Advertising Agency

Improving profitability; back to basics for creative agencies

By Raymond Kieser | Global Director of Practice

Deltek WorkBook

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The Drum Network article

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April 11, 2016 | 4 min read

We are well into 2016 and UK agency profit margins are at a 10 year low highlighting a worrying trend where despite revenue growth, agencies are not necessarily any financially better off. This can be attributed to both spiralling direct costs and workloads increasing faster than revenue which are eating into margins. However, despite serious business implications, it is not all doom and gloom. There are still ways for agencies to overcome these issues and transform income into profit.

According to a report by KingstonSmithW1, margins are consistently under pressure, falling as much as seven percent in some sectors since 2012. Contributing to this is the record high when it comes to employment costs, averaging 60.6 percent and scope creep which was the top charging and profitability challenge for 10 percent of UK agencies.

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When it comes to staying profitable the general consensus is that benchmarking is essential. There are also three golden rules to follow around employment costs:

• Spend no more than 55 percent of gross income on employment costs

• Record an operating profit margin of more than 20 percent

• Generate at least £120,000 of gross income per head

There are also other ways to try and maximise margins – taken straight from tips and guidance provided by industry players. These include getting a handle on costs, managing cash flow accurately and effectively, utilising the workforce and overcoming over-servicing. Getting a grip on all of these areas means that your agency is better placed make long lasting changes designed to increase profit growth.

One way agencies can look to combat depressed margins is with the implementation of an effective agency management system. Designed to provide better insight into operational efficiency and agency processes, this technology removes the guesswork and enables better decision making, more quickly. While it won’t serve to immediately revert the trend of decreasing margins, there is a real opportunity for agencies to take the front foot here and maximise margins in a difficult environment.

Raymond Kieser is global practice director of marcoms at Deltek.

Advertising Agency

Content by The Drum Network member:

Deltek TrafficLIVE is the creative industry's preferred cloud-based agency management platform. With TrafficLIVE, agencies can simplify their processes from pitch to delivery, proactively manage relationships, schedule the right resources for the right job, monitor client profitability, record time effortlessly and create more accurate estimate. Used by global networks, large independent agencies and small boutiques, TrafficLIVE is a solution that creative teams love and finance teams trust.

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