Image by freepik.
A few years ago, I wrote about a ludicrous e-auction process by the British Government for their prestigious creative roster. Their process was a shortsighted, misguided attempt at lowering costs without any consideration as to what constituted value. It was a dim-witted idea, devoid of common sense, conceived by idiots.
Yes. I said idiots. (Perhaps the same lot that came up with Brexit, I don’t know…). Unfortunately, the British Government is by no means alone in being dim-witted when it comes to coming up with daft ideas that end up treating agencies poorly. Many marketers seek deals that can be unsustainable for agencies. This might include extreme discounts, unpaid work, or extended payment terms. While aiming for the best value is understandable, these practices can damage the working relationship.Think of it this way: Agencies have resources, talent, and overhead costs to cover. Deep discounts or delayed payments make it difficult to deliver high-quality work. When this pressure becomes excessive, here are some potential consequences:
Provide fewer resources
Just like any business, agencies need to maintain healthy finances to deliver their best work. This means staffing projects with the right resources based on the agreed-upon scope and fees. When fees are significantly reduced, it can become difficult to dedicate the necessary team members and expertise to your project.Provide less senior resources
To manage cost pressures, agencies may sometimes adjust their staffing approach. This could involve assigning less senior resources alongside senior guidance. While this can be a way to maintain project scope within budget, it’s important to be aware of the trade-offs. A client noticing a shift towards less experienced team members is a sure sign fee negotiations have likely impacted resource allocation.Team burn-out
Limited resources, particularly when involving less experienced team members, places a strain on everyone else. This can lead to increased workload and potentially burnout, which will ultimately affect the quality of the work delivered. Inspiring strategies, exceptional creative, and innovative problem-solving typically thrive in environments where teams feel supported and have the bandwidth to excel.The agency quits
If your agency quits – it’s more than just embarrassing – it’s expensive, time consuming and disruptive to then have to undertake an agency search. Even if your agency doesn’t quit – it’s likely they’ll be fishing for a competitive vertical business to replace your unprofitable account (even if you don’t know it).Everything starts to cost extra
When budgets are significantly reduced or payment terms extended, it can be challenging to maintain the initial project scope. This may lead to the need for additional estimates, change orders, or contingency budgets. These adjustments can add complexity and potentially increase overall costs compared to the initial agreement – all of which may cost more than you’ve actually succeeded in cutting!You’re handed an (unpleasant) year-end surprise
Even if you succeed in cutting costs, reducing fees or extending payment terms and you think you’re out of the woods, the chances of the agency coming back to you at the end of your fiscal year with a nasty surprise are high. Trust me when I say, ‘agencies keep track of the work they do, who’s working on what and how much your business really costs to service‘ (even if it doesn’t always appear as if they do!)So…
In the marketing world, news travels faster than a social media hashtag, even across continents (think of it as the marketing gossip grapevine.) So, if you do manage to pull a fast one during a pitch process, become the life of the party at industry events by complaining about everything, and or treat your agency like a used napkin – let’s just say word gets around. Faster than you can say “unrealistic expectations.”
Remember, even the flashiest brand can’t hide a reputation for being a, shall we say, “frugal” client. There’s a sweet spot between value-conscious and, well, infamous.
And while your brand may be enticing, there’s a limit to what marketers should ask and what agencies should expect.Image by freepik.
When it comes to agency relationship management, disconnects between marketers and agencies can be extremely costly and potentially very damaging. The danger is that rather than proactively attempting to resolve problems, there’s often a tendency to either hope for the best or put lipstick on the proverbial pig in the hope it’ll look better tomorrow.
Problem is, even small upsets can shake the very foundation of client / agency relationships – especially if they’re disconnects around:
- Strategy and / or creative direction
- Fees, costs and / or expenses
- Deliverables
- Resources required on the business
- Roles and responsibilities between agencies
Unfortunately, these kinds of disconnects are all too common and the fixes run much deeper than a simple out-of-pocket expense for a corresponding make-good. Left unchecked, disconnects can lead to:
- Serious ramifications on the health of your brand
- Loss of sales or erosion in market share
- Turnover of resources causing a loss of legacy knowledge and experience
- Duplication of effort between multiple agencies
- The deployment of valuable resources focused on the disconnect rather than on the well-being of your business
- All the resulting costs associated with the disconnect in question
- A potentially disruptive agency search process to replace the incumbent as a last resort to bridge the disconnect
That’s the bad news.
