Ask the PR M&A expert: Why flat profitability isn’t acceptableBy Bulldog Reporter on July 19th, 2017 | Reading time: 3 minutes
During the economic doldrums following the stock market crash in 2008, “flat” was considered the new “up” for PR firms’ growth and profitability. But that was then and this is now.
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With the economy regaining its strength—and a very tight labor market, to boot—“flat” will no longer suffice. That’s why the latest Gould+Partners Benchmarks Survey—showing PR agency profitability flat for the last two years, at roughly 15 percent—is cause for concern.
The long, flat road isn’t rewarding for agencies
After all, perception is reality. And if the marketplace gets a sense that PR agencies are poorly managed, they may take their business elsewhere. Rick Gould, CPA, J.D., managing partner of Gould+Partners, provides some advice for how PR firms can get back to growth and profitability mode.
What do you attribute to PR agency profitability generally being flat in 2016, compared to the previous year?
Gould: It’s a tough pill for PR firm owners to swallow, but the main reason for flat profitability—or any decrease in operating profit—is totally attributable to an increase in labor costs without a corresponding increase in fees. This is a vicious cycle for many PR agencies: They promote or hire account staff, but don’t make the necessary hikes in their fees that will help fund those promotions and/or new hires.
This is a function of fear because PR firm owners and C-level executives don’t want to potentially alienate the client by asking for higher fees. However, PR firms just dig a bigger hole for themselves—which gets exponentially harder to climb out of—if they continually shortchange their services.
PR firm owners need to be a lot fairer to themselves. When they fail to raise fees to protect their profitability, they play into stereotypes about PR executives being less than financially savvy. That hurts the overall reputation of the industry and—despite tremendous gains in the PR field the last several years amid the rise of digital communications—could set the profession back.
Just remember: When you decide to raise fees, you may lose a client or two. But that’s preferable to losing an entire market, which could be the scenario if you don’t get in the habit of raising fees appropriately.
The report also found that staff turnover averaged 22 percent in 2016, compared with 21 percent the previous year. Is this an ominous trend for PR firms when it comes to staffing?
Gould: It could very well be if PR firms don’t start to alter their employee retention strategies. There’s a growing number of millennials in the PR industry—and, of course, a significant percentage of them will vote with their feet if they don’t think their work is being recognized, nor do they see a path for promotion.
The onus is on PR firm owners and their top deputies to reconfigure their employee playbook and figure out ways to better engage millennial employees—and all their employees, for that matter, regardless of age or stature in the firm.
Sure, your employees need to feel vested. However, in light of a fluid marketplace, PR firm owners probably need to do a better job taking the time to make sure they explain to employees what’s precisely expected of them, as well as the value they bring to the firm and what the future holds for advancement. At the same time, PR firm owners are the boss, and must act that way if it comes to employees who think they deserve a promotion without having earned it.
Rick Gould is author of “Doing It The Right Way: 13 Crucial Steps For A Successful PR Agency Merger or Acquisition,” and “The Ultimate PR Agency Financial Management Handbook: How To Manage By The Numbers For Breakthrough Profitability Of 20% Or Greater” (4th Edition)