STATE OF THE INDUSTRY
Jack Bergen, President of the Council of Public Relations Firms,USA
With probing coverage by ten trade publications, half a dozen awards competitions, and several different rankings, the public relations industry is constantly under the microscope. But the Inside PR Report Card is the critical annual checkup, a review of vital signs of the leading U. S. public relations agencies. It complements the Harris client service survey and the agency rankings. This year, the Harris client poll indicated that a significant portion of clients are satisfied with their agencies, while the agency rankings validated the growth and vitality of the public relations business. Important assessments of the current health of the industry, those three diagnostics suggest that the public relations business enters the new century very healthy; perhaps the healthiest of all the marketing and professional services.
But as in any annual physical, the tests only tell part of the story. Also important is the physician’s assessment of the environment and lifestyle of the patient. Stress, sedentary lifestyle and smoking are danger signs. Good eating habits and regular exercise bode well for a healthy future. In the case of the public relations business, the trends and environmental factors portend danger signs for the State of the Industry that the diagnostics miss.
Ironically the dangers are rooted in the current good news. While an exploding demand for communications services and consulting suggests a positive prognosis, it will also challenge the management expertise, investment capacity, human capital and administrative infrastructure of today’s firms. If the public relations industry fails to meet those Herculean challenges, it will quickly lose its vitality and public relations as a management and strategic tool will diminish in value. Talented professionals will seek other fields, investment capital will be redirected, and clients will rebuild their internal staffs or turn to other industries.
While there are promising signs, many reflected in the Inside PR report card, that firms are building the capacity to meet those challenges, a full picture of the State of the Industry needs to consider the environment and trends that are affecting the business of public relations. In order of importance, those factors are the phenomenal growth of the communications field, the increasing importance of intangible corporate assets, the prospects for an economic downturn, the consolidation of the PR industry, and the impact of the New Economy.
Communications in Hyper-growth
The underlying reason for the explosive growth of the public relations industry and the substantial appreciation in the value of PR services over the past five years is the simple principle of supply and demand. At a time when the number of graduates, workers and executives with adequate communications skills has declined woefully, the demand for communications has expanded dramatically. So long as public relations firms can recruit, train and retain scarce human communications resources, and direct their talents to satisfy client needs, they will continue to grow the value of their services and the size of their businesses. For they will control the supply to an insatiable and growing demand for communications caused by changes in society, the media and business.
As the world grows smaller and the pace of life more frenetic, communications has become a social tool for everything from educating our children to building bridges across cultures. Today public relations firms are implementing major communications programs for the European Union across a broad range of social issues, from infant care to respect for the elderly, from nutrition to addiction. The largest public relations account in the U.S. is a national education program to help young teenagers and their parents cope with the scourge of drugs. In the past year, public relations played a key role in building participation in the census and in getting out the vote. Virtually every cause and charity has used public relations to gain visibility, volunteers and funding. Public relations agencies, offering both paid programs and pro bono support, will continue to major participants in the growth of social communications.
The media is working hard to meet the increasing appetite for communications, creating new specialty magazines and cable television networks, expanding aggressively on the Internet. Even the older forms of media, newspapers and radio, are growing at double-digit rates. The convergence of old and new media, moving to new levels with the pending merger of AOL and Time Warner, will accelerate the hyper growth of media communications. Not only does the media explosion cause a fragmentation of media that complicates and expands the public relations challenge, but also it adds to the competition for communications-literate talent.
Business is directly affected by social and media changes in the US, coming under far greater scrutiny in its corporate citizen role. It’s not surprising that its communications needs are increasing proportionately. Internationally, business institutions and interests are melding with, and in some cases replacing, national interests and governmental institutions. Multinational corporations, not nation states, have led the forces of economic globalisation. As companies take on this new role, communications become evermore vital to build understanding and relationships with cross-cultural workforces, global markets and an international investor base. As they gain prominence as the forces behind globalise, companies have also become the flashpoints for social and political grievances between nations and peoples. American icons like Coca Cola, Nike and McDonalds suddenly find that assaults on their corporate reputation put at risk their entire brand. In the new global economy, public relations replaces advertising as the essential marketing communications tool, while also helping to build understanding among all the company’s stakeholders worldwide.
Considering all the demands within society and business for skilled communications professionals, the industry’s ability to recruit, train and retain talent will have a major effect on the industry’s future well being. For that reason, the primary mission of the Council of Public Relations Firms is to expand the pool of talent available to PR firms by recruiting at leading liberal arts schools and by attracting and preparing qualified professionals in other fields to transfer to public relations.
