Tag Archives: Compensation

4 Keys for Optimizing Direct Labor Based Remuneration Systems

9 Jul

punch clockAttorneys do it. So do accountants, consultants, architects and engineers.

What are these firms doing? Tracking billable hours. Why? Because time and material based compensation remains the predominant method of billing for professional services firms and this includes advertising agencies. In fact, according to the Association of National Advertisers’ 2017 “Trends in Agency Compensation” study, labor-based fees remained the “most used” method of remuneration for marketers of their ad agency partners.

There are many inherent benefits to direct labor based compensation systems from both an agency and advertiser perspective including simplicity and clarity, particularly for marketers utilizing multiple agency partners that may be collaborating on overarching campaigns or playing specific roles on comprehensive, integrated projects.

We believe there are four key steps to successfully implementing and managing direct labor based remuneration systems:

  1. Establishment of a clear, concise Statement of Work (SOW), with specific deliverables and estimated timelines.
  2. An agency Staffing Plan that identifies the individuals that will be assigned to the client’s business along with information detailing their department, title, bill rate and utilization rate.
  3. Build-up detail supporting the agency’s suggested billable hourly rate (i.e. direct labor, overhead, profit margin) to accompany the agency’s annual fee proposal.
  4. Timely, accurate time-of-staff reporting to facilitate the monitoring of burn rates and to support the fee reconciliation process.

While there are contractual language considerations that will also help to insure transparency and establish client and agency expectations, including limiting agency revenue to that which is agreed upon as part of the remuneration program, we want to focus our thoughts and recommendations on tracking billable hours.

Aligning advertiser expectations with agency resource requirements is the basis for any compensation system. Thus collaborating on an annual Statement of Work, complete with detailed deliverables and timelines is a critical first step in the process. The resulting document will inform the agency’s efforts to construct its Staffing Plan, which in turn will form the basis for its fee proposal.

Experience suggests that conversations should be had in advance of the agency’s development of its Staffing Plan. Specifically, the parties will need to agree upon the basis for the annual full-time equivalent (FTE) calculation and the rules related to the application of agency employee time in excess of the FTE standard for fully-utilized employees and how utilization rates are impacted by an employee’s “total” annual recorded time. As it relates to FTE standard, there is no normative data for the advertising industry. That said, an 1,800 to 1,875-hour standard (35 hours per week, multiplied by 50 weeks per year) represents a typical FTE range.

Once the SOW and Staffing Plan have been agreed to, reviewing and coming to agreement on the basis for the proposed billable rates is the next step in the fee negotiation process. The basic formula for calculating a billable hourly rate is as follows:

Billable Rate = (Direct Labor Costs + Overhead + Profit) / Total Projected Annual Hours

Ideally, billable hourly rates would be calculated by employee or by function, without revealing specific employee salary detail. As a fall back, calculating billable hourly rates by department are clearly preferable to a blended hourly rate for the agency as a whole. Thus for an agency associate with direct labor costs (salary + benefits) of $100,000 per year, an overhead factor of 1.0 x direct laborpunch clock, a target profit percentage of 15% and an 1,875 FTE standard, the billable hourly rate calculation would look as follows:

Billable Rate of $114.67 = ($100,000 + $100,000 + $15,000) / 1,875 hours                                                                                                                                             

From a reporting perspective, monthly time-of-staff reports detailing “actual” versus “planned” hours by individual are ideal to serve as the basis for regular discussions between client and agency on burn rates and what, if any, course corrections are required. The goal of the reporting and resulting conversations are to ensure that there are “no surprises” that would adversely impact either party. A formal time-of-staff reconciliation should be conducted annually, preferably by an independent third-party to validate that the time reported by the agency is consistent with the time in the agency’s time-keeping system.

Following the aforementioned steps will help protect the interests of both client and agency and will lead to a compensation program that is both transparent and fair.

The Real Cost of Agency Employee Turnover

31 May

talentTalent. Whether viewed in the context of attracting, developing and or retaining ambitious, gifted employees, talent management is a major challenge for all professional service providers, perhaps none more so than for advertising agencies.

As the industry has evolved over time, the ability to attract entry-level talent has become more difficult. Agencies have reduced their on-campus recruiting presence, starting pay levels are not as competitive as other professional services firms, such as management consultants and agencies are viewed by many candidates as “sweat shops” with low pay, long hours and little loyalty.

