How does your Revenue Per Head compare?

We’re all guilty to a greater or lesser extent of working in silos. This can certainly be true about how finance departments operate but it’s also true about agencies as a whole.

One very simple way to bridge this gap is by knowing how other agencies are performing and how you compare to your peers across the 3 key per head metrics (revenue; staff costs and profit). We’ll look at Revenue Per Head (RPH) in this blog. We’ll go to look at Staff Costs and Profit in parts 2 & 3.

Using data from the very useful annual Kingston Smith survey of the financial performance of marketing services this can be done relatively easily. In fact I’ve made it easier than that – I’ve prepared some helpful charts. I’ll then explain what actions you could take off the back of seeing how your commercial model compares. Now here’s the data by sector

http://novemberfriday.wpengine.com/wp-content/uploads/2014/04/RPH-2013.xlsx

If you’ve beaten your sector average, congratulations, you’re commercial and operational model is better than most.  It’s still a good idea that you keep, or start, checking the client utilisation levels of your team and the profitability of your clients to ensure the 3 deadly sins of under-estimating, over-servicing and scope creep don’t pull you back. If you’re below the average this becomes more urgent.

A good way of sense checking how you are doing is based on this 4 quadrant model.

http://novemberfriday.wpengine.com/wp-content/uploads/2014/04/4-Quadrant-Graph.xlsx

We’d all like to be to the right of the RPH target. How busy you need to be to achieve that will depend on your ability to charge a premium price as well as how effectively you manage the 3 deadly sins.

To the left of the RPH average and the problem becomes more pressing. If your team is under utilised and your RPH is low you need to investigate whether you’re overstaffed. Check the forecast and the pipeline but if revenue isn’t going to take an upturn soon you may have to take action.

Being busy with a low RPH means you’ve got a bad combination of the 3 deadly sins going on. Check your estimating procedures (who is raising them? Is anyone checking them?): how your team are monitoring progress and if your clients are always asking for free stuff.

This may mean some difficult conversations but at you’ll be doing it based on some data from outside of your own silo.

Trends in Marketing Services Profitability – the Kingston Smith 2011 Survey

 

Every year Kingston Smith (www.kingstonsmith.co.uk) produce a comprehensive survey of the financial performance of the marketing services sector.

Even given the different year ends, different commercial models and remuneration methods there are still some important nuggets of information, some trends in results which  are worth noting.

 First, some overall stats. The sector by sector analysis covers 220 agencies which employ over 34,000 people. They generate over £3.3billion of gross income and make a combined operating profit of £400million. In short it’s an analysis which is worth trying to understand. I’m no research analyst but for what it’s worth here is my view.

I’ve taken Kingston Smith numbers to see what an average agency of 10 people would look like if they mirrored exactly the overall sector metrics so whilst the sector might grow unless the revenue per head grew this average agency would show a decrease in gross income. I’ve chosen a headcount of 10 for the simple reason it’s easier to compare how your agency compares to the market average – there’s an appendix at the end of the article.

Media Sector

Always the most commercial of sectors they have reacted to an era of flat growth as I would expect by reducing overheads, rewarding staff in a modest way and still generated more operating profit. A text book way of maximising profit in a difficult time. It’s always worth looking at your overheads to see if there is a way of taking cost out of your business. It isn’t, however, a trick you can repeat every year so the focus will be on revenue growth in the next year or two.

Advertising

The 2nd best performance in generating more gross income postpones the death of advertising for at least another year. This was not translated into operating profits as purse strings loosened in Adland. Overheads rose more than staff costs which might be due to the classification of freelancers but if agencies are going to maximise the benefit of any gross income growth they need to be a little more prudent.

PR

A modest upturn in gross income (up 1.7%) was completely wiped out and more by a 6% increase in staff costs, the biggest change in the compensation to revenue metric across all sectors. Given that PR has the highest staff costs per head what is the reason for this? My pet theory is that as everyone scrambles to “own” social media PR agencies have had to bring in a wider range of digital skills without, like many digital agencies themselves, cracking the commercial model to make it pay. If true, PR agencies need to be careful about overstretching their reach.

Design

The star performer with double digit revenue growth which, despite significant staff and overhead increases, delivered an impressive 85% uplift in operating profit. A lot of this may be due to a bounce back from 2009 when design budgets would have been slashed. Such growth is unlikely to carry on so design agencies need to ensure that any such generosity continues to be matched by revenue growth.

DM/SP

 Discipline in keeping staff costs flat meant that a modest top line growth still translated into    bottom line improvement. How long DM agencies can keep staff costs under check when the best employees have transferable skills is a worry. Many DM agencies face similar pressure to make digital pay so these twin pressures will make digital delivery an increasing priority.

Digital

 Another poor financial performance from Digital agencies who continually struggle to manage skill shortages, pressures from fixed fee project budgets and competition from other sectors. Some of these pressures are outside of their control but this throws the emphasis on far greater operational and commercial efficiency. Specialisation, better delivery and clearer scope of work definition all need to improve in order to bring the sector in line with its competitors in other sectors.

Across all sectors the average growth in revenue was 2.8% which helped grow operating profit by 5% which is an encouraging but not exciting performance. These numbers are over a year old by now but the themes I suspect will be the usual suspects; constant vigilance on staff compensation to revenue , digital delivery and cost control.

If you need any help making sure your agency beats the average email me on simon@novemberfriday.wpengine.com

2011 Benchmarking Appendix