Profits are falling in the design sector, according to accountant Kingston Smith W1’s annual survey of design and branding consultancies.
But before you sink into your chair with despair, take heart in the news that revenue growth across the industry has been strong, with a total increase from £306m to £332m in 2007.
The Perfect Storm, Kingston Smith W1’s Financial Performance of Marketing Services Companies 2008 report, charts the fiscal fortunes of design and branding’s top 30 consultancies in 2007 ranked by gross income, and highlights an increasing erosion of profit margins, due to rising non-staff costs.
‘Rates and rents were increasing significantly throughout 2007 – though they are starting to fall again now – and this has impacted on margins for that period,’ explains Kingston Smith W1 partner Mandy Merron.
‘It may be that some consultancies chose to expand or to refurbish, but now that everyone is anticipating a reduction in client budgets, it’s worrying that these fixed costs will be a burden. You can shed people costs but you can’t shed property costs,’ Merron points out.
The report also throws up a disparity between independent and networked groups in terms of efficiency, productivity per head and profitability.
While revenue among independent groups rose by 11.8 per cent, compared with 2.6 per cent for networked consultancies, operating profits for independents were down 13.8 per cent. Group-owned consultancies, however, saw a minimal increase of 0.3 per cent in their operating profits.
‘Networked consultancies have tighter control over costs, budgets and delivery of projects,’ says Merron. ‘Their discipline comes from the bottom line. However, this can stifle the entrepreneurial spirit you tend to find among independents.’
Efficiency per head is also reported to be higher at group-owned consultancies, while salaries are notably 10 per cent higher. The average salary paid by group-owned consultancies was £53 013, according to the report. ‘They tend to have to pay the market rate, while the chief executives and managing directors of independents often forego their salaries to keep staff numbers. This would affect the figures,’ explains Merron.
In light of current economic turmoil, however, it is the independent groups that can afford a ‘pulling-together spirit’, which boosts staff morale, according to Merron. ‘Historically, we’ve seen this unleash a wave of start-ups as designers from networked groups get hacked off with the cut-throat approach, or get made redundant,’ she adds.
A message reiterated by Kingston Smith W1, that gross income per head should ideally be around £80 000 to £100 000, is being heeded by some at least, the report finds. Gross income per head for this year’s top 30 averages £83 421, with 13 of the top 30 managing to achieve gross income per head of more than £100 000. Ten companies, however, generated less than £80 000 per head.
Most importantly, consultancies should also be aiming for operating profits of between 15 and 20 per cent of gross income, Merron says. Only ten of the top 30 design consultancies achieved 15 per cent or more, suggesting that efficiencies still need to be made across the industry.
The top performers of the tables include Allan Burrows, which, with operating profit of £5 171 000, tops the chart, followed by Loewy Group, Red Bee Media, Stocks Austin Sice and The Brand Union.
In terms of revenue, or gross income, Red Bee Media came out on top, with a figure of £66 794 000, followed by Imagination Group, Loewy Group, Allan Burrows and The Brand Union.
This year’s survey is the 18th by Kingston Smith W1, formerly Willott Kingston Smith, and is used by consultancies as a benchmark against competitors.
• Total gross income increased from £306m to £332m in 2007
• Profit margins fell by 1.6% because of non-staff costs increasing faster than revenue
• Average operating profit per head fell 14.7% to £7938 per person
• For further details, see www.kingstonsmith.co.uk