November 15, 2012
This is a guest post by Nick Hand a Senior Consultant at TrinityP3. Nick has over 15 years experience in advertising agency finance and operations. His expertise and knowledge covers the spectrum from large multi-national operations down to the boutique creative shop.
My mother always used to say that “trust is earned, not given”.
Which is just like money then – most of the time at least.
And what we find all the time at TrinityP3 is that in an agency-client
relationship, wherever money is being lost or even whenever there is just
the perception of money being lost trust is spiralling down the plughole
at more than twice the speed.
Here are the five most common errors we come across when we’re looking at
agency remuneration deals. Whilst they’re nearly always unintentional, they
tend to do the most to destroy trust. Fortunately, they’re easy fixes!
1. Getting the invoice wrong.
The idea was a cracker, executed perfectly, and the client’s sales are up. Agency and client are patting each other on the back and life is good; the client is even talking about a bonus payment to the agency. Until the account exec. asks for the wrong estimate to be billed – you know the one, the initial estimate that was raised for the script that was going to cost twice the budget. Before the location, talent and music were downgraded.
Now the Marketing Director is yelling down the phone to the agency CEO, accusing them of “trying to sneak one past us”, relationships become strained and the success of the campaign (which was really good) is quickly forgotten because of an admin oversight. And don’t even get me started about not submitting invoices on time, leaving off the P.O. number etc. etc. (maybe a blog post for a future date). Get the invoice right.
2. Marking up 3rd party costs.
The contract says you can’t. But, you’ve managed to do a cheaper deal with the supplier, it’s only $50, and the administration involved in reconciling is too hard. Or the disclaimer at the foot of your estimate states it’s a “fixed price quote” so you believe you can ignore the unders and overs. Or the difference will make up for some of the time that you had to write off. Or the client’s systems can’t deal with the credit notes.
The justifications are probably quite valid, but when the client’s finance or procurement find out, it looks – despite honest intentions – like the agency’s ripping them off. Dealing with these items is one of the most difficult and time consuming areas of the client/agency financial relationship, but there is a solution: talk to the client! Explain to them the problem (before it ever becomes an issue) and together work out how to deal with these items, make them terms to the contract, and explain the process to all those who need to know (both agency and client).
Consider, perhaps, a dollar threshold for not needing to reconcile; or do a reconciliation by campaign rather than by job; or a “bulk” reconciliation every quarter; or agree some items need to be reconciled and others don’t – whatever fits best with the way the client and agency work together and the nature of the relationship. (Or, strike the “at cost” clause from the contract; let me know if you succeed!)
3. Double dipping on cost plus mark up rates.
Whether they be project head hour rates, or retainer head hour rates, much has already been written about how “cost plus” rates are calculated (here and here, on this forum alone). To quickly recap, it is the cost of employment of an agency employee (or average cost across a role) marked up by a factor to cover the general costs of running the agency (overhead) and further marked up by another factor to provide the agency with a profit margin, divided by the number of hours the employee is expected to work.
When calculating the cost of employment, many agencies start with the salary figure and add to it employment “on costs” such as payroll tax, workers comp insurance, and annual leave entitlements – nothing wrong with that. Except then either inadvertently or by design, the agency marks up the cost of employment by the overhead factor which also includes these on costs – effectively double counting and inflating overhead rates by as much as 20%, depending on payroll tax rates and so on.
Include the on costs in either the cost of employment, or the overhead component, but not both. And if your agency is participating in a competitive pitch, where your mark-up multiples are being compared to other agencies, you should explain which method you’ve used.
4. Allocating an agency employee more than 100% across a portfolio of clients.
This is a common practice, done for the agency to try and squeeze as much revenue out of one person as possible. It seems harmless enough (except to the family life of the poor individual involved) but there are implications for the agency/client relationship.
Consider an Account Director named in the contract with Client A at 80%, and named with Client B at 50%. Not only is each client paying for a certain number of hours (1,320 and 825 respectively if 1,650 hours are used as the annual base), but clients have a reasonable expectation of that same level of attention and focus on their business. Client A may indeed get their 1,320 hours (because our Account Director is doing at least two and half hours of unpaid over time a day) but they are also getting a distracted and stretched Account Director who can’t possibly devote 80% of their energies to Client A’s cause.
5. Leaving the unders and overs conversation too late.
Unfortunately, many agency people are not comfortable or skilled at having the “money” conversation with clients. Often the actuals incurred on a job will exceed the approved estimate and the agency can legitimately recover the additional amounts.
However they don’t raise this with the client until it’s time to send the invoice, at which time the client struggles to find or can’t get the additional budget approved – making them (and by association the agency) look foolish and unprofessional in the eyes of their business. Or worse, the agency just sends the invoice for the extra amount without having the discussion at all. Needless to say, that usually doesn’t get paid. Flag the extra cost, when it happens, and most clients are happy to pay the extras.
Any others in your top 5? Post your comments now to let me know.