AGENCY REMUNERATION, AGENCY RETAINER OR BILLABLE HOURS ?

AGENCY REMUNERATION, AGENCY RETAINER OR BILLABLE HOURS ?

I thought I would address a quick question, I get asked each and every week by brands or clients looking to understand how to work with a Brand Agency, Digital Agency or even a PR Company. They want to understand in how do I get more ‘bang for my bucks’ ? And,  what’s the best way to maximize my advertising and marketing budget in 2018?

Today’s most effective agencies will all provide full service branding and direct marketing capabilities in the online environment as well as total communications programing and planning. Plus, the elite agencies will also be staffed with intelligent, motivated, highly experienced people with those areas of expertise.

I believe more than ever, agencies and companies that help clients and brands grow, direct and protect them are more important than at any time in history.  I also believe that to create memorable, value brand-experiences for clients today relies on the proper application of art and science.

BUT, with that said, research from the 2017 ANA Agency Compensation Report suggests – use of labor-based fees and performance incentives has decreased as marketers look to simplify their agency compensation practices.

Brands today are already scrutinizing their agency compensation structures and costs. They are also looking more closely at the transparency of how their agencies are compensated, their agreements, and their agency revenue models.

Having a proven, strategically rigorous approach to understanding audiences, identifying positioning territories, developing innovative and credible brand strategies is a must today.

BUT, as I have frequently seen over the years, to get the most value from a client/brand perspective – without a thoughtful Request for Proposal (RFP) or Request For Information (RFI) – the best intentioned agency will not be able to provide you with the best or most accurate response or costing.

Note: Many Multinational Agencies in addition to service fees, will  also incur out-of-pocket expenses on a client’s behalf for items such as travel, materials, illustrations, photography, color laser prints, and miscellaneous e.g. telephone, messengers/couriers, etc.

One thing is for sure, and even evidenced by the latest 2017 ANA Trends in Agency Compensation Survey:  

  • In 2018, will continue to see a decrease in the use of labor-based fees and annual retainers.
  • More marketers are engaging agencies on an as-needed project basis.
  • In today’s environment, speed and simplicity come into play and more clients are looking for specialists and experts in key areas.
  • Clients are now demanding more transparency coupled with more clarity and necessity today. 
  • Todays ‘best marketers’ don’t want to get into a lengthy solicitation and negotiation of staff time allocations and cost break downs of overhead and profit margins. Speed, choice and options are abundant today.

Picture: ANA Trends in Agency Compensation | 17th edition (2017)

Additionally, clients’  ‘traditional agencies’ generally have provided a holistic marketing effort but, in 2018, insight into online marketing gained through experience and immediate ROI accountability is more important than ever.

One thing I always counsel my clients, who are looking for a new agency is: understand how people use the web – to shop, to research, to conduct business, to form communities. Understanding how the market and Internet and mobile marketing are evolving is mission critical.

Typically, the main agency focus of services today includes:

  • Strategic planning: The development, determination, and understanding of the competitive marketplace, both offline and online target customer and how the target utilizes and traverses web content. Thoughtfully developed pre-specified objectives are then translated into effective interactive strategies resulting in growing our clients’ businesses into profitable, Internet commerce ventures. (even including: Research & analysis, brand architecture, visual identity, guidelines, brand activation, etc.)
  • Media planning and buying, stewardship: Trafficking, monitoring, authorization and optimization management – the process of designing and implementing marketing plans which utilize a wide variety of interactive media vehicles to reach the desired online target audience and deliver qualified customers in a cost effective manner (“Cost per Customer/Order”).
  • Creative development: Understanding the target audience, the product/service categories purchase behavior/purchase cycle and the content environment in which messages appear. Most agencies focus heavily in  developing the creative brief in order to obtain a cohesive, persuasive message that motivates the target audience with a “call to action” – i.e a click, a sale, a registration, a subscription, a trial, etc.
  • Strategic alliance development and management: Understanding the Internet/Mobile landscape and how all the various potential or existing alliance “deals” and partnerships affect your clients’ business. Especially in 2018, The Internet is a collaborative medium that feeds off strategic partnerships and alliances.

