As comforting as this figure might be to all of us working in, or with, the PR industry my own take on the figures suggests that the picture may not have been quite so rosy.  I estimate that a reduction of around 5-10 per cent is probably a more realistic range and is more consistent with David Brain’s analysis yesterday from a global perspective.

This conclusion is based on an analysis of the changing make up of the table and other supporting evidence.

For clarity PR Week’s 2010 league table is based on income generated in calendar year 2009. Similarly the 2009 league table is based on income generated in calendar year 2008. 

Analysis of the league table positions

The table below shows the income that an agency had to achieve in each of the last two years in order to be ranked at the particular positions shown in the league table;

The table shows that to achieve a particular position in 2010 requires significantly less income at all levels compared to the 2009 league table. For instance to be ranked 25^th in the table this year required an income of £7.52m, but to achieve the same position last year required £8.35m, a 9.9 per cent reduction.

Excluding the change at the 150^th position the reductions are between 8.0 and 14.4 per cent with an average of 10.9 per cent.

In producing this table I have made adjustments for new entrants and mergers to make it more accurate:

2010 New entrants

Of the agencies that were new entrants into the Top 150 this year six of them would have been included in last years list had they submitted their figures. I have added these into 2009’s list for consistency.

Mergers

The numbers are also affected by the mergers of Grayling/Trimedia, Ketchum/Pleon and Tonic/Huntsworth Health. In these cases I have also combined the income for the three combinations in 2009’s list as well in order to compare like with like.

Other evidence that doesn’t fit with the headline estimate

Agencies joining and leaving the list – is it a fully representative sample?

It would appear that Stephen Waddington’s challenge to the industry to submit their numbers for the benefit of all has gone unanswered by some. 30 agencies (excluding those that have merged) that were in the top 150 last year do not appear in the 2010 league table.

Between them these agencies had total income in 2008 of £67.2m and varied in size between £13.80m and £1.13m. Given that the 150^th position agency in the 2010 league table has income of £0.44m these agencies would have needed to have suffered a reduction in income of between 61 per cent and 97 per cent to have not made the cut.

This seems highly unlikely and what I suspect is more likely is that these agencies just didn’t submit figures this year. Obviously individual agencies could have any number of reasons why they chose not to, or were unable to, submit figures. However the absence of 20 per cent of last year’s list begs the question as to whether relying on just those who have submitted represents a valid sample. Have some agencies chosen not to submit numbers for fear of how they might look? Is the table therefore more likely to be biased towards those that performed better?

It is impossible to calculate a sensible estimate of the impact of these absences, but it does seem reasonable to question whether the sample, that the 0.75 per cent growth figure was based on, is truly representative.

Performance of the major Marcoms groups’ PR brands

The major global Marcoms groups that publish figures for PR specifically performed as follows in 2009:

WPP is organic change from 2009 analyst report
Interpublic from PR Week article 17 March 2010
Omnicom is organic change from 2009 analyst report

It is obviously possible that the UK elements of these businesses performed better than the rest of the world. However given that the UK recession was amongst the longest and deepest and in the absence of any specific data to the contrary, I would take these figures as they stand.

Between them these three groups account for approximately £2bn in PR revenues worldwide and these figures would also indicate a reduction of approximately 5-10 per cent.

Conclusion

It was clearly going to be a challenge for PR Week to pull together a robust analysis this year due to the optional submission nature of the list. However I think there is significant evidence to suggest that the headline performance of slight growth is more than a little misleading.

But what do agency heads think? Is my estimate of minus 5-10 per cent nearer the mark?

To put these figures in context I thought I would delve a little further here and look at relative sizes and then look at the market’s view of PR via their share price performance.

Size

Income

The combined PR income of WPP, Interpublic and Omincom was still approximately £1bn in the first half of 2009 (though this includes Interpublic’s event marketing and branding business) and this in turn represented around 11% of their overall total revenues of around £9.5bn. This compares with approximately £115m of PR based revenue for Chime, Huntsworth and Next Fifteen combined in the same period which represents the majority of their circa £165m of total combined revenue. So the big three’s PR income is around 9 times more.

Market capitalisation

The combined market capitalisation of the three larger groups is approximately £16bn as at 7th September 2009 compared to approximately £300m for the three smaller ones. Over 50 times greater.

So given their relative size the results of the larger groups are a much stronger indicator of the overall global PR market’s current performance. However the higher proportion of PR income in the income of the smaller groups arguably makes them a better indicator of how the market perceives the PR industry’s prospects given that they are all (Chime excepted) suffering a reduction of PR income of broadly similar levels.

