agency profitwatch 2010

Agency Profitwatch 2010R e s e a R c h R e p o R t

View from the Top . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Systems and Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

The Agency Holding Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Agency Systems and Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Areas of Weakness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Systems and Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

The Agency Holding Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Agency Systems and Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Areas of Weakness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

In Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Contents

3 V ie w from the top

“Five years is a long time in the dynamic world of marketing and communications. In fact, the past five years have arguably been the most transformative of the past 30. Whilst the arrival of the dot com era signalled a change in technology before the new millennium, it is only in recent years that internet technology has become ubiquitous – all ages, anytime, anywhere. Coupled with the boom in social media, the marketing industry has been, and is still largely, in the process of reinventing itself.

However, what makes this technological transition unique is the economic backdrop that accompanies the new wave of commercial and consumer behaviour. The enduring recession experienced across the majority of western economies since early 2008 has given a new meaning to the term ‘more for less’. Budgets have been cut, growth has been elusive and agencies have been tested to the limit.

Maconomy conducted a ‘Profit Watch’ piece of research in 2005 that has been repeated in 2010. We are pleased to share the findings with you and to encourage debate about how agencies have been and should be responding to today’s unique set of commercial pressures.

View from the Top

After massive investments in digital in the recent past ... our aim is eventually to derive a total of 60% of our revenue from the two sectors of digital activities and emerging economies. (Publicis 2010)

In 2005 many large marketing and communications businesses were struggling to implement systems that captured billing and resource information. The ability to link these systems and integrate them with finance was even further from the ‘norm’. Whilst these issues still endure in 2010, they are beginning to improve. Generally speaking, agencies in 2010 are more accountable and rely upon a more sophisticated ‘backbone’ than was the case previously.

The challenges for 2010, as agencies endeavour to ‘digitise’ service offerings, are still grounded in the hunt for profitability. However, the need for business intelligence to ensure an effective response to dramatic operational changes is central to future financial success.

Marketers like to speak of ‘tipping points’ for client organisations. It appears that the industry now has a tipping point of its own. Responding appropriately to the period of transition that 2010 represents will pay dividends. Most innovators in the sector have a view of future [digital] strategy, but turning this into workable services requires internal transparency, re-organisation and insight. ‘Vision’ may describe the future, but only operational aptitude will make this vision a reality.”

Hugo DorphEVP & General Manager, Deltek | Maconomy

In order to grow with our clients, we have therefore accelerated our investment in digital talent, professional training and technology throughout the organization in recent years.

(Interpublic 2010)

WPP Digital exists to accelerate WPP’s development of world-class capabilities in digital marketing and media.(WPP 2010)

4 V ie w from the top

During the next few years, we expect to see an accelerating focus on digital media to communicate brand messages(Omnicom 2010)

6 execu tiV e Summ a ry

The marketing and media industries are in a period of rapid transformation in the wake of a recession which has accelerated the movement of digital media into the centre of the communications landscape. The 2010 Agency Profitwatch report seeks to examine whether agency systems and processes are agile enough to help agencies thrive amidst this change.

The following report examines how agency decision-makers across a range of marketing disciplines collect and use agency time and resources. In particular, it seeks to understand how the systems they use contribute to agency profitability and whether agencies are able to use data about costs and assets to their best advantage.

The findings indicate that many agencies are collecting enough information for successful day-to-day operations, but only a dynamic minority have truly integrated record-keeping. Most agencies have per-project budgeting and cost control processes in place, but many still have resource blind spots, such as new business generation and over-servicing time. The most expensive and valuable resource agencies use – their people’s time – is not always caught by systems or connected to data about margins and profits.

Executive Summary

60% agree that improving

corporate accounting processes would increase

company profits

Key stats

7 execu tiV e Summ a ry

In general, agency processes have evolved in the last five years, but most recognise that they still have systems and processes that could be improved. The pressures of the recent recession appear to have locked some agencies in something of a ‘holding pattern’, keeping them from making further improvements to processes and structures.

Without a good way to monitor and evaluate their current situations, some agencies may not be as agile as they need to be in order to react quickly to the seismic shifts in the marketing landscape which are now under way.

only 11% report that they

have re-distributed permanent staff through hiring or

redundancies

only 12% report that they

have re-distributed temporary staff through hiring or

redundancies Massive changes to the media environment

aren’t being matched by organisational

change within many agencies

Key stats

8 SyStemS a nD profita bilit y

The systems agencies currently have in place are not always helping them realise their profit potential, or enabling companies to recognise information or efficiency gaps. Indeed, 60% agree that improving corporate accounting processes would increase company profits.

