If communications professionals don't understand the following business reality, Armageddon is upon us: The PR industry has been commoditized in the years following the turn-of-the-millennium economic downturn, prompting the ratio of senior to junior executives to change dramatically. Here's why: For a company to be profitable, it must maintain an approximate 3.5 multiple, or the "salary" versus how much business it brings in. For example, if a company spends $1 million on employee salaries, then those employees must bring in at least $3.5 million in business - otherwise, that ship is destined to sink. This may sound like a problem for accountants to solve, but here's why agency and corporate communications managers should be concerned: Despite the necessary "strategic" value PR must bring to the table, many organizations' senior-most people (who average a 2 to 1 multiple) have been replaced by junior employees whose multiple is seven or eight-to-one, but who can't provide the high-level counseling required to keep the industry afloat. Thus, the counseling services that could and should be provided by PR agencies have been cannibalized by the likes of McKinsey, where executives can command higher prices without question. So what is the solution to such a conundrum? PR practitioners must be strategic counselors to stay relevant to their clients, but they must also meet their firms' financial needs. According to Tom Hoog, Hill & Knowlton senior counselor (and former CEO), the solution (at least a big part of it) lays in redefining the standards of agency billing practices. "From the counselor's point of view, you want to be able to provide the best possible communications counsel to support the client's business imperative," he says. That's the value-add that you should bring to the table. But, it must always be done in the context of being profitable for your own organization. It must be a win-win." Hoog points to the two most commonly used billing practices - hourly rates and retainers - as requiring modification in today's business context of commoditization. It's a tall order, but he backs it up with some very convincing suggestions for change. "Both hourly billing and retainers have downsides as far as accomplishing the goals of all parties," Hoog says. "The downside of a retainer is that it provides an opportunity for a client to take advantage of the counselor and to take so much of their time that it's not valuable. It has the potential for misunderstanding and therefore conflict between the client and the counselor because it doesn't clearly define the number of hours expected." As for hourly billing rates, he says, there are built-in limitations to creativity because counselors are often restricted or rushed by the clients' budget restraints. These significant downsides present equally significant complaints on the parts of clients and counselors. For the counselors, they can feel overworked and underpaid, and therefore under-produce; or, more likely, they will put their junior staffers on the job and then deliver less strategic, more tactical results. Then, writes Dennis Spring, president of Spring Associates, there are the clients' gripes: "Clients often complain that their agency goes over budget. This is especially true during economic boom times. The firms usually argue that ... the client [has] either implicitly approved of the extra work that was done on [their] behalf, or, that circumstances mandated that [their] account be over-serviced." So therein lies the problem. The solution? How about an outside-the-box approach, for starters? "There are several ways to address [the billing] issue - a value-add, for one," Hoog says. "For example, the ability to provide unique and special counsel that helps the client in a notable way would be rewarded accordingly." Consider this as a hypothetical example: A major news show calls a company because its reporters have gotten wind of a crisis in your company, and your spokesperson is preparing to go on air. There are three agencies that are offering their guidance. Two of them suggest traditional crisis management strategies, while the third proposes to use their contacts at the news outlet to get them to pull the story. This is a value that only they can bring, so you pay them accordingly. However, this situation is the exception rather than the rule, and circumstances only rarely enable such a contribution. Thus, Hoog's second approach is more plausible for most agencies: "Another approach that may apply better is a sort of compromise between hourly billing and a retainer," he says. "It's a contract predicated on a minimum that also provides the opportunity for additional services, as needed. The way to make that most valuable to the client and the counselor is to discount the hours inside the minimum, and then charge a normal hourly rate for additional hours." Here's a breakdown of how this payment strategy would play out: A client comes to a counselor with a project, and together they establish a guaranteed minimum number of hours (or a minimum amount of money) - say, 100 hours. Then, the counselor charges the client for those 100 hours, but at a discount (if the hourly billing rate is $250, then maybe the counselor charges $220 for up to 100 hours). If the client requires work over 100 hours, then they begin paying for the services on an hourly basis at the usual cost. "What you're really doing is building a partnership relationship with the client right from the start," Hoog says. "You're saying, 'We're committing to you at a discounted rate, but we also want to be able to do more to add value on an as-needed basis.'" Granted, there is no end-all solution to the challenge of fair agency-client billing rates, but Hoog's strategies make headway in the commoditization that threatens the industry's viability in today's marketplace. Under his plan, agencies can keep senior executives on accounts and still pull in enough money to meet their margins. Plus, it reinforces the thing upon which public relations was built in the first place: relationships. "We need to be people who are capable of walking into the corner suite and adding value," Hoog says. "All client-counselor relationships must be a partnership to be effective. If it remains a client-vendor relationship, the account is doomed." CONTACTS: Tom Hoog, email@example.com; Dennis Spring, firstname.lastname@example.org Agency Billing Rates According to the 2007 Salary Report put together by Spring Associates, not much happened in the way of hourly billing rate increases in 2006. A receding increase is seen as a "continuing correction of hourly rates that spiked dramatically during the dot-com boom years," according to the firm. Here is a snapshot of hourly fees in the three categories (ad agency-owned, top 100 independents and other independents): Ad Agency Owned: +2.9% (previously +10.7%) - AAE/Acct Assoc +6.4%, AE/Acct Mgr +5.0%, SAS/Group Mgr +3.9%, Media Mgr +3.4%. Top 100 Independents: +2.2% (previously +6.6%) - Sr Media Mgr +5.7%, Media Mgr +4.7%, AE/Acct Mgr +3.2%, AAE/Acct Assoc +2.7%. Other Independents: +1.9% (+2.6%) - AAE/Acct Assoc +8.2%, Media Mgr +7.9%, Senior Media Mgr +2.8%.
Commoditization of PR: Redefining The Standard Agency Billing Rates
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