Design industry performing well despite shrinking profit margins

Accountant Kingston Smith’s Marketing Monitor report has examined the financial performance of branding and design consultancies alongside, digital, advertising, marketing and other sectors.

Close up of graphic designer using graphics tablet in a modern office

Design has performed favourably against other sectors in a new piece of research which looks at the state of the marketing and creative industries.

Accountant Kingston Smith’s Marketing Monitor report – which looks at the strength of all sectors from the last year – finds that across the marketing services industries consultancies are “delicately poised”, as they enter post-Brexit economic uncertainty.

The general state of play for all sectors is that there have been modest increases in fee income, which are becoming increasingly overshadowed by worsening margins.

Despite this there were also broad trends showing that the industry had recovered from the financial crisis.

Top 30 design consultancies increase gross income

Branding and design is performing well according to the report, which finds that its “top 30” (unnamed) design consultancies generated an additional £13.5 million in gross income year-on-year compared to last year’s report.

However the gross income wasn’t turned into operating profit and therefore profit margins are down one percentage point to 10.3%.

Kingston Smith recommends that a well run design consultancy should be generating operating profits of at least 15% of fee income and ideally 20%. While 11 of the top 30 hit 15% only five were in excess of 20%.

Talent shortages

One metric for looking at the health of the health of a consultancy is by comparing employment costs and fee income.

The average ratio of employment cost to fee income is on the rise, creeping up by two percentage points to hit 61% this year. When freelancers are considered this figure is even higher.

Talent shortages are cited as a reason for driving up staff costs and the recommended target ratio of employment cost to fee income is 60%.

Independent’s catch group owned

There are 17 independent consultancies in Kingston Smith’s top 30. The profitability gap is closing between independent and group owned consultancies.

Operating profit margins are now 11% for group-owned consultancies and 10% for independents. This is four percentage points closer than last year.

Average fee income per head in the design sector has worsened and now stands just under the benchmark target of 100,000. This averages out from group-owned consultancies earning £108,000 per head and independents earning £94,000.

However the group-owned consultancies spend more on staff costs and overheads, which is why their profit margins are not much better in the end.

How to be more efficient

As design work is by it’s nature project driven and freelancers are often brought in to manage peaks and troughs, getting the balance right between permanent and temporary staff is “absolutely vital to protect those slim margins” advises Kingston Smith.

Another tip it gives is to have someone to oversee capacity management and sign off additional resource.

Design consultancies need to regularly challenge whether they are using staff in the most efficient way and come up with “new and innovative ways of working” that keep up with client demands, finds Kingston Smith.

The report looked at key performance indicators across other sectors, revealing that PR had performed the best, advertising had not performed as well as the year before, while in digital gross income per head has increased although margins are being squeezed.

Meanwhile in marketing and sales productivity remains steady but spiraling operating costs have hit profit margin.

You can read the full report here.

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