A hyperlink is a two-way bridge between sites that provides easy access for a user to navigate from one site to another. All of these potential pathways offer opportunity and/or challenges to your clients’ businesses, and needs to understand the relative value of each alternative and how best to optimize performance.

  • Testing process, design and optimization management: Structured learning and growth. Understanding what/how/why direct marketing works on the Internet and integrating this learning into the optimization of agencies clients’ day-to-day executional efforts.
  • Data collection, analysis and reporting: There are quantifiable reasons behind all interactive direct marketing performance. There should be no “chance” in Internet advertising. If an event happens, there is a quantifiable explanation, and the best agencies strive to understand cause and effect and incorporate all learning into future strategy and executions.

Therefore, the core areas associated with agency remuneration must be: strategic thinking, connecting, inspiring and delivering exceptional results!

So, to begin with, I usually start with the overall topic of ‘Explaining how many billable hours in a Year’.

Basically, I then walk through this story BEFORE, talking about the nuances, other options and maximizing your effectiveness and cost efficiency.

Like all creatures on planet today, you have 365 days in a calendar year (except a leap year). These 365 days yield 260 weekdays and 52 weekends and, in the United States we have zero days paid leave required by law.

Therefore, If you do the math, 260 days x 8 hours per day = 2080 billable hours in a year.

But, if you are like others, and me, the reality is you’re probably not working on many holidays or most holidays, if you have children. You probably take off two weeks per year for vacation and you probably lose another week’s time with Thanksgiving, Fourth of July, Halloween and Christmas e.g. 49 weeks x 31 hours = 1519 hours you’re probably required to bill clients in a year.

Importantly, most advertising agencies today charge their clients/brands based on ‘billable head hours’. This is the simple model many Chief Financial Directors/Officers or Agencies use to monitor how much money you are making them. Do some simple math and figure out if you’re making enough revenue to cover your salary.

1519 x (the hourly rate you bill at) = is this less or more money than you cost your employer?

But, if you are still working with agency retainers then the issue of billable hours per person will definitely be an issue.

From an agency perspective, I certainly know from past experience, that we always closely tracked, evaluated and projected: revenue, gross margins, staff salaries, Inter-company time of staff, severances, other staff costs, bonuses, overhead allocations and more.

Too high or too low both have impacts on the retainer calculations and the result. But what is the right number of billable hours per year? From my experience, it has varied from a ridiculously low 1,200 per year up to a mind-blowing 2,080 hours per year. S I’ll bet you now see why this is always a huge issue when negotiating with a new agency or client.

The consideration is what is the accepted working week in your city or market? This will vary from market to market, often set by government or the labor authorities or simply cultural practice e.g. Singapore, London, Taipei, and Sydney to Barcelona. The working week is made up by the number of hours per day and the number of working days per week.

Based on the ‘old standard’ e.g. eight-hour day and the five-day working week the weekly working hours is forty. BUT,  in some markets the working week is six days or five and a half days. And, having worked in Taiwan and Spain, its totally different altogether! 

Others work a seven-hour day and so over five days you have a 35-hour week. Of course people can work overtime, but this is only a consideration if the agency actually pays overtime. Unpaid overtime has no impact on calculating billable hours per year.

In my experience, most of my friends work much more than 40 hour weeks and often push closer to 60+ hours a week.

Next consideration is the number of days considered holidays. Holidays can be both annual leave and public holidays. Annual leave is the leave accrued and given to employees based on a working year. In some markets it is five or six weeks per year, others four or two and some markets do not have annual leave at all.

Interestingly China and Taiwan, have no annual leave provisions,  and have an extraordinary high number of public holidays for New Year, National Day and International Labor Day. While other markets that have higher annual leave provisions will often only have a lower standard number of public holidays.

