Gould + Partners pioneered the practice of benchmarking for the public relations industry in 1987. After more than 35 years of in-depth surveys and analysis, we’ve helped clients evolve their businesses to adapt to changing markets, implement new business practices and apply benchmarking data to ultimately increase profitability and value to their firm. Our annual Financial Benchmarking Report, Billing and Utilization and Industry Growth Report should be an ongoing part of your management toolbox.
If you aspire to create and manage a first-class PR agency, one that not only generates significant profits, but that also creates exceptional firm value, these are the kinds of financial reports you must regularly produce and take into consideration when you make decisions.
Our clients in the PR, creative and digital industries all have a good grasp on running their businesses. Where the benchmarking reports add value is in discovering how their business compares to their competitors. It’s a powerful tool that provides actionable data companies can use to increase overall operational effectiveness.
Some key benchmarking benefits:
Strategic goal setting. Conducting benchmarking at regular intervals provides insight into how competitors perform certain aspects of their businesses successfully. With solid data on that performance, you can set measurable goals and implement strategies to meet objectives that will improve your firm’s value. It’s a good way for firms to look at how other companies in their industry do business and then look in the mirror to make internal changes and shake things up.
|This article is featured in O'Dwyer's May '23 PR Firm Rankings Magazine
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Growth opportunities. Benchmarking is effective for spotting new trends and targeting business sectors that have the potential to generate business growth. Understanding where competitors are focusing their efforts to increase profitability and recognizing industry trends is how quality benchmarking and data analysis pays off. Results then steer plans to accelerate performance and position a firm to take advantage of opportunities.
Spot trends in the marketplace. In the PR, creative and digital marketplace, trends in technology and new client services move extremely quickly.
Monitor progress of business goals. Once the initial benchmarking report is finished and a new strategic plan is in place, the process isn’t over. Benchmarking is a great tool to track company performance in specific areas to make sure any deficiencies are being remedied over time. If the gap isn’t closing a firm can pivot to a new strategy or dive deeper into discovering where the problem lies.
Create a culture of continuous improvement. Benchmarking offers performance metrics for your employees all the way from entry-level positions to senior management. It helps people get a better perspective on how their job performance stacks up against competitors and even inside your firm. Presenting this data in a positive way can incentivize employees to improve their performance to beat the industry averages.
The key to managing your PR agency to earn a 20 percent or higher operating profit is to set the correct benchmark for your key cost and expense categories.
How to target revenue/cost benchmarks
Net Revenue = 100 percent - Net Revenue is “Fees + Markups.”
Direct Labor = 55 percent or less of net revenue.
Operating Expenses = 25 percent or less of net revenue.
Operating Profit = 20 percent or more of net revenue.
While these benchmarks may not exactly describe your agency at present, and there may be structural reasons why you can never get your agency to operate at precisely these ratios in the future, you’ll nevertheless find it helpful to set and work toward a “target” net profit benchmark for your company. It’s also valuable to realize that if you reduce your firm’s labor or operating expenses, you will automatically—dollar for dollar—increase its operating profit.
Setting a target benchmark is useful because it makes thinking about other financial metrics easier. For example, if you set a target operating profit benchmark of 20 percent for your PR agency, it’s easy to remember that your costs-no-matter what- should never exceed 80 percent. The minute you let them climb higher than that, you’ve given up on your goal of netting out 20 percent of revenues.
A critical factor in managing and increasing your PR agency’s profitability is how successfully you can control costs. You can’t do this at all unless you have a strong grasp of the essential performance numbers your agency is making, and you can’t establish and maintain that grasp unless you obtain reports on and then review your agency’s financials each month, or more often.
Which labor benchmarks should you be managing?
Costs are critical in any business, and in the PR business, the single most important category is labor. To control and improve your agency’s profitability, you absolutely must monitor and manage your agency’s labor costs more rigorously than any other line item.
The plain fact is that you may not have much day-to-day control over your agency’s equipment or office space expenses. But the substantial amount you spend on labor, to produce the PR counsel and the PR services you provide to your clients, is almost always within your direct and immediate control. At most important benchmark is revenue per full-time equivalent “professional.” This range should be between $200,000 and $240,000, depending on the size, location and specialty of your firm.
In addition, a staff person’s available client hours and billable client hours is an equally critical benchmark. The benchmark for average available client hours is around 1,700. If a staffer has 1,700 available client hours and they have 1,500 billable hours their utilization/productivity percent is 88.2 percent (1,500 ÷ 1,700).
With benchmarks like this understood and in place, a professional’s ability to command a higher billing rate from clients, or to bill more hours during the year, provides an automatic indication of how big a salary increase they may deserve. Similarly, when agency revenues fall, the benchmarks provide a clear recommendation of how much to cut from the agency’s total payroll, if you are to keep revenues and labor costs within the benchmark model ratio.
There are other key operating expenses to track, by the numbers. These include:
Administrative salaries: These should total no more than seven percent of your agency revenues.
Rent and utilities: Try to keep these expenses to six percent or less of agency revenues. If you must spend more, be very sure the reason is a compelling one.
New business: This is a vital function, but should consume no more than two percent of your agency’s net revenues. If it costs more than this to bring in new business, it’s time to look underneath these numbers to see if you’re approaching the right kind of prospects with the right kind of proposals.
Technology: Computers and software are essential for today’s successful PR agency. But too much emphasis on keeping up with the latest and greatest information technology can easily allow these expenses to run out of control.
Our “model” PR agency keeps its IT expenses to about two percent of net revues. There’s some room for flexibility here, but if this ratio stays too high for too long, management should look behind the numbers to see what’s really going on.
What gets measured gets done
Regular review of your firm’s performance numbers will accomplish two things:
First, it’s well known that whatever indicators you monitor are the ones that improve. What gets measured gets done. So, by monitoring your monthly performance and results, you increase the likelihood of improvement in these crucial areas.
Second, checking your firm’s monthly profit and performance on a regular basis gives you many opportunities to identify a threatening trend in its earliest stages, before it can take hold or get out of control.
The numbers in your P&L are vitally necessary for monitoring your key business ratios and benchmarks. There’s a direct correlation of agencies in which management does not regularly analyze operating performance to agencies that are not successful. Certainly, it’s possible to operate a PR agency successfully with less than full attention to the numbers. But it’s much less likely, compared with agencies that attentively manage by the numbers.
Rick Gould is Managing Partner of Gould+Partners.
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