Sadly, once a young graduate joins an agency, some of these perceptions too often mirror reality. This is often compounded by limited opportunities for training and development, in favor of a “baptism by fire” on-boarding process marked by immediate deployment onto client accounts with high expectations and demanding, results oriented environments.

The end result for advertising agencies has been an increased level of employee turnover. In turn, this lack of stability has led to higher operational costs ranging from increases in time-on-task to higher recruiting and training costs. The impact of increased agency employee turnover rates negatively impact clients. This often takes the form of higher re-work rates and the need for greater staff coverage to cover of employee inexperience and a lack of direct knowledge of the client’s business.

More significantly, many would argue that these talent issues have negatively impacted client/ agency partnerships, resulting in shorter tenures and more shallow relationships between personnel on both sides of the aisle.

For its part, the industry has acknowledged that “talent management” is a challenge that must be addressed. Given the rapidly changing marketing landscape, driven in part by a seemingly never ending stream of technology advancements, there is a clear need to expand not only the depth of the agency talent pool, but the breadth as well. The need for application developers, coders, data scientists, user-experience architects, social community managers and content curators and creators is now just as important as attracting account managers, copywriters, art directors, media planners and buyers.

By comparison, management consulting firms have been able to more successfully manage their talent pipelines, attracting the best and brightest of our university graduates, developing that talent, retaining their personnel and achieving billable rates that are much higher than their agency counterparts (or should we say competitors).

The irony is that management consulting firms have quickly morphed their business models, competing directly with traditional ad agencies. Firms like Accenture and Deloitte now provide a full suite of marketing and advertising services involving branding, attribution modeling, digital management, graphic design, social and experiential marketing to provide clients with end-to-end customer engagement support. Importantly, these firms also have the ability to readily deploy personnel within these functions on a global basis.

With an expanding set of competition including other professional services firms, technology firms, media sellers and advertisers migrating select functions ranging from their agencies to in-house solutions the challenges for agencies looking to address their talent needs will likely remain steep in the near-term. That said, given the importance professional staff play in establishing trust and credibility with clients, the growing pressure from advertisers for full-disclosure remuneration systems and the resulting need to build out agency teams and the pool of billable hours will be critical to driving top-line success.

If agency holding companies want to avoid becoming temporary staffing firms, one important element in the talent acquisition cycle is to build strong agency brands with compelling cultures that appeal to college graduates, young professionals and mid-level managers. With the multitude of agency’s within their networks, holding companies may ultimately have to consider consolidating and integrating some of their agency brands to create scale, introduce a broader range of services and to provide meaningful career development opportunities for their associates.

Beyond building compelling brands/ cultures, agencies will likely have to rethink their staff compensation programs, which over time have become very polarized, with top managers earning significant salaries and more junior personnel laboring at lower salary levels with few perks. Unfortunately, the easiest way for these folks to advance their economic status is to jump ship and go to another agency for a loftier title and a bigger paycheck. Too often this pattern is then repeated every two to three years.

This will require ad agencies to begin with rethinking entry level pay, which pales in comparison to what a college graduate can earn by going to work for another professional services or technology development firm. There is no sense in ratcheting up the on-campus recruitment effort, if an organization is not willing to back that up with a competitive compensation program.

According to a 2014 4A’s report, average ad agency starting salaries of $25,000 paled when compared to the $70,000 paid at management consulting and technology firms and $125,000 for 1st year law associates. Sir Martin Sorrell called it right in 2011 when he called the agency talent situation “criminal.” In the past, agencies were able to leverage the industry’s reputation as an energetic, forward thinking, collaborative, fun sector and the agencies themselves were thought to have engaging cultures that helped candidates look beyond compensation. Today, it is the technology companies that are viewed as having employee friendly cultures, while agencies are viewed as having more competitive, more cutthroat culture, which does not appeal to millennials.

Earlier this spring, Digiday published an article suggesting that as challenging as the competition for entry-level personnel might be, the real talent crisis was in middle management, individuals with 3 – 5 years of experience. These are the frontline troops, the doers and problem solvers. While compensation is a concern for this group, they are also looking for “more challenges” and “leadership experience.” Often times, they cannot satisfy their desires in this area at their agency and when they leave, many don’t stay within the industry.

In our experience, addressing the challenges of attracting top talent and reducing turnover in the ad business is an important component in reinvigorating client/ agency relationships, boosting the levels of trust and confidence… and the caliber of the work. We hope that agencies can make meaningful progress in this area and once again become desirable, highly coveted career alternatives for talented young people.

 

 

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