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SHOW ME THE MONEY: THE FINANCIAL FUTURE OF PR10 September at 16:51 from atlas
This is the third in a series of articles on the future of PR produced by The Roxburgh Group.
In any discussion about the future of PR, the issue of profitability needs to be front and centre. That's why I found the recently published 2013 WORLD PR REPORT, produced by the Holmes Report in conjunction with ICCO, an interesting read.
As with many PR announcements, the situation is amazingly good, the future is bright and to top it off they just invented zero calorie Tim Tams (ok, maybe not that good). Double digit growth (11%) is coming from "firms increasing their investment in digital build and production and social community management", and "competing successfully for so-called 'non-traditional' assignments". The big four holding companies are doing well, the independents are doing better. There are more employees in PR (80,000) and per head revenue is up ($155,000).
Life is wonderful, isn't it? So why have the last three Australian agency heads I've spoken to, told me that they are working twice as hard now for the same (or less) revenue? Something is amiss. Let's take a closer look at the World PR Report numbers.
Using the Report's revenue per head figure ($155,000/year), combined with a working assumption that the majority of PR employees work (at least) a standard 40 hour week, we uncover our first unpleasant finding. The average global charge out rate is a mere $75-$80 an hour (depending on how many weeks holiday a year they get). From my time in agencies (in both global and local firms), $80 an hour is at best considered the intern or admin rate in Australia. You aren't giving crisis management advice to the CEO for $80 an hour (I hope).
I know it's a large generalisation about multi-market figures (with a few assumptions thrown in for good measure) but that amount supports the comments made by the Australian agency heads. It means agencies are competing more heavily on price than ever before and the "non-traditional assignments" aren't quite as profitable as the media relations work it is replacing.
Supporting that conclusion is the hidden Australian success story of the chart - Click PR. Click recorded the largest growth in revenue globally from 2012 to 2013 (an impressive 170%). Taking a quick squiz at their website, they have eight staff. So based on the numbers from the Report, their per head revenue is $100,931 (we'll assume they were all on board for the whole year) or over $50k lower than the global average. What is more concerning for PR in Australia, is that based on the Report's numbers, Click's average charge out rate (40 hours a week, 48 weeks a year) is almost $30 an hour less than the global average.
While I commend Vuki for his fine commercial stewardship to the top of the global chart, I must add that if it takes a very low charge-out rate to achieve growth, it means PR in Australia is in a race to the bottom of the value jar. And no one wins gold in that race.
Does it mean clients are valuing our work less, are we selling our advice too cheaply or is it that competition for assignments in traditional PR is more intense? None of those options are healthy for profitability. And with pressure on profitability comes stagnation in salary growth and more incentive for the brightest 'millennial' minds to look elsewhere for rewarding careers.
Returning to the Report, it shows an annual revenue of $2.8m will get you into the top 250 PR firms in the world. That means the majority of PR firms in the world earn less than $2.8m a year. That isn't something to be excited about as an industry. Compare that to advertising or law and we're talking one decent FMCG account or the fees on a single merger or celebrity divorce.
My conclusion from these points is that the World PR Report paints a dangerous overestimation of the current health of the PR industry. In an age of authenticity, realising that there is a problem is the first and most important step. A conversation needs to be started about how to grow the PR pie organically. Sure, we can poach business from the ad agencies, media buyers and digital agencies (the non-traditional assignments), but if it isn't in an integrated communications campaign, are we not admitting that the discipline of PR is on life support?
I've done my own little experiment to litmus test the true health of the Australian PR community. Keep in mind that if we use the Golden PR Rule of Three (a third on salary, a third on admin and a third on profit), the pass mark for a healthy PR agency is 33 percent profit.
Consider the median size of a single practice agency in Australia is 12 people. Using the $155,000 per head figure from the World PR report we get a total revenue line of $1.86m. The immediate conclusion to be made is that to get to the $2.8m mark you're going to need at least two industry practices to your bow (or specialise in the finance industry).
Drawing a quick and dirty, 'average' sized, agency pyramid structure with 'average' salaries, you have 1 x MD ($180k), 1 x GAD ($140k), 2 x ADs ($100k each), 3 x AMs ($65k each), 4 x AEs ($50k each) + an admin person/accountant ($50k), with the median salary for each in brackets (Roxburgh Group figures). That comes to a salary bill of around $965,000 or 52%. Ok, we'll say half. So, even accounting for averages, Australian PR is 20% (or $372,000) below a healthy benchmark. That gap will only increase with inflation and cost of living pressures, if the corresponding revenue line doesn't improve.
Think of what you could do with an extra $372,000 (or 20% of your revenue) in profit each year.
If you've got this far, it must be solutions time. I've got four hot tips for you.
Don't be afraid of annual fee increases. A $10 increase in an hourly charge out rate equals $19,200 in annual revenue ($10x8hrsx5daysx48weeks). Your clients increase their prices each year to match inflation, you should too.
You can't cut to growth. Making consultants redundant won't solve your profitability problem. Sure, the salary cost is removed but you've also cut 160 billable hours a month. The challenge is to find the 160 hours of work. Get them working on generating new business leads instead.
Expand your new business horizons. Agencies have pigeon-holed themselves in the 'awareness' sector of marketing for too long. Media relations revenue is not going to rebound. Clients are looking for communications advice on every step of their customer's journey e.g. PRs that pitch their social media expertise make the mistake of focussing on the product. The client wants to know how using social media is going to improve their digital customer experience (B2B and B2C) and by how much.
Use business metrics to evaluate your work. The whole question of PR value has always been undermined by our inability to put a credible business metric against our work. We all shudder when AVEs still get mentioned by clients. This is where our thinking needs to change. Instead of column inches we need to be considering how 'awareness' or 'reputation building' will solve a business problem for the client. It all starts in how you set the terms of reference of your engagement with the client.