Duncan. I agree completely that my cost assumption will not apply to all agencies. That is one key reason why I provided the spreadsheet model so that individual agencies could apply their own assumptions, performance and cost levels to see what the impact of outsourcing might be.

I would suggest that there are three separate issues here. The first relates to whether the outsourced provider can deliver at a lower cost. Clearly this equation will be impacted by the current cost of the staff employed by the agency as you say. This comparison is shown in the “Income per release: Creation in house; process outsourced” section. Agencies with lower overheads may be achieving better levels of profitability than this model suggests and outsourcing may therefore not offer as great a level of cost saving benefit.

The second is flexibility of cost base. In these uncertain times one potential benefit of outsourcing (depending on contract terms) is risk transfer. Where the service is provided by employees these are fixed costs whereas a service provider’s costs can potentially be linked to volume.

The final issue is the opportunity cost of the staff. The argument for outsourcing would still be compelling if the staff are capable of generating more income in a given amount of time if they were employed on higher value work. This is in addition to the potential motivation, recruitment and retention benefits that could accrue to an agency whose staff were employed doing more creative and less process related work.

Marc. I am slightly unclear if you mean that I have not taken account of the time taken to manage the existing activities of the agency, where everything is carried out in house, or the time taken to manage the service provider if outsourcing is employed.

If the former then this would potentially make the argument for outsourcing more compelling as it would increase the cost of in house provision. If the latter then I agree completely that this time needs to be allowed for though I have assumed in my model that the service provider requires very little contract management. Clearly this would depend on the provider, but I can honestly say that this is the case for RealWire.

In particular, firms that are owned by their staff, especially as partnerships, have the option to flex compensation in line with profitability by paying dividends to staff.

A detailed analysis of 1000 PR agencies by Plimsoll shows the opposite pattern. Smaller agencies are more profitable, and not less, than larger ones. That’s because the small firms that survive tend to have lower overheads (especially real estate) and are able to deliver premium service.