An increasing number of agencies are including promises of AI benefits in their pitches. Typically, these are framed in the context of improved productivity through automation, allowing the agency to provide more for less. A.K.A. – savings.

This is a valuable opportunity for any marketer facing heightened demand, a tight budget, or any procurement team focused and measured on cost reductions.

However, the claims of savings are becoming increasingly unbelievable, with some boasting of up to 60% more in savings than what the marketer is currently paying. It’s not just content and creative agencies involved; media agencies also offer lower fees and, in some cases, no fees at all, arguing that automation has substantially reduced their labour costs and, therefore, the fees required to provide those services. Additional factors beyond automation efficiency come into play with media agencies, including non-transparent payments from media sellers and principal-based trading. For this discussion, let’s concentrate on content creation.

ChatGPT was launched in November 2022, and in this brief period, agencies have raced toward the shiny new offering. Major holding companies and groups have announced significant investments in AI technology amounting to millions and even, in some cases, billions of dollars.

While many herald this integration of Artificial Intelligence (AI) and automation within advertising agencies as a pathway to increased efficiency and reduced operational costs, the underlying investments required for AI adoption necessitate a re-evaluation of agency compensation models. This often means that the anticipated cost reductions may not materialise or may even lead to new cost structures.

While AI undoubtedly offers the potential to streamline workflows, enhance creativity, and provide deeper insights, the assumption that its application will automatically translate to lower client costs is a significant oversimplification.

Embracing change within the agency

There is an early mover advantage for any agency in adopting AI, through the faster generation of insights, more agile strategy iteration, and adaptable marketing processes. However, implementing AI solutions in an advertising agency involves several key considerations, including:

1. Strategic Planning and Roadmap: Agencies must establish a clear roadmap for AI adoption in marketing. This entails setting up a cross-functional AI council to provide direction and drive strategy. The council should concentrate on risk management, upskilling talent, and fostering trust. It also needs to review existing client contracts and collaborate with clients to identify and mitigate risks.
2. Data Readiness: Many agencies neglect data governance and metadata management, which needs to be implemented at the enterprise level. Identify key marketing use cases for AI and designate a marketing data champion to oversee and maintain data quality and security. This may require many agencies to recruit essential skills in data and technology to manage this process. Data management, a critical component for effective AI utilisation, demands robust systems and expertise, adding another layer of expense.
3. Change Management: Successful implementation requires change management across every element of the current workflow within the agency, the clients and the agency suppliers. This includes training and upskilling employees to prepare them for AI integration.
4. Financial Costs: While the holding companies have announced significant investments in this area, the financial cost of implementing AI for an independent agency or a local office of a network agency can vary widely depending on the scale and scope of the project. Costs will include software and hardware investments, data management, training, ongoing maintenance, improvements and upgrades. The budget for these expenses must be considered against potential cost savings from increased productivity and efficiency. We explore these costs further below.
5. Timeline: The timeline for implementing AI solutions can also vary. Initial pilot projects may take a few months, while full-scale implementation could take a year or two or more. It’s crucial to have a phased approach, starting with pilot projects and gradually expanding to widespread implementation. We look at these in more detail below.

The timeline and cost of fully automating an advertising agency using AI can vary significantly based on several factors, including the agency’s size, the complexity of the tasks, the technology stack chosen, and the level of customisation required.

Financial Investment

While the financial cost of designing and implementing an AI-enabled transformation of an agency will vary wildly depending on the size of the agency, the range of services and processes impacted, the level of complexity of integrating into existing client business and more, for this exercise, we have developed costs for a medium size independent creative agency offering strategic, creative and production across digital advertising.

These cost estimates are broken down into the following four categories:

1. Technology Costs: This is based on purchasing existing software and developing custom solutions. It includes designing, training and testing the AI platform with costs ranging from $250,000 to several million dollars.
2. Consulting Fees: There are already a plethora of AI and Tech Consultants hawking their services in marketing and advertising. Hiring one or more of these experts to guide the automation process may cost $100,000 to $200,000 per year.
3. Training and Talent Costs: The human cost is often overlooked when discussing technology-driven transformation. Investing in training your existing employees on a new system or recruiting subject matter experts could cost between $50,000 and $100,000 per year, excluding additional salary costs.
4. Ongoing Maintenance and Enhancements: Technology is not a set-and-forget investment. Keeping up with ongoing maintenance, updates, and upgrades could cost 10% to 20% of the initial cost annually.

