Agency financials often make for bracing reading and Kingston Smith W1's annual survey of the UK's top 40 PR firms does not disappoint in this regard. The report, based on financial results from 2011, includes a wealth of information about the growth and profitability of the UK's key PR players, including gross income, employment costs and the always-interesting highest-paid directors list. What caught my eye, though, was the ranking of agencies by profit margin. Unsurprisingly, perhaps, the top 10 is dominated by corporate/financial PR firms, but the agency that comes out on top is consumer boutique Frank PR. [caption id="attachment_3393" align="alignleft" width="406" caption="Source: Kingston Smith W1 | Financial Performance of Marketing Services Companies 2012"][/caption] Frank's margin comes in at almost 50 percent, an eye-catching figure that comfortably outstrips the profitability of Freud Communications, another firm that cannot be classed as a City PR stalwart. So what is the secret to Frank's success? Agency chairman Graham Goodkind is well-known for his laserlike focus on cost control. Indeed, another table reveals that Frank has the lowest employment cost to gross income ratio of the 40 firms, at just 39 percent. Also worth noting is that Frank's figures are for the year ending June 2011, when it was focused on aggressively boosting margin during its Photon earn-out. [caption id="attachment_3396" align="alignright" width="392" caption="Employment cost: gross income ratio. Source: Kingston Smith W1 | Financial Performance Marketing Services Companies 2012"][/caption] Still, it seems clear that Frank's profitability is a direct result of its ability to keep costs under control, which is also true of some of the other firms in the top 10 above: Freud, Bell Pottinger and Fox IPL (Weber Shandwick's tech practice). For financial firms, this appears to be a less pressing issue; RLM Finsbury's ranking, for example, is hardly affected by the £3m that its highest-paid director earned in 2010. Cost control, says Kingston Smith partner Esther Carder, is particularly important because PR agency costs are rising at a faster rate than fee income. This has contributed to a situation where the average margin of the top 40 is 12.8 percent, some way below the  15-20 percent that Kingston Smith expects for a well-run firm. Employment costs have grown by eight percent and other operating costs by almost 10 percent, while income rose around eight percent at the UK's largest PR firms (more or less in line with our global growth figure). Despite this, Carder noted that the PR industry continues to be relatively profitable when compared to other marketing disciplines, because of a greater reliance on senior fee-earners and the better financial planning afforded by a higher proportion of retainer clients. There are, however, some specific risks. One, unsurprisingly, is over-servicing, which Carder views as a "natural inclination" for people working in the agency world. Another, she notes, is "too much middle management," which can erode margins. That may be so, but there must also be a concurrent risk of losing business by handing over servicing to junior staff in order to boost profitability. Finally, Carder points to a threat that remains a grave one where PR firms are concerned - procurement. I asked Carder whether, as is often pronounced by agency folk these days, in-house procurement can really bring any benefit to the client-agency relationship. Like me, she seemed unconvinced by this argument, noting that "procurement is pushing it in completely the opposite direction." Generally speaking, though, Carder thinks that PR firms are much better managed these days than they were a decade ago. They will need to be, because she does not see much in end in sight to the tough economic conditions that have characterised the past four years. I've excerpted her full comment below as I think it's worth a read in its entirety:
"2013 will be just as tough. I don’t think there is going to be any bounce-back. This is the new world we live in. Having said that, agencies are making money. By and large, a lot of them have recovered to roughly where they were before the recession. They are much more financially grown up, they have recouped their margins. They are having to run a lot faster to stay there. I think that’s going to continue for a long while."
A sobering analysis as 2013 begins in earnest.