Proactive PR CEOs Keys to Greater Profits

By Rick Gould, CPA, JD

This is a condensed version of the op-ed that appeared on CommPro.biz on July 1, 2012. To read full article click here.

I stand by my passion and conviction that PR agencies can attain at least a 20% bottom line with proper counsel and guidance, can build ongoing value in the firm, and can ultimately sell the firm for a price beyond their wildest expectations.

The question many of you are asking now is “how”?

The answer requires more than a “business” philosophy. PR executives don’t normally think or act from a “business,” can-do-it philosophy or standpoint. The way the 20%+ profitability is attained is by shifting to a determined, goal-oriented, can-do-it mindset. A 50-55% labor cost and 25% operating expense costs guarantees at least a 20% operating profit. You CAN do it. You SHOULD do it. You NEED to do it to survive, prosper and grow your firm the right way.

For your firm to grow, to retain top talent, and to employ cutting edge technological and digital capabilities, you need to have at least a 20% operating profit. Your task is to get your clients to understand and see the win-win value in this. They should embrace this. If they don’t, then you need to work harder in building your case. I can help you do that here.

Let’s start by discussing key benchmarks.

Rise of the Proactive PR CEO

First, what is happening in the PR industry is the transformation from the “reactive” to the “proactive” CEO. Proactive CEOs of PR agencies are shifting their thinking and priority to the business of their business. They are looking at the benchmarks more than they ever have. They are looking at productivity/utilization. They are focusing on all of the components that are needed to attain at least 20% profitability. Proactive CEOs are those wanting to make change, provide top-line service AND be rewarded for the efforts.

PR Industry Benchmarks: The Survey Results

This year’s Benchmarking Survey/Report results showed signs of significant improvement. Here are some key findings:

• Revenue Per Professional crept up from $206,000 to $210,000.
• Operating Profit for the <$3 Million group was at 20.5%, mainly due to 22.3% overhead, well below the 25.5% for all firms.
• The average for all firms participating regarding Labor was at 53.4%.
• Operating Profit was at 19.2%.

These are all positive signs, likely resulting from a more disciplined fiscal approach.

I believe the reason for the spike in operating profit was tight, management-controlled labor and overhead, an increase in billing rates, and a rise in minimum fees… all adding to the bottom line.

Lessons from “Model Firms”

A key indicator in my benchmarking analysis comes from looking at what we call our SGP “Model Firms”: ones that attain 20%+ operating profit no matter what the state of the global, U.S. or PR economy. These firms have the very respectable ability to hold labor costs at 50% and operating expense/overhead costs under 30%.

I have closely tracked this select group of firms over the past 10 years. These firms, while facing the same challenges in a rapidly changing business world, maintain high profit margins. What distinguishes them is they manage “by the numbers” with laser-like precision. They manage by benchmarking.

Selected Stats of “Model Firms”

Here is a quick snapshot of key stats drawn from my analysis of the industry’s model firms:

• Revenue Per Professional: $222,882
• Account Salaries: 38.7% of Net Revenues
• Freelancers: 2.3% of Net Revenues
• Administrative Salaries: 5.3% of Net Revenues
• Rent & Utilities: 5.1% of Net Revenues
• Average Monthly Retainer: $11,000
• Operating Profit: 27.7% of Net Revenues
• Largest Client: 17.3% of Net Revenues

Key Benchmarking Takeaways

• Raise your billable rates each time you give a raise
• Lock in your second-tier of management
• Control staff turnover
• Control over-servicing clients
• Keep rent expense at maximum of 7% of net revenues
• Retain a full-time or part-time CFO

Bottom line: I have been counseling CEOs of PR agencies for many years to “run your firm, position your firm, and implement the process as if you will sell in the next six months.” Even if you don’t, it is a discipline that will make the firm leaner, better managed and more profitable. The results will be extraordinary. And, equally important, you will improve the vitality of your agency and your own self-satisfaction, pleasure and stature in the industry.