It appears that external-facing systems such as invoicing meet with greater satisfaction than internal-facing systems that measure non-billable hours and other difficult-to-capture resources. 59% of respondents agree that lack of time accountability by creative teams has a negative impact on company profits, but only 9% report that their invoices are often queried or rejected due to error, for example.

Systems and Profitability

59% agree that lack of time accountability by

creative teams has a negative impact on

company profits

9 the agency holDing pat ter n

Unsurprisingly, the recession has negatively affected profits at 45% of respondent companies. An additional 30% have held steady, with no change in profits – only 11% report increases in profits during the recession. The majority of respondents are focusing their efforts on cost-cutting, with only 37% agreeing that revenue generation is a higher priority than managing costs.

While some agencies are maintaining an employment status quo, 43% report redundancies of permanent staff. The basic shape of agencies has not changed, however – the changes one might expect in the wake of technological and social developments have not yet occurred. Most agencies are not using staffing changes to review how skills are used, with only 11% reporting that changes in permanent staffing (positive or negative) have re-distributed responsibilities at the agency. Only 12% say the same about temporary staffing changes. On the whole, agencies appear to be slimming down, but not necessarily becoming more agile.

The Agency Holding Pattern

45% of agencies

have seen their profits decline during

the recession


4%

6%

8%

8%

20%

23%

34%

5%

6%

8%

5%

16%

22%

38%

2%

5%

7%

11%

23%

23%

29%

Market research

Direct Mail

Design

Web/Internet

Integrated Marketing

PR

Advertising

US UK Total

Which of the f ollowing industries does your company work in? Base: 200 100 (UK) 100 (US)

Fig. 1: sector breakdown of respondentsResearch methodology200 telephone interviews were conducted in May and early June 2010, with agency professionals at director level or above across a range of marketing disciplines, based in the UK (100) and the US (100) .

Respondents were screened for strategic and budget responsibilities, and those working for companies with fewer than 50 were excluded . The survey was conducted by Loudhouse Research, an independent consultancy headquartered in the UK .

This survey follows a similar effort in 2005, when a telephone survey reached 223 respondents at agencies with over 30 employees, 100 in the UK and 123 in the US .

This is taking place against the backdrop of major changes in the media environment with which agencies engage – some agencies are holding still in the face of widespread change, while others are rising to meet the challenge.

11 agency SyStemS a nD proceSSeS

Almost three quarters of respondents (72%) say their agencies budget in advance for each job they undertake, and 77% say they have ongoing cost control in place for each job. Information is often going to waste, however. Only 53% of agencies have a cost accounting system that can link job codes to the general ledger, and only 47% have a system that can perform time and expense analysis prior to project completion. Only 39% have an automated system to manage employee personal expenses, suggesting that basic and easily captured information is often being missed.

Timesheet systems are still not achieving enough coverage to help agencies manage resources well. Only 1 in 3 respondents has over 90% coverage of employees’ time, and 1 in 6 (16%) of respondents say their agency has no automated timesheet system at all. Encouragingly, respondents are aware that their systems need improvement - asked to estimate what capacities they will need three years into the future, respondents generally voice a need for much more sophisticated systems.

Agency Systems and Processes

Fewer than 50

0%

50-25069%

More than 250

31%

Fewer than 500%

50-25080%

More than 25020%

Company size: UK

£0 - £999,99917%

£0 - £999,9998%

£1 million- £4,999,99931%£5 million -

£9,999,99924%

£1 million- £4,999,99945%£5 million -

£9,999,99921%

£10 millionand above27%

£10 millionand above21%

Refused/DK1%

Refused/DK5%

Company turnover: UK

Company size: US Company turnover: US

Fig. 2: sample breakdown for Us and UK

Could you please tell me how many employees are there within your company? What is your company turnover? Base: 100 (US) 100 (

12 a r e a S of w e a kneSS

The systems agencies employ have several areas of weakness. The new business process takes a tremendous amount of agency time – respondents estimate a rough average of 18% of their time, with 36% spending one day per business week (20% of time) or more. Despite this, reporting of new business time is patchy. Only 45% of respondents report that their timesheet systems can capture non billable hours, and only 55% agree that their new business processes are well managed and organised. 29% of those who have an automated timesheet system report that these do not capture time spent on new business at all.

Budgeting and cost control responsibilities are very widely distributed at respondents’ agencies, with the creative teams on jobs actively involved in budgeting at 42% of respondents’ agencies, and in ongoing cost control at 36%. Over-servicing also remains an issue for most agencies (although less pronounced than five years ago), with agencies reporting an estimated average of 13% over-servicing and only 19% claiming to have eliminated over-servicing completely. This figure – 19% – is likely to be high, as agencies in the current economic climate have fewer active clients making the urgent demands that drive over-servicing. Improvement is clearly needed, with agencies aspiring to 3% over-servicing on average.