The final considerations are issues like sick leave provisions and an acceptable amount of non-billable time. Non-billable time is the time required by employees to fulfill requirements that are not directly billable. Some people accept a blanket allowance for this time such as 5% or 10%, while others assume that these activities will be taken up in overtime outside of the number of billable hours per week.

Importantly, before you enter into compensation or remuneration discussion, I firmly believe you must discuss internally before any ‘external meeting’  these three questions:

1. How has this client/brand been paying their current rostered agencies.

2.What is their proposed Marketing & Communications budget?

3. Are they interested in discussing a performance -based compensation? Or, as I say a ‘Carrot 0r Stick’ incentive.

Always understand their ‘revenue model’ and ‘expense models’, especially tech, digital and Telco clients. Especially, elements like: 

  • How do they make money? Key revenue streams?
  • Pricing? Flat fee or %? Why that rate?
  • Recurring revenue frequency?
  • Is there a big difference between Gross vs. Net Revenue?
  • High Volume vs. Low Volume Business?
  • Example showing basic math:
  • 100 Clients x A Units x B Fee = $C Revenue
  • Easy to apply multiples: 10x, 100x clients
  • Cash collections: Immediately? 30-90 Days?
  • Expected conversion rate to get a paid client?
  • Expected ARPU (Average Revenue Per User)?
  • Life-time Value of Customer (LTV)?
  • Key Expenses / Time-Efforts Needed To Generate Revenue?
  • Channels: How to reach / market to customers?
  • Strategy: How to convert, acquire or close clients?
  • Unique Strategic Relationships / Partnerships?
  • Potential for leverage or scalability to grow fast economically?
  • How long is sales cycle to get a client?
  • Average Cost to Acquire a Customer (CAC)?
  • Cost to Maintain a Customer & Build Recurring Sales?
  • Monthly burn rate, now vs. after funding?

Here are the major Compensation/Remuneration Options used today:

  • The Commission – Based System (Traditionally – up until 2010 – 15% paid by media. This has been driven by marketers’ who push for simpler compensation methods, the use of traditional media commissions. This model is near “extinction” at only 3 percent of respondents in 2010,  primarily for media services, and notably for programmatic media, which involves both human labor and technology costs.
  • Fee–Based Arrangements  Client & Agency negotiate a flat sum on agreed scope;  after years of growth, the use of fees. Although this is still the most-used method, it is losing momentum in favor of a small but increasing use of traditional commissions and value-based compensation. Generally, these are daily or hourly and applied to by role and multiplied by the number of hours or days taken.
  • Cost-Plus Arrangements  Fee basis of cost of work, when media billings are low/limited PLUS, agreed Profit Margin
  • Incentive-Based Commission  Primarily based around determined performance goals, sales and market share. This includes evaluation of creative plus, compensation thru media commission, fees, bonus and/or combination.
  • Percentage Charges  The Agency purchases services from various outside providers with no commission/or administrative costs.
  • Value-Based Compensation  This is a newer type of compensation and has started to become more common but, indications are that marketers will continue to explore alternative approaches to traditional fees or media commissions. (e.g. team goal rewards, bonus structure, citizenship credit, etc.)
  • Monthly Base Retainer fee based on staff direct costs plus overhead and profit. Most agencies maintain an “open book policy” with clients, whereby hours are estimated on services requested and reconciled against actual on quarterly basis. Base retainer adjusted quarterly based upon actual service requirements.
  • Performance – Incentive Compensation based on customer acquisition bounties. During first quarter of activity, agency and client will need to assess goals and achievability and set performance benchmarks.
  • Resource-Based Compensation – Commonly used today, where the cost of resource provided is based on a formula where the direct salary cost of the resource is multiplied by an agreed overhead and profit multiple to determine the annual fee for the resource and then divided by the percentage of their time required. (In fact, I first came across this model when negotiating with VISA in San Francisco years ago!) 
  • Value and/or Big Idea Based Compensation – This is relatively new and being pressed hard by many of the highly innovative and creative hot shops. Basically, it is a mutually agreed price or value that both parties agree upon to deliver a specific service and output to achieve the business objectives. 

