How to step beyond simply cost benchmarking your advertising agency
February 12, 2013
This post is by Darren Woolley, Founder of TrinityP3. With his background as analytical scientist and creative problem solver, Darren brings unique insights and learnings to the marketing process. He is considered a global thought leader on agency remuneration, search and selection and relationship optimisation.
A marketer called me the other day and asked “Can you benchmark agency fees?”
I told them that we had agency remuneration and resource benchmarks and that we could benchmark the fees against not only what the agency produced, but also against what resources the agency provided.
There was silence at the end of the phone until he said “No, I just need to know if we are paying them too much”.
They sent through the information on hand for the various agencies including creative, digital, media, search, social and public relations. There were rate cards, and retainers, and commissions and hourly rates. Plenty of data and certainly enough to be able to provide a cost benchmark.
But I can’t help question if that is enough.
Likewise, we can tell them where the media commission sits in relation to the market for the level of investment. But we cannot determine if the agency has invested in the right level and mix of staff to ensure that media spend is best invested.
And we can provide insights into the studio cost at the creative, digital and even the public relations agency against the market rates. But we will not be able to determine if they are allocating the right number of hours for the various projects that go through that studio.
The problem is, they know the cost of everything and the value of nothing. And with the information they have provided, at best we can tell them if their perception of cost is correct or not against the market.
It is a bit like getting a credit card statement and knowing your spent $65,472.96, but having no details or idea where you spent it or what you obtained for that investment.
The problem is in the design of the financial systems within most businesses. The financial system is designed to track expenditure, and it does this to within a cent. Most CFOs can tell me to the cent how much they spent with a particular agency (or vendor) in any set period of time. But they look at you blank when you ask what was it that they purchased, defined in a quantifiable format.
Yet with this vital information we can benchmark more than simply cost. Knowing what was produced and the agency resources (read costs) that were used to produce the particular output, we can:
- benchmark the efficiency of the marketing / agency process.
- benchmark the agency resource mix and level against industry and identify opportunities for greater output efficiency.
- provide a business case for changing the advertising process to deliver greater high volume outputs at lower cost.
To go beyond simple cost benchmarking requires going beyond simple cost reporting.
Another client is currently renegotiating with their media agency. While they can tell me how much they spent in total with that agency, they have no view of:
- how many campaigns they briefed last year,
- how much they spent per media channel,
- how much commission the agency collected,
- how much was spent on digital, search or traditional media,
unless they are willing to go through every single media plan and extract the information.
This will be weeks of work across a multi-million dollar media spend.
Now in this case it is critical to obtain this information because the agency gets paid by commission, and that commission varied by media channel. So while the media agency was able to provide this information to justify their position that they require a fee increase, the marketing team has no way to know if this truly reflects the financial situation.
To go beyond this simple cost benchmarking, marketers (and their procurement team) need to:
- Make sure they collect details on the agency resources working on their business on a six monthly or annual basis. This needs to detail the resource type and their head hours or FTE (Full Time Equivalent) percentage.
- Collate the tasks, projects or outputs the agency is producing on a monthly basis with a breakdown of the agency fee, production cost and third party costs.
- Have a clear understanding of the agency financial fundamentals including the billable hours per annum, the overhead cost and the percentage margin on direct salary costs.
With these three we can calculate and benchmark the level and mix of agency resources against the output produced, the relative cost of those outputs, the cost or production and the efficiency or the relationship to deliver the outputs against category and market.
This is a much more insightful assessment of the current remuneration model than simply a cost benchmarking, which simply tells you where the rate sits to market. The TrinityP3 remuneration benchmarking provides you with a clear understanding of the value of the agency relationship and where that value is being created, lost and potential hidden.
And isn’t that much more valuable?