Measuring Agency Profitability Goals: How You Can Reach Them

Even in this inscrutable economy, PR agency directors and owners are still earning a nice living, clients are remaining and talent is plentiful. Why fret about profitability? Well, I'm here to tell you that attention to performance metrics can spell the difference between survival on a rainy day, sustaining the longevity of your top people and--most importantly--monetizing your biggest asset when and if it's timely. To give you an idea of how enormously significant these metrics are to your life, let's look at your worth on today's market. If your agency is marketable at all, it's probably worth five to 10 times recast EBITDA (earnings before interest, taxes and depreciation plus any bonus you're taking as owner salary). In investor relations, we have a vital tool called a PEG ratio. It's your price/earnings multiple divided by current growth rate. If your recent EBITDA is one-tenth of the theoretical sale price you seek in selling, and if your profits are growing at 10% per year, you have a PEG ratio of a perfect 1.0, and the market would judge you as fairly priced. But since your stock is private and illiquid, it may rate a 10X multiple only if you're a 30/30--an agency with a 30% margin and 30% average annual compound growth rate. Whatever your multiple and value today, the decision to merge or sell should be rational, not emotional. (I tried to block out any emotion when I sold The Financial Relations Board in 1999.) If you now take a $2 million salary and pay normal income taxes, it will take you 17 more years of work to equal the sale proceeds (before taxes) of $20 million. Meanwhile, if you sold and the proceeds were invested over those 17 years, they might easily become $34 million. Assuming that you're dedicated to boosting the metrics, what's achievable? As seen over a decade of surveying the confidential P&L statements of agencies large and small, my partner Rick Gould at StevensGouldPincus concludes that achievable goals are: labor--under 50% of revenues; overhead--under 25%; profit--25-30%. How do your peers measure up? They flunk. Based on our latest SGP survey of 104 PR agencies on 22 metrics--the broadest survey ever conducted in the industry--the results are improving but still inadequate (see sidebar). Measuring Up How do you reach the prime goals? Well, you can ration the paper clips or stop ordering free pizzas for the gang. But what really counts is: 1. An adequate fee structure--monthly minimum retainers against billable hours. 2. Billing rates at market level 3. A quarterly client program plan managed by objectives. 4. Time management with accountability. 5. Invoicing with detail--by person, time input and activity. 6. Team budgets at outset of each month. 7. A mid-month checkup and adjustments. 8. A fairness review before invoicing. 9. A quarterly personnel productivity analysis, with 90% of input billable. But all this is futile unless you can resolve to lick your worst enemy: turnover of key personnel and clients. Our latest survey shows that a fourth of your staff walks out the door each year, costing account disruption, recruiting and training expense. That turnover is vastly higher than other professions. And I predict that our current survey on client turnover will show higher than 20% losses per year, a real plague considering that profitability is in longtime client relationships. When I left the Financial Relations Board, it had reached $37 million in net fee income after 20 consecutive record years, and its 26 senior people had been with me for 10 to 30 years, serving many clients who had been with us for two to three decades. Among the lessons we had learned were: Create a culture of fanatics, not workers. Breed true consultants, not order-takers. People who lead the clients; if they're too firm or persistent and the client fires you, pay that exec a bonus. Build a true meritocracy; promote from within. Relate bonuses precisely to actual agency results. Establish a continuous carrot bonus--paid over four quarters. Be a personal life coach to every employee, holding private face-to-face sessions with them annually to understand their true frustrations, needs and goals. Seek continual feedback. Your most valued question is always: How are we doing? Create Oscar-caliber awards for top work, and display this broadly as the highest standards of the firm. Fight pretension at every level: Everyone uses first names; answers his own phone; never hides behind voicemail. Quash impersonal and lazy reliance on e-mail and emphasize face-to-face discourse. Prepare a quarterly value analysis of cost/benefits to each client, correlated to measurable program results. Above all, know in your heart the inherent worth of the advice you're dispensing to clients, and the lifetime career potentials you're creating for your staff. Confidence is key. Positive thinking is paramount. Profits will come. PRN CONTACT: This article was written by Ted Pincus. managing partner of StevensGouldPincus, a merger and management-consulting firm serving the PR agency field. He is also the business columnist for The Chicago Sun-Times, an adjunct professor of finance at DePaul University, and independent communications counselor. He can be reached at How Does Your PR Firm Measure Up? Below are some highlights of the latest survey of 104 PR agency P&L statements conducted over 10 years by StevensGouldPincus, covering 22 most critical metrics. For full details including results by agency size, location and specialty, contact Rick Gould, at The 2007 averages among agencies of all sizes: revenues per staff--$172K revenues per professional on staff--$221K account salaries--40.3% of revenues bonuses--3.3% administrative salaries--6.3% marketing--2.5% professional fees--1.9% rent & utilities--6.6% total overhead--25.8% total operating profit--19.7% Other stats: billing on time basis--47.2% of agencies fixed retainers--53.1% retainers plus excess time billing--30.4% average minimum monthly fee accepted--$14,098 baseline executive hours input--1,694 account executive billable time--90.2% of input staff turnover per year--24.2% of total staff average markup on rebillables--18%

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