Reputation as a Corporate Asset
Those who put value on corporations – auditors, analysts and business economists – are increasingly emphasizing the importance of non-financial indicators and what they call “intangible corporate assets.” Stressing the impact of brands, intellectual capital and other qualitative features on a company’s stock price, they are looking for ways to manage and value non-financial corporate assets. CEOs and boards are beginning to appreciate that by focusing on intangible factors they can improve business performance and shareholder value.
This will be a watershed for public relations. Public relations has always been about managing the intangibles – public trust, employee commitment, customer loyalty, management credibility. That’s the source of the term “reputation management.” As all the reputation factors take on a more important corporate focus, public relations will have the opportunity to take on a more important corporate role. The question is whether chief public relations officers and their PR agencies are equipped with the financial and other business tools to execute that role.
The key tool that the industry needs to develop is a reliable and universally accepted method for establishing reputation values and the return on investment in reputation-building programs. The Council of Public Relations Firms has undertaken several research projects to develop such business metrics and to assess the methodologies of commercial research firms that offer reputation measurement systems. Those studies have also isolated the essential factors that acceptable reputation efforts must address and measure.
As business embraces the importance of reputation, other professional services industries like research firms and management consultants are developing reputation-related products. While new competitors help to raise the value of PR’s reputation management services, there is also a danger that more analytical-based corporate functions and consulting firms will assume responsibility for the stewardship of corporate reputation. For that reason it is particularly important that public relations firms have universally accepted principles and processes for building and protecting corporate reputation, and systems for measuring the impact of public relations on all intangible corporate assets.
Agency leaders remember the bloodletting of the early 1990′s when the communications industry encountered a minor recession. It was an unpleasant time of programs halted mid-stream, unpaid bills and widespread layoffs. Unable to cope with those business realities, the leaders of many of the major firms were fired or retired. today’s leaders face the prospect of a far more dramatic economic downturn, from the dizzying heights of a decade of prosperity.
While economists debate society’s vulnerability to an inevitable slowdown or recession, the public relations industry is in a much better situation than it was in 1991. Today’s leaders were mid-level agency executives who survived – and learned from – the disasters of the last recession. During the past decade, firms resisted the over-staffing and investing in non-core services that created the need for the layoffs and salary freezes of the early 1990s. Because public relations has become a leading business within the communications holding companies, in a recession it is less likely that PR subsidiaries will be allocated a disproportionate share of the pain for the good of the parent enterprise. And finally, public relations firms now have seasoned account managers and professional finance officers to help guide the enterprises through difficult times.
To prepare for a downturn, public relations firms still must improve their technical infrastructures. Some smaller firms have not had the investment capital to keep pace with expensive hardware and system upgrades or to experiment with the many new software applications to assist in administrative management and the practice of public relations. Larger multi-office firms must integrate a variety of financial, administrative and communications systems, all of different vintage and some incompatible, inherited from acquisitions and resulting from periodic upgrades. Technology has proven to be a great productivity tool, a factor in the steady rise of average revenue per employee in firms during the past decade. But much remains to be done before firms will have the modern integrated systems to help them manage their operations most efficiently in good times and bad.
Building the financial scale to invest in new technologies is one of the reasons for the tremendous pace of acquisitions of public relations firms during the past three years. After some 250 deals in that period, the industry has consolidated, with several major generalist public relations firms also becoming leaders in specialties that were formerly dominated by independents. And with the large communications holding companies now owning nine of the top ten public relations firms, they have become far less dominated by their advertising businesses and more willing to provide capital and stock to PR agency CEOs for further investment. .
The prospect is for continued consolidation. With PR firms commanding stronger growth and healthier profit margins than other marketing services businesses, the communications conglomerates see them as attractive buys. Non-US companies, in particular, are attracted by the prospect of gaining stronger footholds in the corporate suites of US client companies by purchasing US public relations firms. While the acquisition multiples for PR firms are higher than for ad operations, the PR firms are usually smaller and therefore more affordable.
Those who claim that consolidation is creating firms that are too big to provide good client service and to maintain a healthy employee culture often ignore the relative size of public relations firms, and indeed of the PR industry. The fact is that today’s PR firms are still small by the standards of the professional services industries with which public relations competes for talent and business. Based on total revenues, the largest global public relations firm, Burson Marsteller, would only rank 17th among advertising agencies and 47th among management consultants. The management-consulting firm Anderson Consulting alone is twice as large as the entire public relations industry worldwide.
