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When John Foenander, the chief executive of Finex, describes his agency's culture as "obsessively commercial", he underlines a stark reality for today's below-the-line agencies.

Finex is one of the winners in this year's direct marketing and sales promotion league tables, topping the table for pre-tax profits, making £2.7 million in the year to February 2004.

Foenander is eager to talk up the agency's commercial credentials. "We live or die by our ability to consistently drive clients' revenues. Everyone is focused on clients' return on investment and our flat management structure means everyone is a 'doer'. We're all accountable," he asserts.

The truth is, clients are spending less with agencies but expect more for their money. Those agencies that will thrive must be streamlined, efficient and add value at every corner. So it's perhaps not surprising that this year's tables, compiled by Willott Kingston Smith, show margins under strain.

The top 40 DM and SP agencies saw operating profit fall by 22 per cent to £37.8 million. Gross income was down by 3.5 per cent, or some £12.7 million, and - most tellingly of all - operating profit margins are down from 13.4 to 10.8 per cent, on average. As the profit margin of a well-run agency should be 15 to 20 per cent, it's clear that the hangover from recession has lingered.

The pressure on margins is a fact of life that agencies are going to have to get used to. However, the average profit margin of ad agencies has also dropped considerably to 10.7 per cent.

Because of the restrictions of the Sarbanes-Oxley ruling, our figures are for end-of-year accounts filed at Companies House. Most are ranked according to their 2003 figures - a tough year with business only picking up the following year.

Indeed, companies that posted 2004 figures reveal a brighter picture.

Joshua, RMG:Connect, Craik Jones Watson Mitchell Voelkel and Clark McKay & Walpole all enjoyed income growth. "There's evidence that the sector is moving into a more favourable trading climate," Cliff Ireton, a partner at Willott Kingston Smith, says.

But there have been casualties. Four shops which featured in the 2004 table have gone into liquidation - Cramm Francis Woolf, Lowe Broadway, Marketing Drive and Mercier Gray (now trading as Purity).

There are three other absences in the league table worth noting. OgilvyOne, MRM and Harrison Troughton Wunderman do not feature because their accounts are filed at group level rather than being separated out into individual companies. Had they featured, there's a good chance that they would be leaner versions of their former selves. Eight of the ten largest agencies by gross income laid off staff since they last filed their accounts.

This drop in staff numbers reflects a fundamental shift in both the type of work agencies are now doing for clients and the way they are remunerated.

"Easy money is no longer available," Jim Surguy, the managing director of Results Business Consulting, business adviser to agencies, says. "The big change is the decline in mark-ups on bought goods such as print. Clients have wised up."

Clients are increasingly likely to handle the execution of campaigns themselves or to rationalise the execution across different suppliers.

"Agencies are having to adjust to the fact that clients want great ideas and strategy, rather than necessarily campaign delivery," Chris Gordon, the chairman and chief executive of WWAV Rapp Collins Group, says. "There is a shift out of execution and into advice."

So agencies must find a way to be fairly remunerated for their strategic input. "Agencies need to get better at talking to clients about value. They previously made their margins on output but the focus has now changed to input," Chris Thomas, the chief executive of Proximity London, says.

Proximity London ranks as the second-largest agency by income behind Carlson Marketing Group but saw pre-tax profits fall by 35 per cent in 2004. It was a transitional year for the agency as Thomas put together a new senior management team. He also oversaw a costly network-wide HSBC pitch, which was ultimately unsuccessful. But wins included Shell and Yell.

The fortunes of its fellow Omnicom-owned agency WWAV Rapp Collins also dipped with income from the London agency dropping by 29 per cent in 2003.

Its 2005 figures will be hit by the loss of Oxfam at the end of last year and Lloyds TSB this year, although recent wins include Somerfield and Sony Consumer Electronics.

Mergers and acquisitions have continued apace since the last league table, the most notable being the merger of the Omnicom-owned TBWA\ GGT and Tequila London. Their combined figures would put them at the top of both the gross income and pre-tax profit tables, despite the fact that TBWA\GGT saw profits drop by 43 per cent in 2003, largely owing to the loss of the NatWest account.

"After seven years of speculation we have done the right thing by merging the two companies," Tim Bonnet, the joint chief executive of Tequila, says. Since the January merger, the agency has won Morgan Stanley, Reuters and the directory enquiry service 118 888.

In the WPP camp, greater emphasis is being placed on measurable, targeted disciplines. One of the three priorities laid out in its Annual Report was to increase the share of measurable marketing services - such as insight, direct and interactive - from around one third of its revenue to 50 per cent.

"Networks such as ours need to show as much commitment and passion for direct communications as has traditionally been given to TV and more traditional media," the WPP Group chief executive, Sir Martin Sorrell, says.

