Matthew P. Schwartz | Staying Profitable in the New Economy
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Staying Profitable in the New Economy

Should PR firms remain independent and grow organically? Should PR firms remain independent and grow via acquisition? Or, is the firm in growth gridlock, where getting to the next level is proving problematic? In that case, some firms choose to put themselves in play altogether and sell.

These are just a few of the key questions that were batted around at a recent event catering to Washington, D.C.’s PR and digital agencies.

From left to right, Rick Gould, Micheal Lasky and Don Bates, discuss how PR and ad agencies can boost their profitability and increase their valuation.

The event, titled, “Staying Profitable, Sustainable and Legal in the New Economy,” which took place at the National Press Club,  featured Rick Gould, managing partner of Gould+Partners,  Don Bates, senior counselor, digital and new technology for Gould+Partners and clinical assistant professor in New York University’s graduate program in public relations and corporate communications, and Michael Lasky, a partner at the New York City law firm of Davis & Gilbert LLP and chair of its PR & Law Practice.

The questions posed to the roughly 55 people attending the event occupy a growing  amount of bandwidth among PR agency owners due to  several factors.

These factors include ad agencies increasingly acquiring PR firms and encroaching on the PR space; the large holding companies, such as WPP, Omnicom, Havas, Publicis and IPG, besting smaller firms for new accounts because prospects want more breadth of services that the big players can provide and private equity firms buying PR firms to create a roll-up, get bigger and flip the company to a larger private equity player or holding company.

In any estimation, the hypercompetition that now defines the PR marketplace is only going to get more acute, and that will force the hand of agency owners regarding how they should proceed.

Whatever path you choose, you have to build your agency as if you’re going to sell it. It will both maximize the profit and build value to your firm.

So how do PR agency owners sustain profitability amidst the new norm?

During the event, Gould provided several elements that agency owners and senior managers must adhere to if they want to compete effectively, maximize profitability and build value.

Here are some of the critical components to keep in mind:

  • Consistent Profitability: Industry average should be “at least” 15 percent of net revenues if the agency is under $10 million in net revenue and roughly 20 percent of net revenues if more than $10 million. The “goal” should be 20 percent-plus, no matter what the size.
  • Chart Your Expenses: Total labor costs should not exceed 55 percent of total costs. If you hand out raises you need to concurrently raise fees. There’s no way around it. Rent shouldn’t exceed 7 percent of total costs and operating expenses shouldn’t exceed 25 percent.
  • Bill the Right Way: There should be a minimum retainer against the hours you are billing clients (fixed retainers rarely work). Bill for value (if you can).
  • Utilization: With utilization, or productivity, 90 percent should be the goal. If your staff is not part of management or do marketing there is no reason they should not bill 90 percent of their “available” client hours, typically 1,700. So, at least 1,500 hours should be billable.
  • Retain Key Executives: Make sure your second tier of management is well compensated and in it for the long haul (once the original owners have cashed out). You need to think of how to incentivize your key executive, whether that’s via “phantom” equity plans, stock ownership or bonus plans.

What would you add to the list? And how are the critical components to fielding profitability changing?

Matthew Schwartz
matthew.schwartz38@yahoo.com
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