The U.S. public relations agency business achieved an historic surge in profitability last year, with average profit margins widening by almost 70 percent, according to the 2007 StevensGouldPincus Benchmarking Survey, based on input from 100 public relations firms from across the country and tracking several critical best practice benchmarks.
Operating margins in 2006 reached 22 percent, compared with an average of 13 percent in 2005, reflecting the best profitability year since 1987, the first year that the survey was launched by Rick Gould, one of the managing partners of the New York-based merger and management consulting firm.
Operating profit increased were consistently higher among firms of all sizes, averaging 22 percent. Operating profit was defined as revenues less total account labor cost less total operating overhead. Participants were instructed to add back into profit owners’ compensation above and beyond a “reasonable” base salary for owners, with the base salary based on advice from SGP.
Firms in the $10 million to $25 million fee range recorded the highest margins, at 25.3 percent, while firms with less than $3 million in revenues recorded the lowest, at 20.8 percent.
According to Gould, co-managing partner of StevensGouldPincus with former agency principals Art Stevens and Ted Pincus, “This was the highlight of the benchmarking survey. It was the highest, most consistent profitability at every level since inception of the survey in 1987. Even during the boom years of the late 90s we did not see so many firms generating these kinds of profits.”
Gould believes the reason for this is that after the very lean years following the dotcom implosion and recession, which coupled with the aftermath of the 9/11 terrorist attacks, agency CEOs became more entrepreneurial out of fear—and it worked. As a result, more and more firms are now achieving over 20 percent profitability.
Other notable and surprising findings in the survey included:
• Revenues per PR professional averaged $198,000.
• Base account salaries averaged 39.3 percent of Revenues.
• Bonuses averaged 3.4 percent of revenues, or 8.7 percent of salaries.
• Total account labor cost, including payroll taxes, benefits and bonuses averaged 53.1 percent of revenues.
• Rent expense averaged 7.0 percent of revenues.
• Total overhead averaged 24.9 percent of revenues
According to Gould, “model firms” are able to keep total labor costs at no more than 47 to 48 percent, operating overhead at no more that 22 to 23 percent, and total costs at no more than 70 percent. If PR agencies are able to achieve these results they will be able to generate an operating profit of at least 30 percent, he says.
Other critical benchmarks
• Average monthly minimum fees were around $10,000
• The largest client as a percentage of total revenues was 18.1 percent.
• Baseline hours, the total annual hours an account person should spend on client work, averaged 1,724.
• Utilization, the number of hours actually billable to clients, was at 84.5 percent.
• Travel time was billed at full rates by 64 percent of the respondents, a positive trend.
Firms in the healthcare, public affairs and sports and entertainment sectors achieved the highest operating profits. And the top three regions for profitability were the Midwest, Northern California and the Northwest. Six of the nine regions averaged in excess of 20 percent operating profit, with the Southwest, Northeast (excluding New York) and Southeast the exceptions.
The 31 firms with healthcare practices participating in the survey reported the highest operating profit, at 25.1 percent and the highest revenue per professional at $215,000. The 16 public affairs firms had the second highest operating profit (24.7 percent), while the firms with financial and investor relations practices reported the second highest revenue per professional ($211,000). Firms in the travel, professional services and beauty and fashion sectors had the lowest operating profits—all under 20 percent.
“Knowing what specialties are most profitable can give tremendous insights to firm CEOs looking to develop new sectors or expand others,” says Gould.
The 15 firms from the Midwest achieved an average of 24 percent operating profit and revenues per professional of $195,000. Northern California firms had the highest rate of revenues per professional, at $229,000, followed by New York $213,000. Firms in the Southwest had the lowest level of revenues per professional, at $159,000 while firms in the Southeast had the lowest operating profits, at 17.6 percent.
Copies of the full Benchmarking Survey will be distributed initially only to agencies that participated in the survey—until September, when copies are available to any agency requesting a copy.