Depending on the scale and scope of automation, the total investment might range from $500,000 to several million dollars per agency or office. Since agencies are at best reporting a 15% EBIT on income, the agency would need to sacrifice almost three and a half million in revenue to fund even the entry-level investment, and it just goes up from there.

Investment in time.

Many estimates put the entire AI transformation process at anywhere from one to two years for a typical independent agency. While some argue that they are further developed in less time, it is unlikely that they have embraced a total business transformation and instead have looked at piloting a smaller, more defined implementation of generative AI rather than a total business transformation.

While it may be argued that the race to AI integration started in 2022, many agencies have been slow to start. This is because of a number of key issues.

1. Decision paralysis – caused by a lack of knowledge or understanding of the opportunities.
2. Risk mitigation – hoping that others will lead the way and reduce the inherent risks of mapping their own transformation.
3. False starts – with successive small projects that have led to poor outcomes or abandoned due to loss of momentum and commitment.

Considering that the market is allowing the following timelines for each of the transformation steps identified above across the one-to-two-year transformation process:

1. Initial Assessment (1-3 months): Evaluate current processes and identify areas for automation.
2. Development and Integration (6-12 months): Build or implement AI tools, integrate them into existing systems, and customise them to fit the agency’s needs.
3. Testing and Iteration (3-6 months): Test the systems, gather feedback, and make necessary adjustments.
4. Training and Transition (2-4 months): Recruit new staff capabilities and train existing staff on new systems and transition workflows.

Impact on Agency Fees

With the agencies facing a two-year, multimillion-dollar investment to transform their business model to leverage the advantages of AI and automation technology, it is worthwhile to consider how this will be funded, not just for the upfront transformation but the ongoing maintenance and upgrade costs.

The overwhelmingly standard agency fee model continues to be a resource-based cost model based on hourly rates, billable hours, overhead, and profit margins. How will an agency build the cost of the AI transformation process into the current fee model, including the external and internal cost of resources? A simplistic approach would be to increase the overhead of their resource fees. However, these fees and rates have been under significant competition and negotiation processes for a number of years, and many agencies would struggle to have their existing clients agree to pay more for the same services.

Instead, after years of agencies clinging to traditional fee models, we see more agencies embrace new fee approaches. These evolving pricing models highlight a crucial shift for agencies moving away from billing for their time and towards pricing based on the value and results delivered, often enabled by AI.

Efficiency-Based Enhanced Profitability Pricing: Agencies that use AI to produce more output with less time and cost may maintain fixed-fee pricing without reducing revenue. While the agency benefits from increased profitability due to AI-driven efficiencies, the client does not necessarily see a direct cost reduction.

Tech Fees Surcharge: Agencies are introducing a surcharge, typically 1-5% of agency fees, to account for their technology investments. This direct pass-through of costs ensures that clients contribute to the agency’s AI infrastructure.

Increased Traditional Pricing Models: With increased expertise and quality of agency staff, particularly in tech and data, AI can increase existing labour-based or output-based models. For example, agencies may charge for additional, higher-level staff required to manage AI tools or to generate revenue from new, AI-enhanced creative deliverables. This won’t necessarily lead to lower costs and could potentially increase costs.

Other Non-Traditional Pricing Models: Agencies that develop specific and customised AI applications and platforms, such as LLMs or workflow bots, are exploring subscription or licensing models, treating their AI as intellectual property.

These approaches indicate that while AI can drive efficiencies, agencies’ primary focus is leveraging it to enhance their offerings and improve their financial performance, which doesn’t automatically equate to lower client costs.

The bottom line for agencies and marketers

While AI and automation hold immense potential to transform advertising agencies, the narrative of automatic cost reduction overlooks the significant underlying investments in technology, talent, and training required for successful implementation.

To recoup these costs and capitalise on AI’s value, agencies must adapt their fee models through surcharges, efficiency-based pricing, and the monetisation of AI-driven intellectual property.

Consequently, the application of AI in advertising agencies is more likely to result in a restructuring of fee models and a shift towards value-based pricing rather than a straightforward decrease in advertisers’ costs, as agencies often propose in the highly competitive pitching world.

