Yes, Big Can Be Beautiful

Report Cards study shows larger shops outpaced industry

Sometimes size matters. Last year was a challenge for agencies financially, but the largest national ad shops managed, in the aggregate, to increase their revenue, vs. a decline in 2001. The gain was not much—less than 2 percent—and it leaves them below the peak reached in 2000, but up is better than down. These top-tier agencies outperformed the industry, which likely will show a sin- gle-digit percentage decline.

One reason for this relative strength: The big agencies work for the big clients, whose ad activity tends to be less volatile and continues despite economic pressure. Another reason: Big agencies were pitching for—and winning—business below their usual size thresholds in order to keep revenue flowing through their systems.

The data collected for Adweek’s Report Cards study show a slight correlation between a national shop’s size and its revenue growth rate. The four largest agencies had revenue growth at or above the median, while the five smallest shops posted revenue declines and were among 2002’s weakest performers.

The regional shops, taken as a group, did better than the nationals. Aggregate revenue was up nearly 5 percent, outpacing the national agencies and the industry as a whole. All regions showed revenue gains, ranging from New England’s 12 percent to the Midwest’s 2 percent. These good showings are not surprising, since our regional sample has an upward bias. It includes only the 10 largest—and likely most successful—agencies in each of six regions. The national-agency sample dips more deeply down the quality scale.

The relationship between size and growth among the regionals is complicated. When considering the 60 shops, there’s a slight negative correlation. The smaller shops had a better growth performance than the larger ones. Any event—say, an account win—at a small shop will have a bigger relative impact than the same event at a larger agency.

This negative correlation is clearest in the East. Bartle Bogle Hegarty doubled in size last year, but even after that, it is only the eighth-largest player in its league. The same amount of revenue growth that doubled BBH—about $12 million—would have produced a “mere” 14 percent growth at Gotham, the region’s size leader.

In New England, the correlation was reversed. There, as with the national agencies, bigger was better. But the statistics need some interpretation. In New England, there’s much less of a difference between the largest shop and the smallest than there is in the East. The New England agencies cluster pretty tightly around the average. So even though the relationship between size and growth is strong based on the math, in real life, size may not have mattered that much.

The most desirable, but least attainable, measure of a shop’s financial performance is profitability. We use the revenue-to-staff ratio as a rough proxy for a direct profit measure. Since staff expense is far and away an ad agency’s largest operating expense, the more revenue that is available to cover staff costs, the more profitable an agency is apt to be. The data for the national shops rely more than usual on estimates, since many of them, as part of publicly owned holding companies, are cautiously feeling their way through the new thicket of federal disclosure regulations. Among the regionals, however, there is a small but clear correlation between size and profitability. Indeed, bigger is better.