For anyone running a creative agency, Kingston Smith’s annual survey of the marketing services industry is the big daddy. It tells you everything you need to know about how well your agency is doing compared to everyone else’s.
Unlike those occasions where your competitors tell you everything is going ‘really, really well, yah’, the Kingston Smith survey is based on hard facts. For some agencies, the 2019 Survey (which was published just last week) those facts may make for uncomfortable reading. Here’s our take on this exemplary piece of work. The industry achieved a healthy level of revenue growth across the board (up 5.3% last year so nearly three times that of the general economy) but it simply could not translate that growth into healthy profits as rising staff costs more than wiped out any would-be gains. Most agencies – particularly those operating in the branding and design sector which was pummelled last year - were caught between a chronic talent shortage, coupled with the rising cost of freelancers and a growing number of clients intent on using the threat of in-sourcing as a bargaining chip when discussing pricing. These forces conspired to push down operating profit margin across the industry for the third year running from 12.2% in 2017 to 11.1% last year. So far so reasonably healthy you might say? Well, yes and no.
The Top 50, which represents the crème de la crème of the industry had a particularly torrid year last year, with gross income growth amongst these err, industry pace setters, slowing dramatically from 10.3% the year before to just 6.4% last year. That’s the first time this particular group has not posted double digit growth since 2015. The slow down didn’t mean their spending went down too. On the contrary. Employment costs increased to 62.5% of gross income. Kingston Smith considers this well above the 55% it believes most agencies should set as a target for this particular KPI. Clearly all agencies will continue to wrestle with the staffing conundrum, to be made more difficult next year when sweeping changes in employment legislation makes using supposedly more flexible freelancers more expensive. So much for the gig economy.
Of course, there are some bright sparks that are showing the rest of us how to do it. Entering Kingston Smith’s ‘Financial Performance Hall of Fame’ may not set any creative directors’ hearts a flutter. For finance directors, however, this would surely evince wholly different emotions. Gaining admittance means hitting some pretty impressive goals including spending no more than 55% of gross income on employment costs, racking up a 20%+ operating margin and generating at least £120,000 of gross income per head.
The fact that the number entering the hall of fame increased by two agencies over the previous years – despite such a challenging economic environment; that almost half were independently owned (as opposed to the previous year when most were group-owned agencies) and that the agencies were drawn from across all sectors – with the exception of advertising when no agency made the grade – proves that just about anyone can do it. Well almost.
Entering this particular Hall of Fame is a real achievement. It calls for an unrelenting and unswerving focus on the agencies’ key performance indicators. And being prepared to take those difficult decisions when those KPIs are breached.
Of course, running a tight ship is not just about the Finance Director saying ‘no’ all the time. As my business partner, Selbey Anderson’s CEO Dom Hawes consistently tells our agency MDs, a strong financial performance gives you a platform from which to say ‘yes’ sometimes too. ‘Yes’ to business development teams seeking permission to decline pitching for inappropriate clients, ‘yes’ to investments in training or IT upgrades, ‘yes’ to sales outreach campaigns that could take the agency into new areas.
My view is that Kingston Smith does the UK’s marketing services industry an annual favour. It casts light on an area that most working in the industry are either splendidly ignorant of or attach far too little importance to. Is Selbey Anderson itching to enter that particular Hall of fame? You bet we are.
The Kingston Smith 2019 Annual Survey can be downloaded here. (Cost £520 to non-clients)