IntroductionOnce again, we have conducted our annual survey to ascertain the expectations of finance and managing directors of marketing services, media and consulting businesses on the future financial prospects of their industries. The majority of the responses we received were from independent companies; however,

Growth agendaReporting growth within the sector continues to be a challenge especially given the competing demands from both clients and staff. Fierce competition means that fee pressures are unrelenting whilst keeping and attracting talent with the right skill sets is very difficult.

Just under 70% of respondents are expecting revenue growth for 2018. This is very encouraging and an improvement on results from last year of just over 60%. Some 15% are very optimistic about the year ahead and expect growth to be

Talent is considered to be the biggest challenge for agencies in 2018.

Outlook 2018

How much better or worse do you think revenue levels will be in the calendar year 2018 compared to 2017?

More than 20% less

11 - 20% less

0 - 10% less

About the same

0 - 10% increase

11 - 20% increase

More than 20% increase

3.7%

20.2%

40.4%

12.8%

19.3%

2.7%

0.9%over 20% with the majority of respondents expecting to achieve an increase of up to 10%.

Some 10% feel that revenues will decline in 2018, which is unsurprising given the pressures that have been felt and continue to test the industry. These respondents were spread across the various sectors with no individual discipline forecasting significantly worse or better than another. This continues the trend seen last year as sectors become less distinct as digital becomes central to most offerings.

our survey also includes the responses from listed and private equity backed creative businesses. We have also gained the insight from mixed disciplines across the marketing services sector and the wider media and consultancy businesses.

Despite the continued global uncertainty as a result of significant political change the results of our 2018 outlook survey are very optimistic. Encouragingly, most businesses are forecasting

revenue growth but continuing pressures around talent mean that profit margins are still being squeezed.

Profit focusSo, how is the expected change to the top line in 2018 predicted to impact on profit levels and margins?

Reassuringly the results of the survey suggest that growth in revenues is largely expected to feed through to increased profits. Some 72% of respondents expect improved profit levels in 2018 which is particularly impressive given that

only 67% are expecting improved revenues. Some obviously consider they will be able to improve profitability without growing revenues.

Some 15% of respondents expect profits to increase by more than 20% compared with 13% last year. Profit increases at this level are particularly difficult to achieve consistently year on year but it was mainly respondents from advertising and digital disciplines that are expecting this level of growth.

Encouragingly only 2% predict a decline in profits for this year which is a vast improvement on last year’s 22%. This reinforces the sentiment that the sector is feeling much more positive than this time last year.

With 40% of respondents expecting increases of up to 10% in profit levels and 15% of more than 20%, it’s important to look at this relative to 2017 actual results. 2017 turned out to be a difficult year for many agencies and despite the response on this question 60% of respondents

Outlook 2018 survey

How much better or worse do you think your profit levels will be in the calendar year 2018 compared to 2017?

More than 20% less

11 - 20% less

0 - 10% less

About the same

0 - 10% increase

11 - 20% increase

More than 20% increase

2.8%

22.2%

36.1%

16.7%

14.8% 4.6%

2.8%

Fee pressure from clients was identified as the second most significant challenge whilst last year respondents identified this as their key concern, followed by staff and property costs.

still expect to report a margin (profit before tax as a percentage of fee income/revenue) below 15% and 10% expect to report a margin of less than 5%.

Margins across individual disciplines were varied however the PR agencies and consultancies are predicting the highest margins. Just over 20% of respondents expect to achieve a margin above 20%, of which 45% were in the two mentioned disciplines.

We suggest that a 15% – 20% margin should be an achievable benchmark for a well run agency. Therefore, whilst the positive growth forecasts are welcome news, for the majority, profit margins

are still some way off from where we’d like to see them. In order to deliver a margin within this range agencies need to control their staff costs in particular. We suggest agencies should aim to spend no more than 60% of revenues on people costs. However given the current challenges around talent this is easier said than done for most.

Survey respondents feel the most significant pressure for agencies in 2018 will be around talent. Some 89% think that having the ability to find and attract talent will be difficult with 49% expecting it to be a key challenge. Unsurprisingly pressures on people costs continue to be a significant pressure. However less than 30% thought that the ability to attract and retain talent would become more difficult as a result of Brexit.

Whilst Brexit negotiations are now fully underway there is still much uncertainty about what a post Brexit economy for the UK and EU will look like in the future. Interesting, however, that very few (less than 10%) respondents see Brexit related challenges as being significant for their business in 2018.

Fee pressure from clients was identified as the second most significant challenge whilst last year respondents identified this as their key concern, followed by staff and property costs. Whilst most respondents expect revenue growth for 2018, the feeling across agencies is that this growth is still difficult to achieve. A differentiated offering is key to attracting new business and growing existing budgets in order to preserve the top line.