Areas of Weakness

13% over-servicing

on average was reported by the surveyed agencies


Although general satisfaction with accounting systems has increased since the 2005 study, it has not risen at the same pace as technological processes have improved.

A truly agile system would allow for a comprehensive real-time view of resource use. Many agencies report that their current systems are not able to provide this view in one or more aspects of their businesses. 60% of respondents agree that improving corporate accounting processes would increase company profits, as opposed to 63% agreeing with this statement in 2005 (Figure 3).

Systems and Profitability

Fig. 3: accountancy system satisfaction

2010: I am now going to read out a list of statements. Could you please tell me if you strongly agree, agree, are neutral, disagree or strongly disagree with the following? Base: 2002005: To what extent do you agree with the statement “Improving corporate accounting processes would increase company profits”? Base:223

24%

13%

36%

50%

26%

26%

9%

7%

5%

2%

2%

2%

0% 20% 40% 60% 80% 100%

2010: Improving corporate accounting processes would increase company profits

2005: Improving corporate accounting processes would increase company profits

Strongly agree Agree Neutral Disagree Strongly Disagree Refused

60% agree that improving accounting processes would increase

company profits


The external-facing systems agencies run seem to function extremely well, while some areas of internal monitoring remain challenging for many agencies. Only 9% of respondents agree that their invoices are often queried because information is confusing or erroneous, and just 12% agree that they spend excessive time correcting invoicing errors.

Company size seems to play a role in how companies’ systems work toward profitability – larger firms are considerably more likely to see accounting systems as an area for improvement (72% of firms with more than 250 employees agree that improving accounting systems would boost profits, as opposed to 55% of smaller firms.) Larger firms are, however, more likely than their smaller counterparts to focus on revenues over profits.

In general, respondents acknowledge that their agencies’ systems have blind spots. 59% agree that lack of accountability by creative teams impacts company profitability. Just over half (55%) agree that their new business process is well managed and organised (Figure 4). New business takes up a considerable amount of agency time, and there is clearly room for improvement in accounting for this time.

New business and creative work often involve non-billable hours. In many agencies, it seems that the internal systems that manage companies’ most valuable resource – employee time – are not equipped to record key activities or to link the information they store to data on profit and loss.

I am now going to read out a list of statements. Could you please tell me if you strongly agree, agree, are neutral, disagree or strongly disagree with the following? Base: 200 149 (50-250 employees), 51 (250+)

59%

60%

57%

37%

60%

55%

57%

32%

59%

72%

55%

49%

Lack of time accountability by creative teams impacts company profitability

Improving corporate accoun-ting processes would increase company profits

Our new businesses process is well managed and organised

Revenue generation is a higher priority than managing costs

250+ employees 50-250 employees Total

Percentage that agree or strongly agree

Fig. 4: Us and UK systems and processes


While 30% of respondents report no change in their profits at all during the downturn, 45% report a decline (Figure 5). Regional differences emerge in the recession’s effects on profits, with 57% of UK respondents reporting a decline in profits, as opposed to 32% in the US. 14% of UK agencies have increased their profits, while only 7% in the US report they have done so. Most strikingly, US agencies are much more likely to report a steady state, with 42% reporting no change in profits, as opposed to 17% in the UK.

In 2005, at the height of the boom, 41% of respondents claimed that generating revenue was more important than managing costs. In 2010, this figure stands at 37%, higher than might be expected, as green shoots begin to emerge. Profitability is very much front of mind in the agency psyche, but only about half (48%) of respondents report that their agencies have a task force or project examining profitability.

The Agency Holding Pattern

How has the recent economic recession

affected youragency’s profits?

Do you currently have a project or task force established

to improve profitability within your agency?

No change30%

Profits havegone down

45%

Profits havegone up

11%

Don’t Know16%

Yes 48%

No52%

Fig. 5: profits in the downturn

How has the recent economic recession affected your agency’s profits? Do you currently have a project or task force established to improve prof itability within your agency? Base: 200


The general sense that agencies are somewhat ‘hunkered down’ is reinforced by hiring patterns during the recession (Figure 6). As would be expected from the profitability patterns, only a minority of agencies report having hired new permanent staff or retained new temporary staff during the recession (a total of 10% and 8%, respectively). There are also substantial numbers reporting declines. 28% of respondents report a decline in temporary/contract workers, while 43% have let permanent staff go.