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Have agency invoices ever made you sweat more than a disco ball under a heat lamp? Well, if the answer is yes (and we’ve likely all been there) then this post is for you –  all the marketing warriors who have ever fought tooth and nail for every penny of their precious marketing budgets. Whether you’re constructing budgets, dealing with overages, worried about budget allocation or perhaps undertaking – or have just completed an agency review-  there are some simple steps to help avoid unpleasant surprises when the bill arrives. So fear not, brave marketer! This post is your arsenal of ten battle-tested ideas to slay surprise costs, manage your marketing budget like a pro, and finally get a good night’s sleep. So, grab your metaphorical sword (or spreadsheet, whatever works) and let’s conquer those marketing money monsters:

Define a scope of work

Perhaps the most important aspect of budget planning and allocation is to define an annual scope of work and have your agency(s) provide a plan and cost to deliver it. Without it, it’s virtually impossible to allocate your budget in a meaningful way and managing it will prove extremely challenging.

Define out of scope project fees

Having defined your scopes of work for each agency, make sure you understand how out of scope project fees will be calculated, monitored, managed and capped. Set out clear guidelines as to how these fees will be estimated and approved.

Look beyond the rate-card

Even if you’re working to a blended hourly rate or are comfortable with the rates you’ve negotiated, a rate-card is only a menu – it doesn’t define the parameters for which items are ordered.

Understand agency multiples

Everyone deserves to make a fair profit on what they do, but it’s important when engaging an agency or committing to a scope of work that you understand what that margin looks like and how it’s calculated.  If you’re unsure how that works, here’s a simple way to convert  profit markup into a profit margin (and vice versa) using our calculators on our web site.

Benchmark costs

Marketers often ask  “ are we’re paying too much for our agency services…” to which we typically ask, “how much do you think you should be paying?” If the answer is “we don’t know”, then it’s time to find out. We can compare your costs across the board with industry benchmarks to see if you’re getting the most bang for your buck and specifically where in your budget there may be opportunities for improvement.

Know what the extras cost

Particularly in areas where your requirements are production heavy, it’s essential to know what extras cost. Don’t be fooled by those seemingly small costs! Over time, they can explode into a financial monster that’ll leave your corporate wallet whimpering. Dive deep on print and broadcast studio costs, digital outsourcing and other extras to ensure those rates  don’t compound potential sticker shock issues down the road.

‘Free’ doesn’t mean ‘forever’

Many “free” budget items proposed in pitches have limitations – either with complexity or time – or both. Understand true long-term costs and the implications that these may have on your budget after a year or so.

Define success metrics

To help avoid sticker shock, be really clear about your definitions of success for the agency and ensure that budget and cost management form part of any bonus structure you might be contemplating.

Don’t let procurement go it alone

While procurement can provide valuable insight into contract negotiation, they don’t have the intimate knowledge of marketing and strategic requirements that you and your teams do. So if procurement forms part of your negotiation strategy or requirement, take time to ensure they fully understand the nuances of your requirements.

Ask a specialist for our input

In addition to agency search, we specialize in benchmarking, agency evaluation, contract negotiation and resolving cost friction between marketers and their agencies, with proven methodologies and proprietary tools to help shift often emotional discussions into the rational. There’s no magic to this.  But by following these simple steps, you can turn sticker shock into sweet satisfaction. So take control and become a budgeting boss, so your marketing dollars can work wonders for your business.

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The practice of going to tender at the end of the agency contract period has become a habit for many major brands. Procurement will argue it is the only way to truly test an agency against the market. But as we have highlighted previously, this is a flawed approach.

Nevertheless, the practice continues, and for more than a decade going to pitch has resulted in advertisers negotiating lower agency fees as part of the process. But that is all about to change if you believe the headlines about the impact of the Great Resignation. Either that or someone is not being completely honest in this conversation.

The Great Resignation

You cannot have missed the news across the business media about the impact on employee resignations as we come out of pandemic induced lockdowns. Apparently, millions of employees around the world have reassessed their current occupation and decided it is not for them and they are resigning in droves for a better career and better lifestyle.

This has impacted almost all categories and markets to various extents. But the trend is consistent and significant enough to get coverage by the mainstream media globally. The marketing and advertising trade media are also reporting on the impact of what is now known as The Great Resignation. Agencies have been reporting significant increases in salaries required to keep staff and attract talent to their agencies. This can only create upward pressure on agency fees.