Which of the following do you think are likely to present challenges during 2018?

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

49.1%

Pressure on people costs

Pressures on property costs

Fee pressure from clients

AI related pressures

Competition from

consultancies

39.8%

11.1%

Not a lot

A little

A lot

Ability to find/attract

the right talent

Ability to service clients internationally

Difficulty in attracting/retaining

non-British talent, as a

result of Brexit

38.3%

15.7%

41.3%

2.9%12.1%

48.6%

41.7%

45.9%

30.5%

45.8%

13.1%

42.6%

12.8%

66.6%

42.1%

6.5%

39.3%

54.2%

7.4%

20.4%

72.2%

8.3%

31.5%

60.2%

12.5%

36.5%

51%

Reduction of client spend from outside the UK, as a

result of Brexit

Other Brexit related issues

What do you think your net profit margin ( i.e. profit before tax as a proportion of fee income/revenues) will be for 2018

More than 25

21-25

16-20

11-15

6-10

0-5

13%

19.4%

35.2%

14.8%

9.3% 8.3%

Outlook 2018 survey

International marketsNearly three quarters of respondents derive more than 50% of their business from the UK which is slightly less than last year and continues a declining trend over the past few years. More respondents reported working with businesses from the rest of the world confirming the increasingly international approach that brands are taking and the opportunities for UK based agencies to work across the whole piece.

Interestingly the percentage of businesses working with European clients dropped slightly while those working with US clients increased, likely as a result of a weakening pound. Only 8% of respondents reported that more than half their income comes from Europe with a slightly

smaller percentage citing that more than half comes from the US. Therefore, perhaps it is unsurprising that Brexit was not considered to

Managing the assetsAs the results of the previous question confirm, talent is the number one concern and priority for most in the sector. With increased competition, not only from within the sector, and changing digital and AI demands it has never been so critical to be able to attract and retain the very best talent.

In line with the optimistic results already reported in this year’s outlook survey only 5% of respondents said they would reduce staff numbers in 2018 either through redundancies or through natural wastage. This positive outlook is confirmed with an increase on last year in the respondents who expect to increase staff numbers this year – 48% compared with 46% last year. 46% expect to maintain staff numbers which indicates that much of the revenue growth expected should be generated by an existing cost base.

Where retainer work is becoming less common and agencies are finding it increasingly difficult to forecast mid term revenue and as such freelancers can offer valued flexibility, especially for growing agencies. In many cases, talent also prefer working under freelance type contracts rather than as an employee. It is, however, critical that the use of freelancers to fill skill gaps is managed well in order to ensure that profit margins are preserved. The Government recently announced an employment status consultation which is likely to conclude that more people will be categorised as employees. This could be costly to the sector as employees are 17.3% more expensive than self-employed freelancers excluding the costs of employment related benefits such as paid holiday and sick leave. Agencies that rely heavily on freelancers need to be aware these changes could affect their cost base significantly if net take home to freelancers is to be maintained. In reality, the tax burden is likely to be shared and freelancers will be affected as well, but in return receive the benefits of employment status.

How do you think your staffing requirements will change in 2018 compared to 2017?

We will recruit to increase staff numbers

We will maintain numbers as they are and recruit to replace

We will look at reducing staff numbers through natural wastage

We will reduce staff numbers through redundancies

48.2%46.3%

3.7%

1.8%

Talent is considered to be the biggest challenge for agencies in 2018. Concerns around retaining and motivating key staff, not just financially, are widespread and it is those employers that are thinking outside the box when incentivising staff that are attracting and holding on to their talent. Whilst staff challenges are doing little to ease pressure on margins fee pressures are expected to continue. It has never been more critical for

ConclusionThe results for revenue and profit growth in the 2018 survey are very optimistic, suggesting agencies are confident in the demand for services despite global economic and political uncertainty. This is however tempered by the actual reported forecast profit margins which are still lower than many would like.

agencies to differentiate their offering in order to insulate themselves, to some extent, during inevitable fee negotiations.

Despite the optimism from respondents on the outlook for 2018 it will be interesting to see if agencies can actually deliver the expected growth in what are undoubtedly challenging and uncertain times.

Whilst there is no doubt that pressures on staff costs over the past few years have impacted margins, the new generation of Millennials are also demanding more than just financial incentives. Companies need to be continually reviewing and evaluating their policies for staff incentivisation as a priority to ensure they remain current and ahead of their competition.

be a key challenge for 2018 but it will be interesting to see if this changes and how it may affect international trading over the next few years.

How much of your business comes from (%):

0%

1 - 20%

21 - 40%

41 - 60%

61 - 80%

81 - 100%

Latin America

USA

Asia

Europe

UK

Other International

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