Share Price movements in 2009

The graphs below show the movements in share prices of these same companies since the start of this calendar year. (Again you will probably need to view the actual files themselves – graph 1 – showing Chime, Huntsworth and Next Fifteen, graph 2 – showing Omnicom, Interpublic and WPP).

Source FT.com

Source FT.com

The smaller groups that are either predominantly or wholly PR based (Chime, Huntsworth and Next Fifteen) have all outperformed the larger, broader, Marcoms groups during this period. Chime is up to over three times its level at the start of the year and Huntsworth isn’t far behind. Next Fifteen is also up around 60% despite predicting a significant fall in revenues in the first half of 2009. In fact their share prices are back to similar levels to where they were before the recession started.

This compares with increases of around 25-40% for the larger Marcoms groups. They have all therefore outperformed the market generally with the FTSE100 up approximately 10% and the DOW about 5% in the same period.

Of course given the difference in size the increases in the values of the larger groups are much greater in absolute £/$ terms than the smaller ones. However it is still interesting to note that these figures imply that the markets’ perceptions of the PR industry’s prospects has improved considerably over the last six months.

All of which suggests a healthy expectation of the industry’s performance in the coming months. Let’s hope they are right!

Sources/Basis

The analysis is based on publicly quoted figures included in investor presentations, interim and annual reports, SEC filings and in the case of Next Fifteen for 2009, analyst forecasts. Where possible the growth rates represent like for like organic growth excluding the impact of currency movements or acquisitions/disposals. Exceptions to this are Omnicom and Next Fifteen for whom these figures are headline changes as they do not disclose the impact of these items. Also Interpublic’s figures are based on their CMG division which includes their event marketing and branding businesses. If anyone is interested in the chapter and verse just contact me.

1. Ranking who are the largest (by income) PR Agencies in the UK
2. Showing how the PR industry is performing and the strategies that appear to be employed 

Given that a substantial number of the largest entrants do not submit audited numbers (we will call these the Sarbanes agencies) I can understand why some have criticised its validity for the first use. Though I would humbly suggest that it is likely that the majority of the agencies that don’t submit figures would still occupy similar places to those estimated. Just not necessarily in the specific order. 

But I definitely think the table has value for the second use. Allowing for agencies that have not submitted figures, or only have figures for one of the years, there are still 121 agencies in the list for which full figures have been supplied (we will call these the Audited agencies). These agencies account for approximately 60% of the combined income of the Top 150 and around two thirds of the staff. As a sample of the performance of the industry this is still a significant snap shot. 

So I am going to leave the debate around point 1 to others and focus on the areas I discussed on the podcast around point 2. 

What do we find? 

Summary table:

Income

Pretty consistent. And don’t think that’s because the Sarbanes estimates are all just the same. In fact the estimates range from a 22% reduction for one agency to a 36% increase for a couple of others.

Staff 

Again fairly consistent and again the estimates for the Sarbanes agencies do vary a lot from a reduction of 29% in one to an increase of 24% in another. 

Different strategies 

But it is when you dig deeper, as I stated in the podcast, that you find the really interesting numbers. 

Here are tables that stratify each of the groups based on their change in staff numbers year on year.
 

A “Significant increase” with regards to staff numbers is defined as 5% or more; “Little change” is defined as 0-4.9%.

What you can see from the tables is that they are consistent in showing the following:

- The Reduction group is the largest by value of income in both cases. By value almost half of agencies reduced headcount in 2008 according to these numbers.  

- The Reduction group increased income per head by the biggest percentage – 15% in the Audited agencies case 16% in the Sarbanes case. 

- The Significant increase group achieved the highest income increase in both cases (19% Audited; 22% Sarbanes) but the smallest increase in income per head – 0% Audited and 8% Sarbanes.  

Analysis 

1. The data consistently tells the same story whether audited or estimated. This is despite the significant variability in those estimates. 

2. The headline numbers hide a wide variation in strategies that agencies have apparently being employing:

- Staffing up for growth
- Maintaining staff levels and apparently looking for margin improvement
- Reducing headcount to enhance profitability significantly 

Implications

The question this poses is which of these groups are best placed for this year?

Have those that have gone for staff growth acquired the cream, and those with the most marketable skills, and so will be best placed to weather the storm? 

Have those that have gone for maintenance taken the right route as their teams and their client relationships may therefore be the most stable? 

Or have those that have gone for an early reduction in headcount made the right call by reducing their cost bases before the recession bit the hardest?