Impact on agency fees

As we have explained over many years, the agency fee model is based on cost recovery. This takes the direct salary cost, either actual or industry standard, and then multiplies this by an agreed overhead and profit multiple and divides by the agreed number of billable hours per year to obtain an hourly rate that is charged to the advertiser.

You can see straight away that any impact on the direct salary cost will impact what is charged to the advertiser. A 20% increase in salary will translate into a corresponding increase in the hourly fee charged to the client, all other variables remaining constant. Even if you are not using actual salaries, but using an agreed industry pool, this will be impacted over time as the number of salary increases affects the pool.

This will be quite shocking for many in marketing and marketing procurement, including many of their advisors and consultants, as agency salaries have in many markets remained relatively stagnant for more than a decade. This sudden spike in salaries will lead many to believe it is an anomaly and encourage many to ignore the issue. But it will be at the marketer’s peril.

Attracting and keeping talent

The Great Resignation is driving up the cost of labour in the market and this must impact your agency and the retainer you pay. Let’s look at an example of this.

Take an agency retainer of 50 people, for convenience. Of those 50 FTEs, typically marketers only see 20% on a regular basis (such as account management) – so you may be able to assess their capability directly. Perhaps another 20% are seen on a less frequent basis (strategic and creative) but you can nevertheless assess their capability through the outputs of their work. So, that is 40% or 20 FTEs from the 50 you are paying to retain.

The interesting part is these people also often represent the more expensive resources in the agency retainer mix, as they are more likely to be significantly committed to your account (in the case of account management) or significantly expensive (in the case of strategy and creative).

Let’s say that half these valued agency staff members are poached by competitors with a salary increase of 20%. To keep them or replace them with equivalent talent will cost the agency at a minimum of an additional 20% in salary cost. What is the impact on your agency fee?

Current FTEs	50
Current agency fee	$7,500,000 per year
Average cost per FTE	$150,000
Valued staff	40% or 20 FTEs
Current agency fee (for this valued group)	$3,600,000 per year
Average cost of valued staff per FTE	$180,000
Agency Staff Poached (from this group)	50% or 10 FTEs
Cost to retain or replace	$2,160,000
New Agency Fee	$7,860,000 per year
New Average cost per FTE	$157,200

If the agency passes on the cost of retaining just ten of the agency team that the advertiser knows and values, it will cost an additional $360,000 per annum. If this cost is not passed on the agency has two options:

1. Promote a lower cost resource, with therefore possibly lower capability and experience, from within the agency.
2. Recruit a lower cost replacement, with therefore possibly lower capability and experience, from outside the agency.

Either way, the advertiser will be getting what they pay for and when this is across 20% of the agency team, that can have significant impacts on the perceived value and performance of the agency.

Worse when you go to tender

So, the agency has been replacing key staff with lower-cost options, until the advertiser decides enough is enough and goes to market. Except that a decade of flat fees and a need from procurement to prove their value by reducing cost means there is also an expectation of delivering a saving of 10% on the existing fee. To achieve your agency fee expectation means the successful agency will be competing for talent in the market at 16% below the new market rate.

Current FTEs	50
Current agency fee	$7,500,000 per year
Average cost per FTE	$150,000
Procurement pitch expectation	Reduced by 10%
Expected agency fee	$6,750,000 per year
Average cost per FTE	$135,000
Market Average cost per FTE	$157,200
Market Agency Fee expectation	$7,860,000 per year
Difference	16.4%

With an account of this size, it is very unlikely any agency would have the resources to staff more than 20 – 30% of the team and so they will be in market looking to recruit 15 to 20 staff or more in a highly competitive talent market – and already at least 16% below market expectation.

What should marketers do?

1. I know this is strange coming from a pitch consultant, but do not go to market unless you absolutely must. Just calling a tender on the incumbent could trigger many key staff to leave and go to other roles before the worse can or does happen.
2. If the incumbent comes and requests an increase in fees, request complete transparency into who and what the additional fees are for and make a business decision on the value of funding the retention of that role or not. But remember, you cannot buy commitment.
3. Avoid discussions on general increases as high as 20% or more due to The Great Resignation. While individuals may be commanding these increases on a one-off basis, as you can see, based on a total agency retainer, this may only be a single-digit increase, depending on the number of agency staff impacted.

And if you need any advice on any part of this, talk to us. We can advise and inform you on the best decision to deliver and maintain value from your agency.