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A battle to balance growth with costs

Huntsworth's update to the market on Tuesday shed light on an issue dominating the thinking of all agency bosses.

Alec Mattinson:

Alec Mattinson: "One agency boss told me they face a struggle to maintain profit margins as costs rise at an even higher pace than revenues."

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Lord Chadlington's group explained its 2012 revenues have come under pressure, but that it expected a double-digit rise in profits over the previous year due to 'rigorous action' on costs.

The Huntsworth scenario may not be universal - group COO Sally Withey said the cost-cutting was related to the group's transition from small to larger global accounts and aligning costs to this new strategy.

But as the UK teeters on the brink of a triple-dip recession, it is indicative of the ultimate challenge facing agency owners - how to maintain growth without allowing costs to ratchet upwards.

Last year's PRWeek Top 150 Consultancies figures pointed to a buoyant industry - high single-digit income growth is not to be sniffed at against the backdrop of a sustained economic slump.

But one agency boss told me they face a constant struggle to maintain profit margins as costs rise at an even higher pace than revenues.

The Kingston Smith W1 annual survey of the top 40 PR consultancies released last year lends some credence to this argument. While profit margins improved slightly year-on-year, they remain significantly down on pre-recession levels.

The accountancy firm says a 'well-run' agency should have a profit margin of 15-20 per cent - its report put the industry average at 12.8 per cent.

Though we face a stagnant economy and low-inflation environment, a number of agency MDs suggested PR wage inflation is rising at a faster rate than the rest of the economy - the fight for top talent remains intense.

Coupled with an environment where clients are often able to demand more for less and the increasing involvement of procurement, most agencies will never have had to work so hard for their money.

The temptation to cut costs is clear, but do 'streamlined' agencies provide the same service and does the market perceive them in the same way?

Equally, others see expansion as a solution to the low-growth environment in Western Europe. Opportunities in emerging markets look compelling, but where PR remains commoditised margins are painfully thin.

In a struggling economy with no Olympics-style marketing fiestas, 2013 is likely to see disparities of performance across the industry become even starker.

The good news is that PR is still a growth market - but making money in it is not getting any easier.

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