Added value

Independent PR agencies demonstrate comparable profitability to larger marcoms group agencies

T

his year, PRWeek asked agencies to submit net profit figures so we could analyse the profitability of the sector.

The average profit margins of the independent agencies that supplied figures were not only comparable with larger marcoms groups, but PR as a discipline is shown to be one of the most profitable in the marketing sector.

PRWeek calculated the average profit margin for the Top 150 companies that supplied profit figures but did not belong to a big marcoms group. Combined profits were £20.6m on income of £144.6m – a margin of 14.2 per cent.

Below, Adam Parker, CEO of RealWire, chartered accountant and Show Me Numbers blogger, has analysed how this margin compares with the larger marcoms groups, which report publicly.

14.2% average profit margin for companies outside big marcoms groups

Profit, of course, is trickier to compare than fee income. We asked agencies for operating profit before tax. But for many reasons, individual figures may not be comparable because of different accounting practices, whether the firm is owner-managed, and discrepancies in what is paid in salary and drawn as dividends.

As always, the figures have been signed off by each agency’s accountants and checked with Kingston Smith W1.

PR divisions/companies’ profit margin (%)

Methodology The PR divisions/companies compared made combined profits of £187.2m on income of £1,163.2m, a weighted average profit margin of 16.1%. All figures for year ended 31/12/10 except Next Fifteen, 31/7/2010. Chime – headline operating profit for public relations division; Huntsworth – profit before highlighted items; WPP –headline PBIT margin for PR and public affairs; and Next Fifteen – segment adjusted operating profit.

Size does not matter, people do

Parker says: ‘At £2.45m, the average income of a Top 150 agency is a fraction of that of quoted PR divisions/companies, but margins are broadly similar – 14.2 per cent compared to 16.1 per cent – suggesting size is not a critical factor in adding value. A key driver of profitability in agencies of any size is getting the balance right between attracting, retaining and managing talented people, but keeping employee costs under tight control. In this way, smaller agencies with fewer layers of management have the potential to outperform larger ones.

‘Specialising in a particular sector or discipline can also improve margins. In Chime’s 2010 investor presentation, for example, the agency notes its geopolitical work and growth in international work are key factors in its success.’

Quoted marcoms groups’ profit margin (%)

Methodology The marcoms groups compared made combined profits of approximately £3.3bn on income of approximately £24.9bn, a weighted average profit margin of 13.3%. All figures for year ended 31/12/10. Publicis – operating margin; WPP – headline PBIT; Aegis – underlying operating profit margin; Havas – income from operations; and Omnicom - EBITA.

PR is a high margin discipline

Parker says: ‘The marcoms groups make most of their income from other disciplines: advertising, marketing, branding and insight. As a result, these figures represent a blended indicator of the added value of marketing and comms as a whole. The Top 150 and quoted PR company sample figures compare favourably, exceeding the marcoms average by 0.9 per cent and 2.8 per cent, respectively. This suggests that as a discipline, PR can create the same, if not more, added value than other marcoms services. In WPP’s case, for instance, PR was the highest performing segment by profit margin in 2010.

‘Therefore, in terms of margins, PR’s main competitors are likely to be marcoms services focused on strategy and creativity in particular.’

Haymarket 1957 - 2011
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