If appropriate, a performance incentive compensation plan may be established in lieu of the monthly base-retainer fee profit factor.

An increasing number of marketers feel that incentives are not working to improve agency performance. While the majority of study participants who use performance incentives (62 percent) report that agency performance has improved, the number of respondents who claim incentives have negatively affected agency performance has significantly increased (from 13 to 22 percent).

Conclusion: Push the envelope each and every day by inventing new and create opportunities for both offline and online marketers to reach, and develop relationships with, users of online services.

As an ‘Agent of change’ for my clients/brands, I conceive and implement breakthrough interactive and branding solutions that add value to my clients’ business. (BUT, always tied closely to listening to their business and marketing objectives) 

I succeed only when my clients benefit from the work. I strive to deliver excellence with the highest standards of integrity. I honor the dignity and value of individuals working as a team. I celebrate diversity of people, ideas and cultures.

I seek to grow through learning and knowledge gathering. I embrace change and encourage innovation.

Therefore, it is imperative to ensure adequate staffing to manage and respond to site performance problems, optimization of sites, site placements, creative, innovation and the pure speed of change taking place today.

My advice to marketers looking to explore agency remuneration options this coming year – if you want to get away from time sheets and having your fees based on hours vs. the results you are driving for your clients, then you need to ‘step up’ and partner with your client partners to develop a performance-based approach. BUT, take the time to figure it out and get it right!

Perhaps, even test it on a brand initiative or in market if needed. Focus on your customers #1 problem, not 10th problem.

Test it on a brand initiative or in market if needed. BUT, in my opinion, always align compensation to business goals!

If you are willing to take on some ‘risk’ in exchange for the reward (e.g. ‘Stick and Carrot’ approach – you can not lament not getting your fair share of the value you created for your client due to a campaign home run, without a willingness to accept little or no compensation for the inevitable strike-outs.

If you recognize you need to upgrade or revise your existing strategies or plans for 2018, please reach out and call me today. Isn’t it time you had an established ‘rainmaker’ helping you become even more successful and have a full business pipeline in 2018.

END

More About Geoff De Weaver:

Since 1985, Geoff has helped pioneer the use of inbound/outbound marketing, content marketing strategies, leadership, digital, PR, innovation and social media marketing specifically for agency new business.

Geoff is one of the Advertising & Digital industry’s leading agency New Business Thought Leaders. His extensive cross-cultural expertise spans five continents, multiple languages and hundreds of companies. Over the course of his career, Geoff has won more than 90% plus of the brands/ businesses he has pitched. (Rare in an industry that averages 20%-25% success rate is considered good.)

Geoff can also access hard to reach brands and clients, fully examine and target your exact needs and requirements in all channels. I can even pitch on your behalf and happily be the extension to your company’s new business team.

Proven, in-depth expertise in Internet Marketing, leadership development, organization design, performance management, training, ideation process and communications. Areas of focus are leadership, innovation, agency profit and loss, global business development and executive coaching. 

Importantly, I develop Ad Agencies, PR Agencies or Digital Agencies to discover power, accuracy and efficiency through properly sequenced and correctly timed mechanics. Geoff is a strong globally experienced strategic thinker, active practitioner, and perennial entrepreneur. 

Give me a call and let me show you a better way and prepare for the future, +61 411 224 961 or send me an email: geoff@geoffdeweaver.com

Specialties:

Global Brand Management & Operations, Digital Marketing, Marketing, Advertising, Sales, Training, New Business, Consulting, Management, Strategic Planning, Leadership Coaching, High Performance, Team Building, Operations, Developing Strategic Business Development & Marketing Plans and Ad Agency Growth.

 

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