PR consultancies may be enjoying improved levels of income, but
will their profit margins ever recover to those achieved in the
1980s?
The signs are not encouraging as consultancies are having to work much
harder for every pound of profit.
But there are some notable exceptions. It seems that consultancies
specialising in the medical, financial and hi-tech markets often achieve
a profit margin on gross income well above the traditional norm of 15
per cent. By contrast the average margin achieved by the top 20 UK
consultancies is now little more than 11 per cent.
According to those in the PR business, some of the biggest obstacles to
better profitability are all too obvious. First, too much ad hoc advice
is given for nothing - ’and those who are giving the advice for nothing
tend to be very senior people’ commented one consultant.
At the other extreme, it is claimed that the industry is packed full of
relatively young and inexperienced personnel whose ambition for reward
and promotion is not matched by the value they add to client
relationships.
Weaker managements accede to those ambitions - increasingly so as the
market has picked up - with a resultant increase in staff costs.
Where clients refuse to pay for those inflated egos, either the
consultancy’s profit margin is eroded or the client moves elsewhere, and
the same thing will happen again. Staff costs now account for over 50
per cent of PR consultancies’ gross income.
Another reason advanced for the increased cost of servicing clients is
the growth in international business. That adds to the overall cost of
administering the accounts, but few overseas affiliates are prepared to
bear a fair share of it.
There are also stories of work allocated to an overseas associate based
on cost estimates which prove wildly wrong after the event.
Another cause of margin erosion is poor management of time. Some
consultancies demand that their staff spend a very high proportion of
their time on client chargeable work, thereby making a virtue of hours
logged on their timesheets rather than profit earned for the
consultancy. Small wonder much of that time proves irrecoverable.
But the most widely acknowledged cause of margin erosion has been the
decline of the larger retainer relationship and the reluctance of
clients to pay ’by the hour’ except for certain types of work like
crisis management or a takeover bid.
So what can be done? Here are ten profit pointers worth thinking
about:
- Seek opportunities to expand into, or focus on, those specialised
markets or expertise where profit margins are above average.
- Hire, keep and exploit exceptional personnel and charge a premium for
them.
- Improve the monitoring and management of resources so that action can
be taken to restore profit while a project is still in progress.
- Choose the right clients (the profitable ones) and don’t be afraid to
decline or fire the rest.
- Ensure all personnel understand how profits are made and lost.
- Work out the most efficient way of managing the engagement before
quoting.
- Get the financial basis right at the outset (or on renewal).
Put the right people on the job and manage them.
- Tell clients when they get good value - they don’t always realise
it.
- Make sure your staff have confidence in the service being
delivered.
- Bill frequently and in advance where possible.
