Close-Up: How do you make profit in recession?

Claire Billings looks at the agencies whose financial husbandry prepared them best for the slump.

Last week, the Private Plums survey compiled by Fintellect for Results International showed which privately owned agencies were the strongest financially going into the recession - obviously a huge advantage over less financially secure businesses.

Agencies were awarded a "Plum" for meeting each of the eight criteria, including having an average operating profit margin on gross income of 15 per cent and net current assets exceeding either £250,000 or three months' estimated operating costs.

Seven agencies scored top marks, including CHI & Partners, i-level's owner ILG Group, Beattie McGuinness Bungay, Albion, the Latitude Group and Ptarmigan Media.

This varied list of big and small agencies within different sectors shows that sensible financial husbandry is a more common theme among agencies that won all eight Plums than size or sector.

Keith Hunt, the Results International managing partner, says: "Agencies were agreed on several things. The first was the quality of the people they recruited and then investing in them, the second was capital and keeping some in reserve so you can make sensible decisions - including getting the best people - and the third was having more than one or two people running them with support from mentors and non-executive directors."

Another important factor in achieving high profit margins (all the top agencies' profit margins were higher than 19 per cent) is the size and number of clients, according to Bob Willott, the director of Fintellect.

"Those with eight Plums have really run an efficient operation, which is about having a reasonable amount of sizeable clients rather than a lot of tiddlers that take a lot of effort to service or one big one."

As traditional advertising was hit hardest, many agencies beefed up in more accountable disciplines. CHI became a full-service integrated offering while smaller agencies such as Albion and Kitcatt Nohr Alexander Shaw invested more in digital. The latter also led from the top in its steps to avoid redundancy, with the partners taking a 10 per cent pay cut, prompting the next layer of management to volunteer to do the same.

The top agencies were also united in motivating staff. Albion froze salaries but introduced two performance-related bonuses - one that paid out if the agency did well and one that rewarded individuals. TCS Media, which also performed well, is another that operates on a bonus structure, but it only pays out once the money is in the agency. Kitcatt Nohr maintained its training budget and although it cut back in some areas, the £150-a-head culture budget allowing staff to claim back visits to art galleries or theatre and the like, remained.

Also, one clear advantage of being independent is the ability to write your own rules.

CHI empowered the managers of smaller business units to find their own ways of reducing individual budgets rather than imposing company-wide rules in the way a network might. It also reacted quickly to the needs of its Royal Bank of Scotland client by opening a shop opposite its offices in Clerkenwell, into which its digital and DM activity was consolidated, proving that in order to be profitable, even an agency of 220 people must be nimble and quick to respond to changes in the market.

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AGENCY HEAD - Johnny Hornby, founding partner, CHI & Partners

"When clients started to move spend into accountable media, we were in a position to take advantage because we had already reduced our reliance on advertising to 40 per cent of our business.

"We never had a major redundancy event, but we changed the balance of talent. Our numbers have increased and our media business, MCHI, has grown to 40 people and £100 million billings in two years.

"We had a hard look at all fixed costs; you have to get innovative about how many people need to be in meetings, on planes and on trains. But rather than forcing everyone to go second class, if you're going to a meeting in Scotland and you need to prepare for it, then go first class."

DM AGENCY HEAD - Marc Nohr, managing partner, Kitcatt Nohr Alexander Shaw

"Our approach to managing costs in 2009 started by being frank with our staff. We said we were going to cut back on non-essentials, so out went some parties and a big summer bash. We cut what could painlessly be put off, such as a new generation of computers.

"The partners took a 10 per cent pay cut, followed by the management team who volunteered. Then we offered a nine-day fortnight to those who could conceivably manage it for the six months until October.

"As the four founders still own the company, we decided to hold on to as many people as possible, but sacrifice a little bit of profit. We made what we thought were the right decisions for the longer-term interest of the business."

AGENCY HEAD - Andrew McGuinness, founding partner, Beattie McGuinness Bungay

"We've grown less quickly because of the recession, but we are still growing, which has given us more flexibility because you manage your costs as you grow.

"We've always said spend the agency's money like it's your own and only spend if you think it's worthwhile. We've still had the same numbers of parties and drinks, but people have had to work hard this year so rewarding them this year is still important.

"A big chunk of our profitability comes from payments we only receive if the advertising overperforms on what the client expects. This has made everyone more focused and very clear about what we're trying to achieve and that makes it easier."

DIGITAL AGENCY HEAD - Stephen Rust, chief executive, ILG

"We adopted a 'three C' mantra. Clarity, of where you're going as a business; clients - understand their business issues and be aware that they're struggling as much as you are because if you can stick with them, they will carry you through; and colleagues - stay close to your star performers.

"But the main difference was in our approach to risk because you require greater certainty before making decisions. We kept a close eye on working capital, making sure we had no bad debts and that cash was OK. We also did regular and thorough forward reviews of our finances, because clients were making quick decisions about their spend - cutting it and sometimes axing it. We went from 40 per cent year-on-year growth to flat."

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