According to a new report from Marketing Services Financial Intelligence, agency holding company profits for 2011 were up almost 30% on an 8% revenue increase. The firm tracks publicly traded holding companies such as WPP, Omnicom, Interpublic, Havas, Publicis and Aegis along with some smaller organizations. Of note, it was reported profit margins also rose for the group, “averaging 15%.”
Clearly, in spite of what has been a tough global economic climate, the agency holding companies continue to perform well from a financial perspective. In addition, they have continued to expand their footprint via a robust level of merger and acquisition activity as well.
So what can we make of the stellar results? Certainly, life is good for the holding companies. Perhaps more intriguing is to ponder how a collective of holding companies managed to achieve a 4X multiple on profit growth vis-à-vis topline revenue. On the surface it’s easy to understand, control expenses and boost the margin yield on incremental revenue. However, the agency business falls into the “professional services” category. Their primary expense is direct labor. So as revenue increases, so do direct labor costs. Right? If not, how do you add business without expanding staffing coverage at the same rate? Wouldn’t this negatively impact client service levels or the caliber of the work?
So if agency staffs are growing commensurate with revenues, what is the source of the extraordinary profit? While the answer may be complex and varied there are certainly aspects of the agency holding company model that likely have contributed to this growth:
- Increased utilization of agency owned resources/affiliates on existing client business ranging from in-house studios to trading desks, barter firms and production companies.
- Improved employee utilization rates, whether in the form of associates working longer or devoting a higher percentage of their time to billable activity.
- Non-transparent revenue growth on existing client business including but not limited to interest income associated with float, growth in agency volume bonification (AVB) revenues along with other vendor discounts and credits.
Let’s be clear. There is nothing wrong with an agency holding company making money. Further, there is nothing wrong with the aforementioned practices as a means of driving profitability. The issue that advertisers should more clearly understand relates setting transparency standards and clear financial rules between themselves and the agency.
As a first step, to understand the current state of affairs and use it as a basis for improvement going forward, it is a best industry practice for the any advertiser to implement a detailed contract compliance audit. This initial review boosts the advertiser’s understanding of the agency’s billing practices, and their basis, to assess time value of money treatment, fees vs. agency time-of-staff investments, AVB calculation methodology, adequacy of financial terms, manual vs. system treatment and the like. The advertiser can then answer the questions – “where are my financial risks?” and “how do we mitigate them?”
Once accomplished, then perhaps the advertiser won’t have to “ponder” agency holding company profit growth rates and can join their agency partners in celebrating their hard earned financial success.
If you would like to gain the benefit of what we’ve learned first-hand through our agency contract compliance auditing practice and would like to schedule a complimentary consultation on “Transparency in Action,” please contact Don Parsons, Principal at Advertising Audit & Risk Management at email@example.com.