The good news is there are tools and solutions to help you bridge disconnects that won’t have you reaching for your corporate cheque-book or calling an agency review. Here are five that we often come across that we can help alleviate:
Disconnects with costs
Disconnects with costs begin either because the marketer believes they’re paying too much or the agency believes they’re not being paid enough. In either case, one solution is to conduct a cost benchmarking exercise to evaluate the costs against your current agency. The results will provide granularity and transparency around costs and resources and provide a firm, neutral ground for negotiation and resolution.
Disconnect with assigned responsibilities
With the evolution of digital requirements in the overall marketing mix, disconnects in responsibilities have become increasingly common. The first place to look is your agency contract to determine what requirements were set when the agency was first appointed. Chances are that a contract review can help define and alleviate disconnects in responsibilities, and provide a fresh framework for a better working relationship.
Disconnects with overall agency satisfaction
Before contemplating an agency review it’s essential to understand where dissatisfaction really lies and whether there are patterns or themes that make-up the disconnects you’re experiencing. The best way to understand what disconnects are causing roadblocks within your agency relationships is to have a third party conduct a stakeholder interview process to help provide an objective perspective on what’s really going on. A neutral stakeholder interview process can pinpoint disconnects and identify potential solutions that may even offset the need for an agency review.
Disconnects or turf-wars between roster agencies
For marketers with multiple agencies on their roster, it’s not uncommon for disconnects and / or turf-wars to crop-up between agencies. The challenge is often that it’s difficult to uncover where disconnects are happening – much less why. A 360º agency evaluation process that evaluates at both agency and client perspectives will pinpoint disconnects or roadblocks and point to solutions that can make for a more collaborative and productive agency roster.
Disconnects with resources on your business
If you’ve been struggling with too many, too junior, or not enough resources in a particular area on your business, chances are the disconnects are around the cost of those resources to run your business. A professionally run staffing and cost alignment process will help most marketers define what resources are required to run their business effectively while also defining the costs associated with that plan.
The best way to avoid disconnects in any client / agency relationship is to proactively manage the relationship before the disconnects are allowed to begin – using some or all of the tools described above.
If you haven’t got an agency relationship management plan or a mutually agreed client / agency playbook – perhaps it’s time to sit down, start talking and taking your agency relationship seriously. That way you can avoid the lipstick and the potential pig’s breakfast.
he industry conversation about in-housing agency services continues with the protagonists proposing the pros and cons of the move to take agency services into the client organization. The discussion focuses on brand control, creative excellence, speed to market, greater agility and the like. The topic that is not being discussed is the reduced cost. Either because the pro-in-house group are not wanting to position this as a cost reduction process or don’t want to upset the agencies, whose lunches they are invariably cutting.
But how much would you really save taking these agency services in-house?
Now, to remain objective, we have made a huge assumption that the resources and therefore the quality of the in-house agency services would reflect those currently provided by the outsourced agency. This assumption is rarely true because one of the issues that in-house agencies will struggle with is attracting key personnel in strategy, creativity and other pivotal areas that will define the quality of the service deliverables and outputs of those relationships.
Also, because the funding of the in-house agency will be fixed for the year as part of the marketing budget process, we will assume that the outsourced agency is retained on a full annual retainer for a like-for-like set of resources. That is the in-house and outsourced agency will have the same number of people or the same or identical mix of capabilities, expertise, experience and direct salary costs commensurate with their market value. And that both costs will be based on a fee being calculated and agreed on an annual basis.