Actually consolidation is occurring at the same time as new public relations firms are proliferating. Large firms are acquiring independent specialist firms to improve their coverage of high growth industries like technology and financial services, and to add to their ranks successful practitioners. Meanwhile, some of those practitioners are leaving to start their own firms, and eventually to sell them. Many of the leaders of firms sold in the past three years were veterans of larger firms before they became entrepreneurs. Since many of the new firms pioneer innovative services that are eventually widely adopted, the cyclical process contributes to the dynamism of the public relations industry.
The New Economy
The many changes appearing across the business and media landscape, usually attributed to the “New Economy,” will have a profound effect on the public relations industry. In fact, the Council of Public Relations Firms commissioned a study by the Meta Group that examines how the engine of the New Economy, the Internet, is affecting the practice of public relations and the operations of PR firms.
As compared to other communications disciplines, the Web is made for the more open discourse and community building functions of public relations. But the dangers of PR firms being “disintermediated” by new types of competitors and of PR practitioners being left out of corporate e-business and Internet planning is significant. Public relations firms need to innovate to compete on a new playing field and corporate practitioners need to seize Internet communications responsibilities that are slipping from the grasp of CIO’s and are up for grabs.
The Internet’s voracious appetite for content provides public relations professionals the opportunity to use their communications skills as content publishers for their companies and clients. How an organization presents itself on the Web is a reflection of its culture, its key messages and the unique needs of its stakeholders. Who better than those who responsible for those factors in the real world to handle them on the Internet? If public relations professionals cede to others the look and content of Internet communications, they may eventually lose their charter in the off-line world.
Because the Internet is so conducive to interactive discourse, public relations professionals and firms must develop one-to-one communications skills and assume the function of discussion leaders in on-line forums. They must also transfer expertise in coalition building and grassroots mobilization to on-line community building and networking. Competence in visual communications will be a much more important supplement to verbal skills in order to capture and hold the attention of Web audiences.
As the New Economy affects client industries, public relations firms need to adapt their offerings. For example, the financial services, retailing, travel and fashion industries are moving on-line in a major way, requiring the traditionally low-tech agencies and specialist firms serving those markets to quickly hire tech-savvy staff and to invest in sophisticated technologies. Meanwhile they still need to keep up their activities in the off-line world, both to support traditional brick and mortar operations as well as to direct customers to e-businesses. This puts a strain on staffing and profitability of PR firms.
Media and investor relations are also changing dramatically in the New Economy. In the latter case, public relations professionals are using marketing communications techniques to reach the fast growing base of individual investors that have moved into the market during the past decade. But the changes are greatest in the fragmenting media world. Not only have the number of reporters grown exponentially with the introduction of new media, but the turnover of journalists has also increased. To a similar degree, changes are affecting the analyst community and other industry authorities. To keep track of journalists and influencers, public relations firms are turning to outside vendors for directory and knowledge management services, a trend that may well create an entirely new partner industry.
High tech public affairs has also become a hot new area that will undoubtedly grow in coming years. Public relations professionals increasingly will be called on to help companies address social issues like personal privacy and the “digital divide,” a term referring to the growing gap between the haves and have nots in the information society. Economic issues are arising around taxation of e-commerce, international trade standards for e-businesses and restraint of trade concerns focused on companies with dominant technologies. And the New Economy creates a host of regulatory issues; from the recent SEC decision on more open disclosure of financial communications threat to protecting intellectual property from Napster-type technologies. All of these issues create tremendous opportunity for new counselling and public affairs services.
The public relations industry’s future health will depend on its ability to adapt successfully to currently emerging trends, to win in new markets against new competitors and to confront inevitable changes to the economic and business landscape. Success will require the industry to continue the progress of the past decade, but also to make some disciplined and bold lifestyle changes. Building a solid knowledge base and analytical tools will strengthen public relations’ role as a strategic business tool and the ability of public relations firms to prevail in all economic environments. Encouraging innovation and recruiting from a broader pool of talent will ensure the industry seizes the many opportunities of the New Economy and brings fresh insights and creative solutions to its clients. If it continues to build its strategic muscle and feed its creative spirit in this way, the State of the Industry should remain healthy.
This report was prepared for a US trade publication