Close-Up: Live Issue - What is the best indicator of success?

How reliable is the use of billings in determining the success of an ad agency, Kate Nettleton asks.

The publication of Campaign's Top 100 Agencies report last month revealed a decline in fortunes for a number of the biggest agency brands. Total billings for the top 30 agencies showed a 4 per cent decline on 2005, but many agencies' decline was well into double figures. Yet all those agencies claim to be in robust health.

Part of the problem is that the commission system, from which the billings assessments derive their accuracy, is no longer the standard form of client payment. And, anyway, the billings figures only cover activity in paid-for media, so much digital and below-the-line client activity is excluded.

And with both of these areas in the ascendancy, the fact they're not monitored raises a major issue. "For any reputable business, online spend must account for at least 10 to 15 per cent of billings," Gary Leih, the chairman and chief executive of Ogilvy Group UK, says.

Then the amount a client spends on media is no guarantee of the levels of remuneration the agency is receiving for the work. What's more, as agencies move into new sorts of relationships with clients, sometimes offering confidential consultation or advice that is well beyond the usual definitions of communication, an agency's published client list often only tells part of the story: "We can't assume the clients listed at an agency are their only clients," Leih adds.

So, if billings aren't telling the full story, is there an alternative?

Assessments based on income could be a workable solution.

When the IPA introduced an income-based report in 2001, the anomalies that existed between those who topped the tables according to billings and those who came top according to income were particularly telling.

But adland's willingness to disclose income data was soon stifled by the Sarbanes-Oxley ruling on corporate governance. "We should not be blaming Sarbanes-Oxley," Bob Willott, the editor of Marketing Services Financial Intelligence, says. "Agencies have never been willing to disclose that information and, even if they do, they will always put a gloss on the figures."

Lorna Tilbian, a media analyst at Numis, argues that creative assessment which is based on awards success might be a better method: "Creativity has got to be at the top of the list for assessing an agency's success, because new business comes from new categories of client, which invariably look at the reel. Income is actually a by-product of the creative product and human talent."

Focusing on the awards an agency has accumulated might work as a measure of efficacy, but this method of assessment can easily be manipulated or skewed. The agencies with the time and inclination needed to enter numerous awards would find themselves climbing up the assessment tables. "Sadly, what will not lead to a successful agency is one that wins lots of awards, but loses lots of money," Willott says.

The managing director of Bartle Bogle Hegarty, Ben Fennell, suggests that evaluations of a creative business should be based on a number of criteria, including qualitative assessments of the work, quantitative assessments of the number and satisfaction of employees and the quantity of innovation the business drives through.

All of which makes Campaign's School Reports and our qualitative judgments a more vital barometer of agency success.

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AGENCY CHIEF - Tony Wright, chairman, Lowe

"For some time now, billings have not been an accurate measure. I would say that 80 to 90 per cent of revenue is now fee-based, and that is increasingly capturing agencies' involvement in holistic communications, none of which are included in traditional billings measures.

"London is becoming an international hub, and the work for the international markets is not easily calculated in billings.

"They are a simple measurement that reflected a simpler time in our business. The key barometer now is an agency's ability to produce work based on big successful ideas in a changing communications environment. But that's a less tangible judgment than billings."

FINANCIAL ANALYST - Bob Willott, editor, Marketing Services Financial Intelligence

"Billings have not been representative of the scale of activity of an agency for many years. The key measure is the amount of income, but that sort of information isn't readily available.

"Another key measure is the productivity of the individuals - how much income the agency earns per person and the operating profit margin. That can be obtained from Companies House, but agencies aren't required to file that amount of information. One should never look at one measure alone.

"Financial success is important in the long run, but you've also got to produce a good quality output. Money is not the be-all and end-all, but it's something we can't ignore."

MANAGEMENT CONSULTANT - David Wethey, chairman, Agency Assessments International

"For agencies that are public companies, or are owned by public companies, profit, and growth in profits rather than billings or revenue growth is the acid test. For agencies with aspirations to go public, the same is true. But rising revenue for all agencies is an indispensable symptom of success.

"Global agencies need to keep winning international business, otherwise who needs all those offices? But they also need to flourish in the important markets, as well as win good local business.

"For creative agencies, the work is crucial. Winning business from good clients and brands is vital for agencies of every hue ... but so is keeping strong client relationships, and winning new brands."

GROUP CHIEF - Gary Leih, chairman and chief executive, Ogilvy Group UK

"It's all advertising, whether it's PR, activation, CRM, medical or design. These aspects can't be ignored by viewing advertising through the narrow portal of the traditional definition of an ad agency.

"If you were to go to Companies House, you would find on record the fact that, was Nielsen Media Research to include all of the marketing activities Ogilvy embraces, our 2006 billings would be more than five times what was reported in the Top 100 table. Or, to put it another way, if the figures were correct, we would need to put more than 1,000 people on the street in London, immediately."