Tag Archives: scope of work

Agency Compensation: The “More for Less” Trap

31 Aug

More for LessFor many marketers, cutting agency fees is an obvious target when it comes to meeting budget reduction goals. The reasons are understandable given the need to balance achieving in-market results and preserving or improving working media levels, while achieving the desired savings target.

A factor which clouds this issue, is the general level of uncertainty among marketers as it relates to the overall competitiveness of the fees being paid to their agency partners. Are we paying our agencies too much? Or are we already at a competitive remuneration rate? Without being able to objectively address this item, there will likely be internal pressure brought to bear from finance and or procurement to reduce agency fees as part of the budget right-sizing initiative.

It should be noted that we believe in regularly reviewing agency fees, assessing their competitiveness vis-à-vis the market and in looking for ways to optimize a marketers return on its agency fee investment. That said, we also firmly believe in compensating agency partners fairly and in proportion to both the agreed upon scope of services and the agency’s ability to contribute to the attainment of an organization’s marketing and business goals.

Experience has taught us that organizations which focus solely on reducing agency fees, without adjusting the scope of work and or the agency staffing plan upon which those fees were based, can negatively impact agency relations and jeopardize the quality of the work generated by the agency. Further, we have found that when an advertiser involves its agency partners in the budget reduction process there is a greater likelihood of successfully addressing the near-term goal, with the least risk of negatively impacting brand sales.

While it should go without saying, we will say it any way, advertisers must adjust their expectations downward with regard to key agency deliverables in the wake of a budget reduction. It is not an agency’s responsibility to fund the advertiser’s savings goal. As it is, budget reductions create financial challenges for agencies in the form of reduced levels of revenue, which in turn create staffing and resource constraints that they must deal with. Thus, asking an agency to reduce its negotiated overhead rate or to lower its profit percentage to preserve planned deliverables (e.g. do more for less) is simply not appropriate.

There are specific areas that an advertiser might consider, in addition to right-sizing the scope of work to align with the revised marketing budget, which can reduce agency time-of-staff requirements and therefore fees:

  • Review the creative briefing and approval processes. Streamlining and reforming current practices in these areas can reduce the number of steps and therefore the number of agency personnel involved in the creative development process. This in turn can lower the level of “re-work” required, yielding meaningful time savings.
  • Extend current campaigns, rather than developing new approaches, leveraging current creative assets and forgoing the investment in both hard costs and agency fees required to conceive of and launch new creative campaigns.
  • When it comes to the creation of regional versions of creative or the production of collateral materials, embrace an “adapt” versus an “origination” mindset, optimizing existing content, rather than spending time and money to re-create the wheel. The age old acid test of “nice” or “necessary” is the best filter to apply in this area.
  • Reduce the number of media plan revisions over the course of a year. Establish clear goals, implement compelling and relevant strategies and tactics and “work the plan,” rather than revising and re-selling plans.
  • Assess the number of meetings, their frequency and the number of agency personnel required to attend. Attendance, travel time and expense and meeting prep time reductions can yield meaningful savings for both client and agency.
  • Work with the agency to adjust its staffing plan, evaluating both the number and level (e.g. experience) of personnel required to deliver against the revised scope of work.

Finally, once the planned reductions have been identified, consider adding or enhancing the agency’s performance bonus, with a large portion of the incentive compensation tied to in-market results. This is an excellent way to let the agency know that your organization understands both sides of the “share the pain, share the gain” partnership mantra. Taking this approach will deliver on the budget reduction mandated by the organization, without negatively impacting relationships with the organization’s agency network.

 

Agency Charging Practices Questioned

9 Sep

ad agency charging practicesEarlier this week Digiday, a media company serving digital media, marketing and advertising professionals ran an interesting article regarding agency compensation and the “tricks” played by agencies to boost their bottom lines. 

In short, the article asserts that; “For ad agencies, it’s harder than ever to get paid. Their services are becoming increasingly commoditized, and their margins are getting squeezed as a result.”  According to the author, Jack Marshall, this in turn is “driving some to get creative with the ways they bill clients, as they exploit loopholes and tricks in an attempt to maximize their rewards.”  Examples of the bad practices employed by some agencies in this particular area include:

  • Artificially inflating the salaries of their employees when developing compensation programs
  • Double-charging clients by including items such as medical expenses in both salary costs and overhead calculations
  • Slow rolling projects and or throwing more people at a project than is required to boost billable hours

Andrew Teman, one of the agency executives interviewed by Digiday for the article suggested that;

“The problem with big agencies is they don’t make money being efficient; they make money billing more hours.”

For practitioners within advertising industry, the aforementioned revelations are not newsworthy.  Attempts to game the system have been ever present and serve as a reminder of the decades long struggle clients and agencies have had in structuring mutually beneficial agency remuneration programs in a post “15% commission” world. 

Ironically, advertisers and agencies want the same thing… a fair and efficient compensation program which incents extraordinary performance, good behavior among the stakeholders and which leads to a solid client-agency relationship.  To that end, neither party’s needs are being effectively served by the games and subterfuge described in the Digiday article.  The solution to the issue, which seems elusive, is actually rather straightforward: 

  1. Development of detailed scope(s) of work (SOW) to serve as the basis for agency resource investment modeling.  This is an important first step, since it is the SOW which will drive agency staffing and the resulting schedule of charging practices.
  2. Completion of a comprehensive agency staffing plan, with personnel names, titles, functions, utilization percentages and billing rates.
  3. Implementation of an agency remuneration program which aligns the client’s goals with the agency’s resource investment.  Of note, there should be full transparency into the various cost elements used to calculate agency fees, overhead and profit levels.
  4. Reporting and control mechanisms to monitor agency time-of-staff investment, performance and outputs to protect the financial interests of both clients and agencies. 

Unfortunately, as straightforward as the solution may appear, few clients and or agencies have effectively implemented the four steps suggested above at a sufficient level of detail as part of their continuous relationship management processes. 

Some would suggest that the real challenge has been in effectively scoping the work required on behalf of an agency.  According to Michael Farmer, Principal of Farmer & Company which specializes in assisting advertisers and agencies in developing and implementing accurate, effective Scope of Work practices and tools, “New metrics are required to track and measure workloads, prices and resource productivity. That’s the only way agencies can evaluate and negotiate changes in the fees they are paid in today’s marketplace — and halt the erosion in agency operational health.” 

We would suggest that putting in place an effective monitoring program in this area is long overdue at most advertisers.  If not addressed, the institutionalization of the bad behavior referenced in the Digiday article sets a dangerous precedent for treating relationship ailments with trickery rather than frank dialog between clients and agencies.  

 

 

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