Larger agencies aligned to major networks may have suffered some of the biggest dips in income and profit - and may take longer to adjust to the new marketplace - but they have the most to gain when major multinational accounts come up for pitch.

One clear trend that has emerged in this year's league table is the profitability of the independents, such as Tullo Marshall Warren. "They continue to outperform large groups and publicly owned companies," Ireton says. "Independents have greater flexibility to adapt to market conditions. The decision-making process can come down to one or two individuals so managing staff and controlling over-heads is quicker and easier."

Gross income among independents as a whole increased by 9 per cent with particularly strong performances from Iris Promotional Marketing (up 60 per cent) and Gyrogroup (up 65 per cent).

A handful of agencies may be on an upward growth curve, but the majority would be happy to simply see their income and profits level off rather than drop in the coming months. Judging by the improvement in 2004 figures, better times might well be on the horizon.

NUMBER OF EMPLOYEES Company name Year end Latest Change % 1 Carlson Marketing Group 31/12/03 409 -13.71 2 EHS Brann 31/12/03 260 -2.62 3 Brann 31/12/03 225 -73.25 4 Proximity London 31/12/04 215 -7.73 5 WWAV Rapp Collins 31/12/03 211 -18.85 6 Joshua Agency 30/09/04 210 10.53 7 TBWA\GGT (previously TBWA\GGT Direct) 31/12/03 186 -3.13 8 Draft Worldwide 31/12/02 158 -1.25 9 The Marketing Store Worldwide 31/12/03 141 -0.70 10= Tullo Marshall Warren 31/12/03 138 18.97 10= Haygarth Group 31/12/03 138 -8.61 12 Arc Integrated Marketing 31/12/03 133 -14.74 13 Tequila London 31/12/03 130 10.17 14 Triangle Holdings (previously The Triangle Group) 31/12/03 129 -8.51 15 RMG:Connect (previously RMG:Black Cat) 31/12/04 107 35.44 16= Euro RSCG KLP (previously KLP) 31/12/04 94 -34.72 16= BD Network 31/12/03 94 6.82 18 Draft London (previously Draft Worldwide London) 31/12/02 90 0.00 19 Dialogue Marketing Partnership 31/12/04 89 -3.26 20 Exposure Promotions 31/12/03 83 20.29 Total 3,240 TURNOVER Company name Year end Latest Change % pounds '000 1 WWAV Rapp Collins 31/12/03 45,475 -41.57 2 Proximity London 31/12/04 40,450 -6.96 3 Carlson Marketing Group 31/12/03 39,278 -13.29 4 EHS Brann 31/12/03 35,210 -11.08 5 TBWA\GGT 31/12/03 29,141 4.10 6 Arc Integrated Marketing 31/12/03 28,572 -3.17 7 Joshua Agency 30/09/04 28,001 20.82 8 Draft Worldwide 31/12/02 24,733 -5.97 9 Haygarth Group 31/12/03 22,151 6.81 10 Tequila London 31/12/03 21,874 -2.18 11 The Marketing Store Worldwide 31/12/03 21,360 24.73 12 Triangle Holdings 31/12/03 20,424 -6.39 13 Logistix 31/12/02 18,984 39.14 14 Craik Jones Watson Mitchell Voelkel 31/12/04 18,945 37.33 15 RMG:Connect 31/12/04 17,549 66.33 16 Brann 31/12/03 16,527 -60.59 17 Tullo Marshall Warren 31/12/03 15,903 12.14 18 Dialogue Marketing Partnership 31/12/04 15,424 -14.76 19 Euro RSCG KLP 31/12/04 15,279 -28.06 20 FCBi London (previously DP&A) 31/12/03 13,392 29.05 Total 488,67 GROSS INCOME PER EMPLOYEE Company name Year end Latest Change % £1 Logistix 31/12/02 109,660 26.89 2 Craik Jones Watson Mitchell Voelkel 31/12/04 107,273 -5.58 3 Rapier 31/12/03 105,960 16.57 4 Billington Cartmell 31/12/03 104,811 -4.51 5 Arc Integrated Marketing 31/12/03 100,286 11.91 6 Lida 31/12/03 100,106 -19.22 7 