluation, the real threat to PR consultants comes from the big media companies who are investing in inter-media evaluation techniques. 'They are now moving into areas a long way away from traditional media advertising,' says Surguy. 'Equally important, they have the resources to develop metrics for measurement and evaluation across all communication channels including PR. Be warned.'

PR agencies both big and small need to be aware of the threats that such convergence poses to their market share. But in light of the continued growth seen across the Top 150, it could equally be argued that it is the ad men who should be looking over their shoulders.

2005 at a glance: M&A activity

JAN Financial Dynamics acquires the 25-person Tamesis agency
MAR Chime buys Grandfield
MARHuntsworth merges with Incepta
APR Rainer PR acquires the five-man Lighthouse operation 
JUNPublicis takes 50.1 per cent in Freuds 
JUN Next Fifteen acquires Outcast PR in the US
JUL Financial Dynamics acquires Partner PR 
JUL Creston acquires Macclesfield-based Baxter-Hulme to strengthen Bell Pottinger in North of England 
JUL Financial Dynamics purchases public affairs consultancy LLM Communications 
AUG Next Fifteen acquires 25 per cent of Lexis 
SEP Chime acquires the outstanding 60 per cent of De Facto 
NOV Loewy Group spreads its wings into PR by acquiring BMA 
DEC Emerging private company Freshwater buys Trew Relations

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