On this basis let’s compare:
IN-HOUSE AGENCY | OUTSOURCED AGENCY |
Recruitment Assuming on day one you will need to recruit the entire agency resource, there are significant costs associated with this as an initial one-off cost. However, assuming an industry average of a 25% staff churn rate, this would be considerably reduced in the next and subsequent years, but will still be an on-going cost to the business with a need to replace the entire agency every four years | Recruitment The outsourced agency exists, but the industry does have a reasonable churn rate and therefore recruitment costs are built into the overhead for the agency used to calculate the retainer. This will often contribute less than 10% to the overhead |
Cost to the company Assuming like for like between the two this includes mandatory superannuation (or pension) contributions as well as payroll tax and other costs associated with employment | Cost to company Of course agencies are required to pay mandatory superannuation (or pension) contributions, but depending on the payroll size, some agencies are exempt from additional charges such as payroll tax and other fees. But these fees are also included in the agency overhead fees |
Real Estate & Utilities The additional employees will require space to work and therefore there will be the cost of providing this real estate and the associated utility costs such as power, heating, air conditioning, internet etc. This would be based on the company average cost per employee | Real Estate & Utilities These are included in the agency overhead fees. These often contribute 30% – 45% of the overhead |
Plant & Equipment Depending on the services provided by the in-house agency, this would include at a minimum, computers, servers, graphic printers etc. But may also include video shooting and editing, audio recording and mixing and more. This equipment is usually leased for tax purposes and to overcome CAPEX considerations | Plant & Equipment All requirements are supplied under the overhead fees, unless specifically charged out on an agreed rate card rate. This will contribute approximately 30% of the overhead |
Software Licences and Subscriptions This is a particularly onerous cost for in-house media agencies, with the significant cost of industry research subscriptions and software licences. But it applies to content to a lesser extent. And without multiple offices or multiple clients, it becomes a significant cost to carry | Software Licences and Subscriptions Media agencies will often have significant costs tied up in industry research subscriptions and software licences required to plan and buy media. But most will amortize this cost across clients in the overhead or negotiate reduced rates across multiple offices |
Holidays and sick leave The in-house agency will need to manage the resources within the workload expectations during times when employees will be taking annual leave and extended sick leave or parental leave. This contributes approximately 14% to the salary costs. The more expensive cost of short-term freelancers will need to be factored into the annual cost | Holidays and sick leave The agency will draw on the broader agency employee base to make up for resources shortfalls due to leave. If these agency does require additional freelance staff, then the cost of these is usually absorbed within the agreed retainer fee |
Professional development & training This is particularly important for staff retention and development. It is also important in key technical skills such as programmatic media, data analytics and marketing automation and therefore would need to be budgeted into the on-going cost | Professional development & training Outsourced agencies offer this as a way to retain important key staff and to keep them up-to-date with industry developments. The cost is covered by the overhead cost. This will contribute less than 10% of the overhead |
Employee under-utilization With a fixed number of employees, under-utilization is a hidden cost in situations where workloads decrease either seasonally or due to unforeseen economic impacts etc | Employee under-utilization The agency will typically run under the expected resource requirement, even with a retainer, and deploy the resources to another paying account if the workload drops, either expectedly or not |
Additional management cost Additional employees will add additional costs outside the in-house agency to the management areas across the business including Human Resources, Finance, Legal, Marketing and Management in the day-to-day operations | Additional management cost These are included in the agency overhead fees. These often contribute approximately 20% of the overhead |
Redundancy If it is decided either through a change of leadership or perceived under-performance that the in-house agency be terminated, as has happened with companies such as Intel, then the cost of redundancy needs to be factored in as a one-off cost | Redundancy When you terminate an outsourced agency, the agency will minimize redundancies and cover the cost of essential redundancies within their existing fee |
When comparing the two options like this, it is clear that the cost of setting up an in-house agency is significant. It would need to be a medium to a long-term strategy to recover the initial set up costs, and then you would need to consider carefully the future cancelling of the strategy due to the significant termination costs.
While some have reported that the in-house agency can save up to half the cost of their outsourced agency, it is highly unlikely this represents a like-for-like comparison. Or it could be the cost analysis has overlooked the set-up cost and the often-unseen operating costs, let alone allowed for termination costs in future operational cost projections. Either way, if setting up an in-house agency is driven by a desire to reduce costs, this will need to be achieved by recruiting lower-cost resources and therefore it is fair to assume less capable or experienced resources with lower market costs.
This may be acceptable for the work of the in-house agency. But if cost-reduction is the objective, it may be easier to either outsource a lower cost external agency or even outsource an external supplier to implant an external agency into your operation and take on all of the responsibilities for the same.
This article was first published in Campaign Asia on March 2, 2021