Must escalating staff costs continue to erode profit margins?
Lots of people no longer believe it is possible to keep staff costs down to no more than half an agency’s gross income. Undoubtedly it is a difficult challenge – one that is increasingly dismissed as unrealistic by those who note how a number of US agency groups seem content to spend at least 60% of income on their staff.
The trouble is that any agency that wishes to achieve the traditional operating profit margin of about 15% will find that is very hard to do if staff costs escalate. That’s because the rest of an agency’s expenses are not easy to vary – items like rent, for example. So, if staff costs take a growing slice of income, less will remain available to shareholders as profit. And it’s never been easy to increase client fees when margins come under pressure.
In the US the fixed costs tend to consume a smaller proportion of income, leaving more scope for profit if staff costs creep up. That’s one of the reasons why US agencies have been in the vanguard of those that gear staff costs to performance and readily pay bonuses to staff that enhance the agency’s income. At WPP, Sir Martin Sorrell has also sought to relate a chunk of staff remuneration to performance, although there appears to be less scope for improving the group’s profit margin by doing so.
In the UK, it has become all too easy to accept profit margin erosion as an inevitable consequence of staff cost inflation. But there are still good examples of agencies that maintain their profit margins at a healthy level. Eight of the 10 privately-owned agencies that had the best financial credentials last year also kept staff costs below 50% of income. All of the top five did so, and they spanned a variety of disciplines that included media buying, advertising and direct marketing.
Even so, it is only a minority of privately-owned UK agencies that can keep staff costs below 50% of income. Indeed, only 30% of the agencies in this year’s “Private Plums” survey succeeded in keeping staff costs below 55% of income – but that was an improvement on the 25% that did so in the previous year.
There is no magic solution to managing staff costs. But there continues to be plenty of evidence that it’s an important aspect of agency management that is all too often ignored.
Bob Willott is editor of “Marketing Services Financial Intelligence”