Whilst staffing changes represent a useful and timely opportunity for agencies to update their processes in light of major changes in the market, only a minority of agencies have done so. Only 11% report using permanent staffing changes (hiring or redundancies) as a part of a change in agency structure, and only 12% doing the same with changes to contract staffing. The situation in the US is more stagnant than in the UK, with only 3% using permanent staff changes to affect a restructure and only 9% doing the same with temporary staff changes. In the UK, the corresponding numbers are 17% and 15%, respectively, suggesting somewhat greater dynamism in UK agency structures.

Fig. 6: changes in permanent staffing

How has the recent economic recession affected your agency’s number of permanent staff? Base: 200

How has the recent economic recession affected your agency’s number of permanent staff?

42%

7%3%

35%

8%

8% No change

We have hired more people, but the general composition of the agency has stayed the same (even hiring of permanent staff across teams)

We have let staff go, but the general composition of the agency has stayed the same (even reductionsin permanent staff across teams)

We have let staff go, and changed the composition of the agency (adding to or creating permanent roles on some teams,reducing or eliminating permanent roles in others)

Don’t Know

We have hired more people, and changed the composition of the agency (adding to or creating permanent roles on some teams, reducing or eliminating permanent roles in others)


Some of agencies’ reluctance to change may be explained by their systems – not all agencies have enough resource visibility to reallocate resources quickly. While most respondents report that their agencies have functioning systems for budgeting and cost control, many either lack some core capacities or don’t have all the processes in place to link the information they collect in useful ways.

Good advance-budgeting and real-time cost control processes are in place at a majority of agencies. 72% of respondents report budgeting in advance for each job, and 77% say they perform ongoing cost control while each job is in progress.

The majority of respondents have an automated timesheet system (only 16% lack one), although only a third has truly comprehensive coverage (91-100% of time covered on the system). This means that two thirds of agencies could improve the percentage of agency time captured in their systems, and potentially see real benefits in agility and control.

Agency Systems and Processes

2/3 of agenciescan improve the

percentage of agency time with a comprehensive

timesheet system


When asked what basic functions their systems can perform, a surprising number of respondents lack core capacities (Figure 7). Only 39% report that their systems can send reminders to those who fail to complete timesheets, and only 48% of systems can automatically inform them when timesheets are due or late. Less than half (45%) of respondents report that their timesheet systems can capture non-billable hours (new business activities, pitch preparation, meetings and administrative time) at all. A significant number of agencies are losing data at the entry point, because they don’t have reliable information about what has and has not been recorded and by whom.

Regarding your timesheet system, does it have the capability to do the following? Base: 168What capacities do you imagine your timesheet / project management system will need to have to help you meet your needs three years from now? Base: 200

Fig. 7: current capacities and future needs

15%

38%

39%

45%

48%

55%

53%

42%

9%

52%

52%

60%

65%

66%

Provide overview of resource availability and skills (future only)

Integrate resource plan with revenue forecast (future only)

None of these capacities

Block out timesheet entries until budget approval has been given

Send reminders to individuals to complete timesheets

Capture non‐billable hours

Automatically inform you when timesheets are due or late

Run time analysis reports

Future needs Current abilities


In addition, linkages between systems could be further improved at many agencies (Figure 8). Only just over half (53%) of respondents have cost accounting systems in place that link job codes to the general ledger, and only 47% can perform time and expense analysis in real time, prior to project completion. As such, the information collected in budgeting and cost-management processes is not always being connected to the systems that measure profits and losses.

Fig. 8: capacities of linked systems

Which of the following systems/processes does your organisation employ? Base: 200 100(UK) 100(US)

only 47% of agencies

can perform time and expense analysis in real-time prior to project completion

9%

14%

39%

47%

53%

5%

11%

47%

50%

57%

12%

16%

30%

44%

48%

Don't Know

None of the above

An automated system to manage personal employee expenses

Time and expenses analysis in real time – prior to project completion

Cost accounting systems (linking job codes to general ledger)

US UK Total


The number of agencies with pre-project budgeting and ongoing project cost-control processes is encouraging. The involvement of a very wide range of agency personnel, as shown in Figure 9, is undoubtedly a positive example of connectedness across the business. Where creative teams are actively involved in setting project budgets (42%) and managing costs on an ongoing basis during jobs (36%), however, there are potential issues given the lack of accounting for creatives’ time and resources already reported. Indeed, 59% of respondents consider that lack of time accountability by creatives impacts company profitability.

