Super profits not enough for digital groups

Digital sector profits are up by 56 per cent, according to the latest New Media Agencies Financial Intelligence survey by Fintellect. Though the news will be welcomed, the survey reveals that there are still challenges ahead as the sector begins to mature. The results reveal a fragmented picture among the top 40 digital consultancies in the UK surveyed, with polarised figures for operating profits, staff costs and revenue generated per head.

According to Fintellect founder Bob Willott, author of the report, digital consultancies have so far generally achieved financial success from either rationalising operations into a single company or correcting inefficiencies from previous experience. But, he says, inconsistencies still remain in terms of staff margins and staff utilisation levels.

‘There’s no doubt that a higher value has been placed on digital consultancies recently. The consultancies we’ve looked at have seen fast profit growth on the one hand, but on the other, we’re seeing a patchy financial performance,’ says Willott.

Five groups dominate the survey, boasting operating profits of more than 20 per cent, while 25 companies report profit margins below 10 per cent. Three of the 40 groups surveyed reveal operating losses. Taking the 40 digital outfits surveyed as a whole, operating margins are low compared with their marketing counterparts, says Willott. The digital sector is yielding profit margins of about 8 per cent, in comparison with a figure of about 15 per cent achieved by marketing services groups, he says.

Start Creative, Avenue A, Razorfish, AKQA and Conchango scored highly in terms of staff output, with revenue per head for these groups in excess of £95 000. Staff costs for these groups were below 53 per cent of revenues.

Despite this, productivity for the digital groups surveyed – at £90 881 per head – still lags behind other disciplines within the traditional marketing services segment. According to Willott, the average figure for productivity per head for marketing services is between £110 000 and £120 000.

Furthermore, digital staff costs are eating into revenues. A number of reasons compound the situation, according to Willott. One of these is that consultancies in digital media are only now winning the battle with clients to be paid sufficient fees for them to run profitably. ‘There is an enormous amount of planning, technical and creative work that goes into digital projects but there is a tendency for the perception of garden shed set-ups within the sector. Bigger clients, however, are now starting to realise the sophistication of digital projects, and as such consultancies are starting to have the courage to ask for more adequate fees,’ he adds.

Another difficulty for digital groups in producing consistent profit margins is that because they are growing so fast, they find it harder to contain staff costs, be it in hiring freelances or expanding teams. ‘Many digital groups are experiencing high costs because they need to hire highly paid consultants for specialised projects, but I think once this sort of thing has settled down, we will see the less profitable companies come forward,’ says Willott.

BEST OPERATING PROFIT PER HEAD

G2 Interactive £33 322
ILG Digital £27 997
Start Creative £25 001
Outrider £24 508
Win £24 190
Avenue A (DNA) £19 271
Poke London £19 172
Agency Republic £15 978
iTouch £15 040
Netstore £14 726

WORST OPERATING PROFIT PER HEAD

Deal Group -£24 884
Green Cathedral -£9539
Twentysix London -£1712
Nucleus £803
Amaze £1240
Sift Group £1685
IS Solutions £2091
Investis £2446
Profero £2671
Wheel/LBi £3059

Ranked by scale of loss in descending order. Loss denoted by a minus sign