Do advertising bosses stop PR firms from making profits?

New data about the financial performance of public relations companies should be worrying not only PR professionals, but also their clients. According to the most recent Plimsoll report 35% of PR companies in the UK made a loss last year, up from 25% ten years ago. I have often been mystified why it is an exception, rather than the norm, to make a meaningful profit. I’ve written about this before, often using Plimsoll  data, initially in 2005. The UK data do not seem exceptionally out of line with global data. Now Plimsoll’s annual reports are updated monthly, we can see can a worse position in the current data. This is how they summarise the industry:

As a further sign of the intense competition within the UK industry, 98 companies continue to sell at a loss for the 2nd year running. These serial loss makers are adding to the congestion in the market, often undercutting the rest of the market and driving down profit margins across the board.

The next 12 months represents something of a crossroads for these companies as they face 2 distinct choices; either they operate more responsibly or they run out of cash.

  No of Companies Average Profit Margin
Most profitable 316 6.9
Least profitable 354 -1.2
Industry Average 670 5.5

 

The sustainability of the industry may rely on the paradox that while prospects in, and of, the industry are not improving the supply of staff remains high. Most surprising is the figure in red which describes the least profitable half of PR firms (more or less, since 354/670 is 53%) . This half of the industry is not only less profitable: it is loss-making. Without any special knowledge of the industry, its easy to guess how this situation could be sustainable. Since customers want to save money, there is always demand for barely-profitable PR. Two-fifths of professionals want to work in marketing, so the supply of staff is high enough to keep wages low. The supply also allows firms to use a revolving door to draw in staff without training them seriously. They often throw them in the deep end, later keeping the ones that float. Those who sink, either leave the industry or start again with tougher skin in the next firm.

The situation is not only worse that it was, it seems to be in an extended decline. If the profit situation is worse today, then it’s worth seeing how far it was better earlier. In 2001, during the years after the dot-com boom when I worked at the agency which is now called Ketchum in Europe, our German business had 364 people and made more than €100,000 of profit per employee. A 2011 study by Professor Anne Gregory (@gregsanne) found that fewer people work for large agencies and more people were freelancing. Her research confirmed that profits were falling and the gap between large and small agencies was growing, even if revenues were stable. Gregory, a former president of the President of the CIPR, writes that just 10% of CIPR members were registered for Continuing Professional Development, and half the PR teams had no formal training or development programmes at all.

I suspect that the continual purchasing of the PR agencies by advertising firms is an element in this process. It would be a vast effort to replicate Plimsoll’s base of financial data and ratios, but it would be useful to research whether these falling profits are connected to the acquisition of public relations agencies by holding companies whose cash-flows come mainly from advertising. Agencies are not vast cash-cows in themselves, but when they buy advertising for their clients immense sums of money go through their accounts. Some firms make less money from advertising and marketing than from treasury operations that stretch out the operating cash flow cycle or play the foreign currency markets. Often these multinationals will bundle in public relations into full-service contracts, rather as a tailor might throw in a tie or a pair of slacks when you buy a suit. In 2012 Robert E Brown (@gatheringlight), a professor at Salem State and at Harvard, published research exploring the commodification even of traditionally premium-priced public relations services, such as crisis communications.

Even if these low costs get passed on to clients, they are the ones who ultimately will pay the price. The situations shown by the studies mentioned above suggests that the pace of work is greater in the industry, especially as the growing number of freelancers mean that in-house staff carry more of the organisational and strategic burden which cannot be outsourced. The notion of commodity-priced crisis communications says it all. At the most crucial time for a brand, a PR agency should have well-trained PRs and spokespeople, water-tight processes and well-prepared messaging lined up to minimize the impact on clients’ intangible assets. New research from Professor W. Timothy Coombs emphasizes the rapid changes in the way that crises can impact firms, and the development of bleeding edge tactics. PR teams need to train and plan to do that week. Instead, they have no training plans, and bargain-basement services priced low in order to free up marketing spend for other activities. Public relations is no different from other professional services, including advertising and design, in that good work cannot be both cheap and fast. PR agencies and their customers need to think critically about the dangers of lower-quality PR.

PS Two other interesting questions to explore are the the following. Are the UK data exceptional? Are large firms more profitable than small firms? Adam Parker () pointed out his series of article for PR Week reviewing the profitability and growth of the top 150 UK PR firms. That analysis is based on data supplied by the firms rather than corporation tax submissions, which Plimsoll uses. The difference is remarkable. The 2012 submissions to PR Week, for example, said that revenue had grown more than 10%. The global holding group’s data were more cautious with, for example, Omnicom reporting 3.3% organic growth in its PR businesses in 2012, although the top-line number was boosted to 4.9% by acquisitions. Even so, the data Parker presented does offer some evidence for the hypothesis that the PR firms aquired by holding groups are less profitable than others. For example, the top 150 agencies made 16.1% profit in 2010 and 15.8% in 2011, while the companies in holding firms reported profits of 14.2% in 2011 and 13.3% in 2010.

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