I would be very interested to know the thoughts of those of you who have first hand experience of this discussion.

Podcast can be found here and the Top 150 2009 can be downloaded by subscribers here. 

I will be publishing my analysis behind some of my comments in the next couple of days for anyone who is interested in more detail.

Update: Embed code now available so view podcast below.

Firstly, and very importantly, I would strongly suspect that everyone so far in this conversation sympathises greatly with those who are suffering the “human” cost of the recession pointed out by Linda in the comments. 

I also I agree with the point raised by Stephen Davies – we have got fat. The West has consumed and consumed, fed through a diet of credit financed by the East to feed its own desire for economic growth and facilitated by bankers’ personal greed. My personal favourite observation of this is the massive growth in storage centres. We have all bought so much “stuff” that we have to hire somewhere to store it! We are therefore going to have to have some degree of “pain” while we lose the weight. 

It seems to me the key point of the post though is not whether the recession is causing/will cause suffering – unfortunately that is a given – but whether an attitude of despair or denial is likely to improve the situation? 

In this regard I find myself agreeing with the quote that Bill highlights “we can have a depression if we really want one”. The problem is we haven’t had a recession with 24/7/365, always on, accessible from everywhere, fighting tooth and nail for attention, media coverage. The internet was literally in its infancy and mobile telephony and 100+ channel broadcasting were not widespread in 1990-92 so it was arguably easier to try and remain positive. In the face of such relentless negativity it is easy to see how people despair. 

What we need is leadership. Leadership of the kind Barack Obama showed in his Inaugural address – things will be tough, hard work will be needed, but if we believe in ourselves we can achieve great things. For me the key distinction highlighted in the piece Linda links to is action. Making decisions, taking opportunities, changing, responding, not just accepting. This is what leadership is all about. We might make mistakes, but at least we tried to ride the wave of change, not let it wash over us. 

Unfortunately Mr Obama is a bit of a one off. However in our own industry it seems to me that posts like these from Stephen are trying to show leadership by asking us all to focus on the positive. As an accountant, and therefore a bit of an outsider, I am inclined to think that the PR industry, as communications experts, has an opportunity to lead the way in trying to get a more positive conversation started.

Price in this equation is the Price a receiver of PR pitches pays per story they subsequently produce. Before I expand on this a bit of background. Andrew Smith posted last Friday on the topic of pitching and the frustration journalists experience with activities such as phone calls asking “did you receive my email”, the latest being Charles Arthur at the Guardian.

As well as being a chartered accountant I am also an economics graduate (sad I know) so I thought I would try to provide a Freakonomics like perspective on this issue – hence the equation. (By the way if anyone is as sad as me and wants some more detailed graphs etc relating to this analysis then please just let me know ) 

Before someone points this out for me I want to state categorically that no matter how hard we (RealWire) try to achieve great results in this area we are also bound not to get it right 100% of the time either!  In fact we have discussed this internally and have actually started implementing some changes to our procedures today on the back of this debate to hopefully improve our performance in this area even more. 

Getting your story covered is an issue of supply and demand

Supply – the stories pitched by PRs.

Demand – the journalists, bloggers, editors, publishers and broadcasters need for interesting stories for their readers/audience to help fill column inches, web pages, airtime.

The receivers of news choose to write, talk about or publish the story and therefore it is they who are making the “purchase”.

The Law of Supply and Demand

In a market supply and demand are brought into equilibrium by the price mechanism.

Suppliers want to supply more product as the price rises. Consumers demand more product as the price falls.

At the equilibrium price (PE), the equilibrium quantity (QE) is produced and consumed ensuring an efficient allocation of resources.

The “Price” of a story is a function of the time invested and interest level

From a receiver of news perspective i.e. editor, journalist etc I would suggest that the Price that the receiver of news is prepared to pay to “purchase” a story is the time I have to spend per story that I talk about or publish i.e. the equation at the start:

Investment of time includes the time it takes to the review emails I receive, telephone calls made to me – chasing, pitch or otherwise – and meetings, interviews etc.

News market segmentation

The news market though is not a homogenous one. Not all receivers of pitches have the same level of demand.

(It is also worth noting that demand for PR pitches probably shifts on an almost minute by minute basis depending on the availability of other material for articles, blog posts etc but I think I should leave the concept of elasticity of demand and substitutes for another day!)

In demand journalist (Charles Arthur) scenario

The most in demand journalists are highly likely to be generating articles on their own without needing to rely on PR pitches as much for their material. Consequently their demand for pitches is low and consequently the price they are prepared to pay is low – see graph above.