Another system ‘blind spot’ is the new business process. Only 57% of respondents agree that their new business process is well managed and organised, despite spending an average of 18% of their time on new business – just under one working day of agency time each week. A core 36% of respondents spend over 20% or more of agency time on new business, making this a crucial area for systems to monitor. 29% of respondents who have timesheet systems report that new business time is not recorded in their systems at all. Those who do record new business time do not always do so as transparently as they could - designations that specify ‘new businesses (such as ‘new business research’)’ are used only by 45-52% of agencies.

Areas of Weakness

59% agreethat the lack of time

accountability by creatives impacts

company profitability


Fig. 9: Involvement in pre-project budgeting

1%

2%

42%

43%

45%

51%

53%

63%

0%

0%

30%

48%

34%

56%

59%

64%

1%

4%

52%

40%

53%

48%

49%

61%

Don't Know

Others

The creative team working on the job

The client service staff involved in the job

The planner or planning team on the job

The most senior person on the project team

The finance or accounting team for the agency

Senior agency management

US UK Total

For each new job you begin, which of the following staff members are involved in setting the initial budget for the job? Base: 144 , 61(UK) 83 (US)


Over-servicing remains an issue, with agencies over-servicing their clients by 13% on average (Figure 10). Only 19% of agencies claim to be free of over-servicing challenges. There has been progress in this area - 55% of 2010 respondents report 10% over-servicing or less, while only 23% had achieved this level of efficiency in 2005. In 2005, 24% of respondents reported more than 20% over-servicing (theoretically, one wasted day per week). In 2010, this figure is 23%, essentially no change.

Eliminating over-servicing remains a goal for a majority of respondents, with 52% hoping to eliminate it completely, and 32% hoping to get to 5% over-servicing or less.

Clearly, agencies want to capitalise on their increasing efficiency, and reap the benefits of further improvements.

We do not overserviceour clients at all

19%

>5%18%

6-10%19%

11-20%15%

21-30%11%

31-40%6%

41-50%7%

50% +3%

Don’t Know7%

Mean: 13%

Fig. 10: over-servicing

By what percentage, if at all, would you estimate that you ‘over-service’ your clients? Base: 200

23 concluSion

Agencies have faced two challenges since the start of the recent economic downturn – the economy has had negative effects on their own profits and has accelerated developments elsewhere in the economy that are rapidly and fundamentally changing the way they must work.

Marketers in this environment need the agility to re-allocate resources – from old to new media, from siloed to integrated organisations, from traditional schedules to flexible ones – quickly when they recognise a need to do so. The most dynamic agencies are equipped with enough real-time information to spot and change wasteful patterns before they hurt profits or to allocate resources to new projects. Most agencies are making progress toward this goal, but they still have improvements to make before they achieve it. The potentially dramatic changes brought about by social and broader digital media needs are a notable factor in creating urgency in improving management intelligence of agency resources. Agencies recognise this challenge and the need to improve their systems in response but vary in the progress already made and the readiness to mature their processes further.

Over the next few years, we can expect that the environment around marketing agencies will continue to evolve, as traditional media weakens and non-traditional channels make up a larger part of the media landscape and agency revenues. Agencies with the information to distribute resources efficiently and re-allocate them quickly will be best equipped to innovate in this environment. Companies need to pursue an improvement to business information, to ensure that systems, people and processes are align to provide the agility needed for future agency success.

Conclusion

About LoudHouse Research

Loudhouse is an independent marketing research consultancy based in London with particular expertise in helping brands better engage with their audiences. Loudhouse works with companies of all shapes and sizes to deliver insight into what makes their customers tick and helps companies use this insight to better communicate with their markets. Loudhouse works across a range of sectors and has particular expertise in business services, technology and people issues.

For more information on Loudhouse, please visit www.loudhouse.co.uk

Loudhouse Research33 Glasshouse Street LondonW1B 5DG0845 5057770

About our Sponsor

Deltek (Nasdaq: PROJ) acquired Maconomy in July 2010 to create the leading global provider of enterprise applications software and solutions designed specifically for project-focused businesses. The combined company has unmatched domain expertise in the professional services market with close to 13,000 customers worldwide. The new organisation has immense geographic reach across the world and serves all major segments within the professional services vertical market, including architecture & engineering, advertising, public relations, accounting, management and IT consulting, and legal. The combined organisation has a prominent market position and has an unmatched list of project-based customers, including:

• 80% of the Engineering News Record Top 500 Design Firms • Approximately 80% of the 2009 ZweigWhite Top 200 fastest-growing architecture, engineering and

environmental consulting firms • Four of the five largest Global Accounting and Consulting firms • The world’s three largest Marketing Communications Networks • Approximately 90% of the Top U.S. Federal Contractors

For more information, please visit www.deltek.com or www.maconomy.com

agency profitwatch 2010

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