Are Creative Agencies Too Optimistic?

Are Creative Agencies Too Optimistic?

Simon QuarendonChief Commercial Officer, Selbey Anderson
Are Creative Agencies Too Optimistic?

Ever the optimists, the marketing services industry's creative agencies may have scored an own goal when making its predictions for 2023.

According to Moore Kingston Smith’s ‘Annual Survey 2022’, agencies are hoping to achieve somewhat racy average profit margins of 14% but accompanied by somewhat more pedestrian growth rates of 6.75%. 

MKS Annual Survey Now in its Thirty Third Year 

The results of the Survey (or the Financial Performance of Marketing Services Companies Annual Survey 2022, to give it its full name) are keenly awaited by the industry each year and the launch event, held at BAFTA in Piccadilly on December 1, was well attended. 

Trawling through over 250 agencies’ financial results downloaded from Companies House must be a thankless task, but the resultant survey makes for interesting viewing.  

Who can’t but marvel at those agencies in MKS’s ‘Hall of Fame’ who spend no more than 55% of their gross income on employment costs and record an operating profit margin of >20% and generate at least £120,000 of gross income per head!  

Most of the financial results analysis is based on 2020 figures which seems like eons ago. So the accompanying outlook survey that MKS carry out as part of this work is far more illuminating as this asked agency leaders to make their predictions for 2023.  

And what a bullish lot we are. Or deluded. 

It’s Better To Travel Hopefully…

The industry predicting average annual profit margins of 14% looks a tad optimistic but seems fair and reasonable. After all, most well run agencies should be able to achieve 20%+ without breaking sweat.  

But the predicted 6.75% growth rate, although more realistic, is also more worrisome. Because it means agencies can only achieve that level of profitability by either cutting costs, increasing productivity or achieving greater operating efficiencies. The industry, frankly, doesn’t have much of a record for doing any of those things. 

Of course, even agencies whose revenues are shrinking can achieve double-digit profit margins. But not for ever. At some point that lack of growth will catch up on the agency’s profitability.  

And in fact, even with inflation predicted to fall off in the latter part of next year, in the early part at least, that 6% growth won’t feel like much at all.   

The Great Resignation Becomes the Great Redundancy? 

Most agencies have employment costs in excess of 60% so if there are significant savings to be made to sustain profitability, the axe will have to fall on staff.  

That’s tough for all kinds of reasons. The one that makes me sad is the realisation that those who leave the industry may never come back. The thought of losing legions of bright, creative and fun people to other industries such as consulting or even worse, software sales, will be a bitter pill to swallow.   

Another area where agencies may seek to make savings is in their use of freelancers. That’s tough for another reason as it reduces the agencies’ flexibility or nimbleness. Freelancers are particularly useful for plugging skills gaps and to help agencies staff up at short notice when unanticipated projects unexpectedly fly in through the door. 

Time for Creative Agencies to invest in decent systems?

The UK is supposed to have the worst record for productivity in Europe. And office workers have poorer productivity levels than say, manufacturing. So the marketing services industry must be positively snail-like. Which it is. Most agencies’ use of workflow technology is limited to standard off-the-shelf packages covering office, accounts, production and so forth.  

With single-digit growth attempting to ‘power’ double-digit profitability, agencies might now need to take a long hard look at how they can speed up throughput, either by digitalising processes or re-engineering them.  

For example, many PR agencies still send their clients monthly activity reports. How about they find another way of keeping clients informed on progress; like a self-service portal which offers a near real time view of activity progress? 

Sad to say but the optimists might have got this one wrong. We’ll know either way when MKS present their 2023 Annual Report.  

Simon Quarendon
Simon Quarendon
Chief Commercial Officer, Selbey Anderson

Simon brings a wealth of agency management experience to his role as Group CCO. During a 30+ year career, Simon has built boutique agencies and managed global agency teams. He supports each agency’s senior leadership team by providing advice and guidance around agency commerciality. Simon also acts as Managing Director of Drumhorse, Selbey Anderson’s shared service centre that provides a range of back-office services to the group from Skopje, North Macedonia. He also acts as the ‘C-suite’ sponsor to Selbey Labs.

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