According to recent research from PR-focused merger and management consulting firm Gould+Partners. the public relations industry began hitting some growth hurdles last year, with marked slowdowns in billing rates and net revenues—presenting challenges not only for agency management trying to keep clients well served and profit margins maximized, but also for owners who want to drive the value of their firms up for a possible merger or acquisition in the future. Gould+Partners managing partner Rick Gould, CPA, J.D., recently took the time to respond to some questions from Bulldog Reporter to help agency execs address both problems in this debut of a new Bulldog column, “Ask the PR M&A Expert”:
Bulldog Reporter: PR Industry growth in 2015 was 6.6%, down from 7.8% in 2014, according to Gould+Partners. What do you attribute to the decline and how can agency owners start to turn things around financially?
Rick Gould: Regarding the decline, one reason is that productivity is down, with a 90% goal not being met by most firms. Many firms have utilization as low as 70%, which is unacceptable. There is no reason that account executives, who are not part of management—or who not involved in new business—should not be billing 90% of available client hours. Available client hours are typically 1,700 hours annually. At the same time—and this has been a worrying trend—firms continue to give raises to their employees, but don’t boost their rates with clients to compensate for the increase in staff salaries. There are a few things agency owners can do to reverse the decline in growth. One is to raise retainers to align with an increase in salaries. Firms can also make better use of time management software tools and time analysis, which should cut down on scope creep/overservicing. For that matter, agency owners probably need to take a close look at whether it makes sense to adopt marketing automation tools, which are software platforms designed to match content (websites, email, social media) to lead generation and are starting to penetrate the PR field.
What are the major priorities for agency owners who want to cultivate the second tier of management ahead of a beginning an exit strategy?
Gould: This is a key element of any merger or sale. Serious buyers are not necessarily looking at the owner/founder who is selling the business, but his or her second tier of management that will run things following the sale and be responsible for taking the firm to the next level financially. Owners will need to incentivize key executives with stock-options plans, “phantom equity”—which, broadly speaking, is the right to a cash payment at a designated time or in association with a designated event in the future—or fairly sizable bonuses that are baked into one’s contract, in terms of reaching XYZ numbers. When cultivating the second tier it’s also extremely important to be totally transparent with managers about the value of the firm as the sale proceeds and what factors in the future might impact the value of the firm, positively or negatively.
What are some of the ways that agency owners can start to monetize social media in order to bolster their overall profitability?
Gould: Social media certainly is growing as a percentage of net revenue for more and more PR firms, so the onus is on PR agency owners and C-level managers to generate more earnings via social channels. Perhaps the most important thing to do is budget for social media and create a road map for costs associated with social media campaigning and messaging. Social should not be separate item, but part of the overall budget plan. And remember that setting the budget is one thing, sticking to it is another, and that’s where the challenge comes in. It’s also crucial that agency owners educate their clients on both the opportunity within social media and, of course, the costs. Agency owners need to demystify social media and disabuse clients that deploying social channels is free. Clients need to know these things upfront and be perfectly clear on what expenses they will incur to take advantage of social media. At the same time, you need to set models for how you are going to bill clients for those additional services required by social media, such as software technology and measurement tools. Failing to do all the things when it comes to social media services—similar to what I mentioned in the first question—plays into the over-servicing that plagues the entire PR field.
This article marks the debut of “Ask the PR M&A Expert,” featuring Rick Gould, CPA, J.D., managing partner of Gould+Partners, which specializes in M&A for PR firms. Gould is author of the recently released, “Doing it the Right Way: 13 Crucial Steps For a Successful PR Agency Merger Or Acquisition.” “Ask the PR M&A Expert,” which is slated to run periodically, will focus on myriad issues facing PR agency owners and C-suite executives, such as valuations, profitability, key executive retention and utilization. Readers are welcome to submit their questions to tap into Gould’s M&A expertise.