AGENCY PERFORMANCE LEAGUE: The industry has seen a remarkable 71 per cent increase in operating profits, according to this year's survey of agency profitability. John Tylee reports

The bandwagon is rolling again for a healthy number of Britain's agencies - but high staff costs continue to be the spanner in the spokes preventing the return to the heady days of 20 years ago.

The bandwagon is rolling again for a healthy number of Britain's agencies - but high staff costs continue to be the spanner in the spokes preventing the return to the heady days of 20 years ago.

Operating profit margins of the kind achieved during the industry's halcyon days remain elusive. However, some of the newer, fast-growing shops have proved that it's possible to absorb increases in business without significant increases in other overheads.

These are the main verdicts from this year's survey of agency profitability - the tenth of its kind - prepared by the specialist accountant Willott Kingston Smith & Associates using figures taken from accounts filed at Companies House and published exclusively in Campaign.

The survey has a number of general and specific purposes. In one respect, it provides a handy check on the industry's general health. In another, it takes the temperature of the major agencies with data showing whether they are in robust health or ambulance cases.

WKS's overall conclusion is that the industry's general fitness is good, with operating profits having grown by a staggering 71 per cent on the back of a 10.9 rise in gross income. That's to say revenue earned from clients and retained by the agency after deducting external costs such as media. However, staff costs grew by 11 per cent.

Interestingly, some of the year's best performances have been recorded by those with the least sexy reputations. Witness Interpublic's McCann-Erickson, where operating profits leapt from pounds 2.8 million to pounds 7.5 million through a combination of increased income and improved efficiency.

Meanwhile, the agency's profit margins have jumped from 7.3 per cent to an excellent 17.6 per cent. This is well in line with WKS's expectation that well-run agencies should achieve an operating profit margin - the amount of profit expressed as an average of gross income - of at least 15 per cent.

Even Bates UK, despite its ill-starred transformation into a fully integrated agency leading to much poisonous politics and a string of resignations, managed to turn the previous year's pounds 3 million operating loss into a pounds 4.7 million profit.

As a result, it joins the large number of agencies that have succeeded in reducing or containing overheads other than staff costs.

TMP Worldwide, the recruitment agency, reported an enormous surge in profits from pounds 1.2 million to pounds 8.2 million after acquiring the Austin Knight business. However, the group failed to publish consolidated accounts for its UK operations - to the consternation of its auditors - and WKS claims the group showed a heavy loss for the period.

HHCL & Partners continues to justify its accolade as Campaign's Agency of the Decade, translating its sustained growth into more than pounds 3 million extra income and pounds 2.3 million in operating profit without any material addition to its non-staff overheads.

The survey also confirms agencies' growing practice of employing fewer but better rewarded staff. It points out that while employee costs in the industry grew slightly faster than agency income, the overall headcount has not risen in proportion.

Instead, there has been a significant shift towards the hiring of fewer staff but offering higher salary and bonus packages. Compared with the overall 10.9 per cent growth in business, staff numbers grew by only 5.3 per cent.

WKS hails this outbreak of sanity, saying that agencies appear to be heeding its previous warnings of the folly of hiring more staff at the first hint of new business without careful thought about what extra resources are really required.

The trend is underlined by figures showing that the average employment cost per head grew faster than inflation - by 5.4 per cent from pounds 43,210 to pounds 45,546.

Whether what's happened merely reflects the scarcity of talented people is an open question. WKS suggests that what's really taking place is a sea-change, as agencies move towards providing more brainpower to clients having to grapple with an increasingly complex media marketplace.

Some agencies have not simply slowed recruitment but cut back on staff in an attempt to maintain their financial equilibrium. Not surprisingly, some of the biggest cuts occurred in agencies that performed badly in previous surveys.

J. Walter Thompson is cited as a prime example, reducing staff numbers by 82 on static income and lifting its operating profit margin from 0.9 per cent to 10.9 per cent as a result. This added pounds 4.3 million to the meagre operating profit of pounds 386,000 reported the previous year.

At Saatchi & Saatchi, hit by a series of account losses in rapid succession last year, the resulting staff cuts did little to improve profits as income declined by more than 5 per cent.

Grey's figures, however, have left the WKS researchers scratching their heads and wondering whether the agency is putting its most creative work into its accounting procedures.

Although staff were cut by 26 per cent and gross income rose by 34 per cent, operating profit actually went down by pounds 1.8 million to a loss of pounds 319,000.

But that wasn't all. Below the operating profit line appears an unexplained item of pounds 4.5 million 'sundry income', which converted the operating loss into a pre-tax profit for the year. 'Grey should win the 'Financial contortionist of the year' award,' Bob Willott, a WKS consultant, remarks.

Despite much improved overall results, WKS exposes a cloud in the silver lining by revealing that only 28 per cent of the agencies surveyed achieved the 15 per cent threshold in operating profit margin. The average is a depressingly low 8.8 per cent.

Not surprisingly, HHCL delivered particularly healthy margins along with St Luke's, Partners BDDH, Rainey Kelly Campbell Roalfe - before its merger with Young & Rubicam - and the then BDDP GGT.

'While it's good to see average profit margins improve from the dismal 6.5 per cent reported last year, there appears to be enormous scope for further growth,' Willott comments.

Nevertheless, some young agencies have made impressive debuts with Circus and Mother among the top 50, with profits of pounds 580,000 and pounds 469,000 respectively.

Circus scored top marks for productivity by handling pounds 152,000 of client business per head, a result that even bettered the Ogilvy group's figure of pounds 127,554. But WKS advises treating the numbers with some caution, pointing out that the newcomers may be using freelancers to supplement resources who won't be reflected in the figures.

St Luke's confirmed completion of its rite of passage from new kid on the block to serious player with a superb year, reporting a 345 per cent profits rise to almost pounds 2.3 million as client income grew by 40 per cent without the agency having to incur a similar rise in staff costs. But not even St Luke's could catch M&C Saatchi, whose remarkable achievement of gaining top-ten status within five years of its launch was symbolised by an 85 per cent profits leap to pounds 2.7 million.

At the other extreme, Faulds, long regarded as the standard bearer for Scottish advertising, suffered a nasty pounds 794,000 fall in profits after client losses. Output per head dropped to pounds 36,822 as the agency was unable to compensate with sufficient cuts in staff and overheads.

At the same time, the rationale for absorbing Ammirati Puris Lintas into Lowe Howard-Spink becomes obvious with figures showing how deeply the agency was immersed in the financial mire before the merger. Its pounds 531,000 loss was even worse than the previous year when the agency was in the red to the tune of pounds 334,000.

But WKS is adamant that a few disappointing results should not detract from a splendid improvement in agency profits that have also boosted the coffers of their parent companies.

This is reflected in the fact that the cash available to the UK's top 50 marketing services groups rose to pounds 833 million. But it's equally true that those same groups would still have net current liabilities of pounds 561 million outstanding after spending all that cash. According to WKS, this is because some groups have relied on credit from their suppliers to help pay for acquisitions.

Surprisingly, agency directors didn't benefit massively from improved profits. A total of pounds 77.8 million was paid to them, compared with pounds 79.3 million the previous year. Whether this is a conscious act of boardroom benevolence or there are simply fewer directors remains to be seen.

The highest paid directors at 16 agencies earned more than pounds 300,000.

Of these, the top five were employed by foreign-owned groups and the highest paid trousered pounds 1 million.

The lucky winner worked for Y&R before its merger with Rainey Kelly. As WKS points out, it's bizarre that an agency can lavish such cash on a single director when it reported an unimpressive pounds 212,000 profit in its latest accounts after a loss of pounds 2 million the previous year.


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