Getting down and dirty between the balance sheets

You don’t have to be an accountancy wonk to find pleasure, surprise and a touch of salaciousness hidden among the pages of the latest annual survey of agencies’ financial performance, published last week by accountants Kingston Smith W1.

For there, laid out in all their glory – and some gore – are the financial secrets of a host of agencies. Gross income, profit, staff costs and numbers, income per head of staff, profit per head, ratio of income to employment costs and, of course, the often eye-watering sums trousered by the directors (rather quaintly known as ’emoluments’, as if in a feeble bid to sanitise the whole business) – it’s all there.

It is both a voyeur’s and a benchmarker’s dream. You can imagine agency MDs and CFOs poring over the figures and realising they’re paying their staff too much, or too little. Or you can imagine them asking why their rivals’ profits rose so much, or perhaps lambasting others for paying themselves greedy wages that don’t match performance.

As I write, finance departments are no doubt burning the midnight oil as they sweat over the spreadsheets and recalculate next year’s budgets.

So what do the broad figures (mostly covering 2011 year-ends) tell us? Well, the conclusion is that against a background of a flattish economy and clients screwing down costs, 2011 wasn’t too bad – with digital agencies increasing income 20%, media agencies 10.5%, and ad agencies 7.5%.

Margins improved too. Digital agencies – after years in the doldrums profit wise, finally seem to be making proper money at better margins (up from 4.7% to 11%), suggesting they’re a) getting their staff costs under control and b) charging proper retainers rather than being stuck on the hamster-wheel of payment by project.

Ad agency margins rose too, although only slightly from 11.9% to 12.1%. Media buying, where margins rose from 18.8% to 19.5%, remains the most profitable agency category.

It’s not time to crack open the bubbly yet though. Margins have yet to recover to pre-recession levels of 2005-06 and client procurement departments are still cracking the whip and demanding more for less (leading to the dreaded condition known as ‘scope creep’ and over-servicing). And, as Kingston Smith cautions, agencies should keep staff costs down – preferably below 55% of income – otherwise additional income doesn’t translate into higher margin.

Of the three types of agency, media buyers tend to be the best run (probably no surprises there). With staff costs only 52% of gross income (versus 57.8% for digital agencies and 58.9% for ad agencies), they generate higher gross income per head and higher operating profit per head (two and a half times higher than digital agencies and about 75% higher than ad agencies).

Working on the basis that, as accountants would say, income is vanity and profit is sanity, who are the star performers?

Among the ad agencies it’s Adam and Eve (ranked 34th by gross income in a category of 50) which generated the second-highest in gross income per head and the highest operating profit (£61,633 – 30% higher than the next ranked agency).

No wonder Omnicom forked out millions to buy it in order to prop up its ailing DDB UK agency (which, incidentally, paid its directors a whacking 52% more than the year before, even though its operating profits fell by 9%).

On the digital side, it’s easy to see why LBi and AKQA were so eagerly sought by the global networks – Publicis and WPP respectively. Both increased profits (LBi by a massive 244%) and generate above-average margins.

And now for a little salaciousness, involving unnamed highest-paid directors (you could guess, but in the current post-Leveson climate keep it to yourself): so who is the lucky individual at Havas’ Media Planning Group pulling down a cool £1.03 million and how come they get more than twice as much as their opposite number at OMD, which makes more than four times as much profit?

And while we’re at it, why do the highest-paid directors at Omnicom media agencies (OMD and PHD) make considerably less than both their counterparts at their sister group ad agencies and their WPP competitors (MediaCom, MindShare and Mediaedge CIA)?

But top of the league of shame must be the unnamed director at Wieden and Kennedy who increased his or her ’emoluments’ by 18% to £774,000 – despite turning a £1.6 million profit the year before into a £1.7 million loss – a negative swing of -210%.

Well, you’ve got to admire the chutzpah of that, and as they might say to their biggest client: “every little helps.”