This post follows on from Part 1 and assumes the reader is familiar with it

So how can the world of accountancy help with measuring the value of PR?

Accountants measure value all the time – giving an opinion on a set of accounts or valuing a potential acquisition for a purchaser, or disposal for a seller.

In order to value a company accountants use a variety of techniques. Examples include:

– Multiples of “profits”, where profits can be defined in an alphabet soup of different ways – PBT (Profit before tax), PAT (Profit after tax), EBIT (Earnings before Interest and Tax), EBITDA (Earnings before interest, tax, depreciation and amortisation- phew!)

– Discounted cash flow models otherwise known as NPVs (Net Present Value) using WACC (Weighted Average Cost of Capital), CAPM (Capital Asset Pricing Model) – yes even more letters! – and other tools to work out the discount factors used.

Despite the complexity involved in some of these techniques they all basically pose the question:

“How much money (in today’s terms) will owning this company, or a share of this company, entitle me to in the future?”

What they are all attempting to do therefore is predict the future.

Unless you are Mystic Meg this is clearly an impossible task. There is no way that anyone can predict the future with any certainty and hence any valuation is almost certain to be wrong. But that doesn’t stop accountants doing it everyday.

So when you try and predict the future earnings of a company what are the factors that you take account of?

Clearly there is the current level of profitability as a starting point. You can then go on to consider factors that demonstrate market potential, competitive advantage and barriers to entry such as:

– Market expectations in the future for that company’s products
– IP the company has or is developing
– Market share
– Potential to improve efficiency and hence profit margins
– Management team and their likelihood to deliver the company’s plans

Public/Investor relations plays a role in increasing the “value” placed on a company where these sorts of factors are concerned by communicating these areas effectively.

But in addition to this the key component of a company’s competitive advantage, and hence its ability to make future profits, is the reputation of its brand. If reputation changes then value can be created or destroyed. This is because the change in reputation will affect perception of the very factors that drive value, such as the likelihood of the company exploiting markets, launching new products and the confidence in the management team.

And PR is the custodian of reputation.

So accountants give opinions and value companies and yet, with the greatest respect to my former colleagues and fellow professionals, probably don’t understand reputation as well as PR professionals.

What does this all mean?

Perhaps we need to look at PR “measurement” in a different way. Perhaps we should be looking at how brand values change, share prices move and the changes in profitability of a company’s products and services. We could then try and demonstrate, through a framework, how reputation management and development through PR has contributed to improvements in these areas. This way PR claims the Value of what it has helped to achieve not the activities or even the actions that have occurred.

In Parts 3 and 4 I will try and suggest some practical ways we could perhaps seek to do this.

PR Industry

The total fee income of the PR Week Top 150 2008 is £781m. Within the Top 150 the single largest brand is the Bell Pottinger Group with fee income of £52m. However this is slightly misleading as the league table shows other brands that have common parent ownership separately. If common ownership is taken into account then the WPP plc brands (Hill and Knowlton, Finsbury, Burston Marsteller, Cohn and Wolfe, Buchanan, Ogilvy, GCI, Clarion) would represent the largest single entity with a combined fee income of £81m. Average fee income per head across the Top 150 is approximately £96,000 per employee.

Accountancy industry

All of the Big Four Accountancy firms  – PwC, Deloitte, E&Y and KPMG – have individual UK fee income that dwarfs the entire Top 150.

PwC (2007) – £1,872m
Deloitte (2008) – £1,725m
KPMG (2007) – £1,396m
E&Y (2007) – £1,226m

Total £6,219m – eight times greater than the Top 150.

Their fee income per head is also substantially better ranging from £127,000 per employee (PwC) to £152,000 (Deloitte).

But perhaps more surprising is to consider some of the mid sized accountancy firms. The figures for just three of the larger mid sized firms – Baker Tilly, BDO Stoy Hayward and Grant Thornton – combined actually exceed the Top 150 as well.

BDO (2007) – £300m
Grant Thornton (2007) – £298m
Baker Tilly – £204m

Total £802m

The average fee income per head of these three firms combined is exactly the same as the Top 150 at £96,000 per employee.

Analysis

Two results immediately jump out. Firstly UK plc obviously invests a much greater amount in the accountancy profession compared to the PR industry with the expenditure on financial advice representing many multiples of that invested in PR.

Secondly that individual brands are still seen as key in the PR industry. By contrast accountancy firms are happy to operate as what effectively amounts to hundreds of small businesses under an umbrella brand.

The first will be due to many reasons, not least the legal and regulatory need for financial advice in many situations. However that still exists to some extent with regards to communications as well, particularly in connection with public company investor relations and M&A transactions. It is also likely to be due to the measurable nature of financial advice. If I save you £1m tax or sell your company for a £1m more you can immediately see and value the impact. That age old problem of PR and measurement raising its head again. After a few years working in the PR industry here is one accountant who has no doubts about the value that good communications can add. Anyone who does should perhaps give some thought to whether Northern Rock’s demise was financial or communications led. With the benefit of hindsight which of these two areas of deficit really destroyed the trust in the brand?

I’m not sure I have an answer to the second observation of brand maintenance. Both types of firms have individual directors/partners in whom goodwill is invested and both provide added value advice. However over the years the Big Four in particular have merged/taken over other firms and have eliminated brands from their identities. Had they not done so Deloitte would by now be called Deloitte, Plender, Griffiths, Haskins, Sells, Touche, Ross, Bailey, Smart, Niven and Tohmatsu. Which would be a bit of a mouthful to say the least Why is the retention of identities seen as so key by the PR industry?