The PR community on the other hand wants the most in demand journalists to talk about their pitches the most and so these journalists probably get sent the most emails, receive the most calls and yet will use the least stories because their demand is low. The effect being that the PR suppliers are expecting this market segment of consumers to consumer a high quantity of product at a high price.

The result – excess supply of pitches in this market segment.

Market implications

In reality there are multiple demand curves as there are many different types of receivers of news.

The best performing suppliers will either be the ones that are able to lower their prices across the board for all receivers and/or ones who segment the market such that they charge the right price and supply the right quantity in each.

For example a publisher of a niche market website publication who has limited in house resources to produce content may see pitches as a good source of material and therefore be prepared to pay a higher price.

Implications for the PR Industry

So how should PRs (and RealWire) seek to improve the situation for Charles and all the other receivers of releases?

Based on my formula above the Price can be reduced by

• Decreasing the investment required of the receiver
• Increasing the proportion of interesting stories they receive

Decrease investment:

To achieve this you need to do things like:

• Make sure they are as relevant as you can make them
• Ensure that the title tells the story effectively, reducing time to establish interest
• That they are in a format that makes receiving easy e.g. no attachments.
• Give them options for how to receive the pitch e.g. RSS

If you have taken the time to do these things well it is more likely that the recipient will invest the time at least reading the subject header of your email. It is then also a question of tracking usage to see if the recipients of your pitches cover any of your stories and trusting that if you have done these things well you don’t need to call everytime.

Effect? Reduced investment on the part of the recipient through reduced emails, less time to establish interest in the story and reduced phone calls.

Increase proportion of interesting stories:

This is clearly a trickier area as a lot is about message, creativity and having compelling stories to tell. I won’t get into what makes for a newsworthy story here as others could cover that far better than I.

However there are other ways of increasing the interest in your story such as using multimedia content – images, audio, video – including links to relevant websites for further information, and including background documents such as technical specifications.

Conclusion

The provision of pitches by the PR Industry to the receivers of news would appear to suffer from a significant level of inefficiency in the allocation of resources. This is due to PR suppliers charging too high a price for a given level of demand. Over supply to the most in demand journalists leads to frustration for them, and a lack of productivity and efficiency on the part of the PRs, causing reduced profitability.

To improve this situation the industry needs to invest, either internally or via external suppliers, in ways of reducing the price and/or correctly segmenting the news market such that each pitch can achieve the maximum return for the time invested.

As I have already commented, profitability is much harder to get figures on than income. However if one uses income per staff member as a proxy you can start to build a model of the underlying picture. 

The table below summarises the income per staff member of the 120 agencies within the 2008 Top150 that are based in London or the Home Counties. I have selected these on the basis that they should have relatively comparative cost bases - all things being equal – a simplifying assumption I accept. 

PRWeek Top 150 Income Per Head

The combined fees of these 120 agencies – £721m – represents 92 percent of the whole of the Top 150.  

So what do these figures tell us about profitability? An MD of an agency – name withheld – told me recently that £100,000 per staff member was a target figure to achieve circa 20% profitability. It also happens to be the overall average for these 120 agencies – coincidence? Anyway having reviewed the staff costs and margins disclosed in a few of the larger agencies’ accounts I suspect these figures may be a bit on the aggressive side. My guess is nearer 10 – 15 percent at £100,000. 

Now obviously different agencies will have different cost structures e.g. premises costs could vary significantly depending on location, but they would suggest a cost base per head of around £80,000-£90,000. 

Fight the recession; increase efficiency 

From the table we can see that this means that as many as 66 out of 120 agencies might have been struggling to do much more than break even in 2007, the year these figures would have related to (i.e. ones with per head fees of below £90,000). These agencies have a combined income of £206m and employ approx 2,800 people i.e. one in three of the staff in these 120 agencies. 

Others have already asked how the recession will affect the PR industry. The above analysis would suggest the first question to ask in return might be how does the industry become more efficient and increase its fee income per head at the same time? 

Now I am not naïve. I realise that unfortunately these numbers may suggest that there could be some pain on the way, in terms of potential job cuts, for some amongst these firms. However I prefer to drink from a half full glass and see this challenging time as potentially an opportunity for the industry to try and improve this situation in a positive way. 

Outsource process work; focus on better audience engagement 

I would suggest that there are two areas that could be focused on. Firstly **disclosure here I have a vested interest in this** the industry could benefit from making better use of outsourcing solutions and technology to fulfil more process driven requirements – administration, database building and maintenance, distribution, tracking, reporting, project management/collaboration etc. 