Proximity London 31/12/04 99,358 4.61 8 Finex Communications Group 29/02/04 96,256 -11.24 9 Dynamo Marketing 29/02/04 93,619 9.09 10 WWAV Rapp Collins 31/12/03 92,180 -12.83 11 Dialogue Marketing Partnership 31/12/04 90,730 -12.89 12 Gyrogroup 31/10/04 87,688 13.61 13 RMG:Connect 31/12/04 86,981 -8.20 14 Tequila London 31/12/03 85,815 -8.68 15 Triangle Holdings 31/12/03 85,783 -2.09 16 Draft Worldwide 31/12/02 85,348 1.06 17 TBWA\GGT 31/12/03 85,226 -7.45 18 Clark McKay & Walpole 31/10/04 84,108 0.73 19 Claydon Heeley Jones Mason 31/12/04 83,500 -3.83 20 Euro RSCG KLP 31/12/04 82,851 17.07 PRE-TAX PROFIT Company name Year end Latest Change % pounds '000 1 Finex Communications Group 29/02/04 2,688 11.91 2 Dialogue Marketing Partnership 31/12/04 2,670 -39.80 3 Dynamo Marketing 29/02/04 2,462 -9.85 4 Proximity London 31/12/04 2,395 -34.56 5 Arc Integrated Marketing 31/12/03 1,791 220.97 6 Craik Jones Watson Mitchell Voelkel 31/12/04 1,770 -5.85 7 Triangle Holdings 31/12/03 1,674 -42.18 8 WWAV Rapp Collins 31/12/03 1,510 -71.73 9 Tequila London 31/12/03 1,464 -12.54 10 RMG:Connect 31/12/04 1,424 -23.73 11 TBWA\GGT 31/12/03 1,373 -42.89 12 Rapier 31/12/03 1,338 29.53 13 Euro RSCG KLP 31/12/04 1,240 -192.19 14 Lida 31/12/03 750 38.12 15 Publicis Dialog 31/12/03 728 -38.10 16 Gyrogroup 31/10/04 708 14,260.00 17 FCBi London 31/12/03 689 -4.04 18 Tullo Marshall Warren 31/12/03 650 19.27 19 The Marketing Arena Services (trading as ID) 31/01/2005 619 433.62 20 Logistix 31/12/02 605 2,340.74 Total 28,548 EMPLOYMENT COSTS: GROSS INCOME Company name Year end Latest Change % £1 Logistix 31/12/02 43.11 0.28 2 Finex Communications Group 29/02/04 43.67 -18.38 3 FCBi London 31/12/03 45.04 6.80 4 EHS Brann 31/12/03 45.14 -15.04 5 Dynamo Marketing 29/02/04 46.25 -1.64 6 Arc Integrated Marketing 31/12/03 47.23 -1.71 7 Dialogue Marketing Partnership 31/12/04 51.95 27.93 8 Haygarth Group 31/12/03 52.03 -9.49 9 The Marketing Arena Services 31/01/2005 52.45 -15.76 10 Euro RSCG KLP 31/12/04 53.43 6.20 11 RMG:Connect 31/12/04 54.22 -1.17 12 Gyrogroup 31/10/04 54.65 -7.99 13 Draft Worldwide 31/12/02 54.73 1.81 14 Craik Jones Watson Mitchell Voelkel 31/12/04 55.98 10.12 15 Publicis Dialog 31/12/03 57.31 8.71 16 WWAV Rapp Collins 31/12/03 58.07 18.98 17 Target Direct Marketing 31/12/04 58.88 16.22 18 WWAV Rapp Collins North 31/12/03 59.39 22.34 19 Triangle Holdings 31/12/03 60.67 9.45 20 Proximity London 31/12/04 61.81 2.19 GROSS INCOME Company name Year end Latest Change % pounds '000 1 Carlson Marketing Group 31/12/03 21,669 -17.46 2 Proximity London 31/12/04 21,362 -3.47 3 EHS Brann 31/12/03 20,634 -4.94 4 WWAV Rapp Collins 31/12/03 19,450 -29.26 5 TBWA\GGT 31/12/03 15,852 -10.34 6 Joshua Agency 30/09/04 14,510 4.36 7 Draft Worldwide 31/12/02 13,485 -0.20 8 Arc Integrated Marketing 31/12/03 13,338 -4.59 9 Tequila London 31/12/03 11,156 0.60 10 Triangle Holdings 31/12/03 11,066 -10.43 11 Haygarth Group 31/12/03 10,923 -1.82 12 Tullo Marshall Warren 31/12/03 10,858 22.77 13 The Marketing Store Worldwide 31/12/03 10,722 -4.81 14 RMG:Connect 31/12/04 9,307 24.34 15 Craik Jones Watson Mitchell Voelkel 31/12/04 8,260 5.37 16 Dialogue Marketing Partnership 31/12/04 8,075 -15.73 17 Rapier 31/12/03 7,947 30.49 18 Finex Communications Group 29/02/04 7,893 1.09 19 Euro RSCG KLP 31/12/04 7,788 -23.58 20 BD Network 31/12/03 6,892 19.55 Total 251,187