This would increase the flexibility of its cost base in these times of uncertain demand and benefit from the potential for these organisations to have better economies of scale and potentially lower overheads and people costs, particularly if they aren’t located in the South East. 

The second is to focus on the areas where PR can achieve the most value for the time spent. IMHO (and apologies here to anyone who thinks who is this accountant to tell us PR professionals how good PR works!) I would suggest there is greater value to be secured, for client and agency, by spending more time on: 

- identification of the dialogue/s organisations should be having;
- better targeting of the relevant communities they should be conversing with;
- using their creativity to engage with these communities in a more effective and influential way; and
- listening to and learning from these conversations and – to the extent that one can – measuring them. 

Perhaps this seems like stating the obvious, but I do wonder what proportion of a lot of PRs’ time is actually spent on these activities compared to process tasks as a survey in PRWeek found last year. 

A high proportion of this process based work is carried out by more junior staff. A great opportunity exists for instance to employ this capacity in these higher value areas in helping clients engage in the online world, as it is these very staff that are often most comfortable engaging and conversing in online communities. 

Greater value; increased profitability 

The effect of these two things would be to increase the potential value per head on the one hand and free up the capacity to do more of this higher value work at the same time. It would also have the added benefit of potentially more motivated staff that are doing more creative work. The top three causes of job dissatisfaction in the Aurum survey being “repetition of the same tasks”, “length of working hours” and “volume of administration”. 

My detailed analysis – worked example can be downloaded here, spreadsheet tool here – would suggest that the following could be achieved: 

1. More value for the client due to time being spent on added value activities.
2. Improved margins for the agency.
3. Increased motivation and productivity from staff due to reduced hours and more interesting and rewarding work. 

What do those who have first hand experience of this think? Am I living on a cloud with the proverbial cuckoo?

At webitpr we have been so busy with service and other developments that we haven’t had time to do anything quite as lengthy or creative. We have though made a commitment to send up to 10 releases for free each month next year for charities that our clients are involved in. As a treasurer of a local charity myself I think 2009 will be particularly challenging for these organisations and so we thought if people can’t help as easily with cash then perhaps we can give some time. Any client of ours who would like to take advantage of this offer just let us know.

Our other news for 2009 is that we will no longer be called webitpr. From the 2nd January 2009 we are changing the company name to Realwire Limited. Our service has gone by this name for nearly a year now and the company name change is being done in response to feedback from our clients to better reflect who we are and what we do – a real group of people helping them to get value from a wire service.

Nothing else is changing just our name – same owners, same team and same service.

I may find time to sneak away and write a few posts during the break, but in the meantime have a great festive period one and all.

Best Christmas song ever IMHO!

1. WPP – £81m (Hill and Knowlton, Finsbury, Burston Marsteller, Cohn and Wolfe, Buchanan, Ogilvy, GCI, Clarion)
2. Omnicom – £62m (Ketchum, Fleishman Hillard, Porter Novelli, Gavin Anderson, Pleon, Fishburn Hedges*)
3. Huntsworth – £57m (Citigate, Trimedia, The Red Consultancy, Grayling, Huntsworth Health, Haslimann Taylor)
4. Bell Potinger – £53m (part of Chime Communications**)
5. Brunswick – £44m
6. Financial Dynamics – £42m (part of FTI Consulting)
7. Interpublic – £36m (Weber Shandwick, Golin Harris)
8. Publicis Groupe – £28m (Freud Communications, MS&L)
9. Edelman – £21m
10. Havas – £21m (Maitland, Euro RSCG, Cake)
11. Next Fifteen – £19m (Lexis, Bite, Text 100, Inferno)
12. College Hill – £13m
13. M Communications – £10m
14. The Photon Group -  £10m (Hotwire, Frank PR)
15. Lansons Communications – £9m

* Fishburn Hedges is owned via BBDO Worldwide
** WPP holds a 21.8% stake in Chime Communications
Analysis based on company websites and/or publicly available annual reports.

Between them these 15 account for £505m or approximately 65% of the total fee income of the Top 150 of £781m. As you can see of the Top 10 only Brunswick and Edelman are not part of a wider group.

So why the title of the post? I suspect you have already worked this out, but if you haven’t it is because if each parent above were treated as an individual entry then the number of entries on the rankings would fall by 25. This revised listing would then fit the Pareto principle a lot more closely.

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?