I was having a coffee with a friend who was a recently-redundant creative director at one of the larger agencies around town. He had decided to now go out on his own, funded by the redundancy package from the agency. And while in the past he would rib me about “lowering the quality and price of television productions” I suddenly had something he needed and that was advice on how to calculate “charge out” rates. (i.e. What rate per hour he would need to charge out himself and others to make profit).

I pulled out my iPhone and started to show him the TrinityP3 Resource Rate Calculator Business App available from the iTunes App Store.

Taking him through the steps and how to use it, he looked at me and said “I wish I had this to negotiate my pay rises with the CFO at the agency”. Looking at him quizzically, he went on to explain that for the last three years his annual pay review involved the agency management explaining that times were tough and there were no pay rises for him or his staff. A message he begrudgingly passed on to his creative teams.

However, if he had known about the relationship between salary and billable hourly rates he would have realised that him and some of his staff were being billed at multiples of 3 and 4 times based on the billable hours per annum and salary rates.

This provides a great negotiation point when looking for a salary increase. Using the example in the video above:

An overhead and profit multiple of 2.5 and billable hours of 1650 hours per year means that being billed out at $400 per hour means that the annual salary (cost to business including pension / super and package) should be $264,000.

Try out the TrinityP3 Resource Rate Calculator iPhone Business App. It is free and it could earn you a pay rise.

Let me know how you go.

PS: For those without an iPhone the calculators are available here.

It is constantly amazing the industry media frenzy that is associated with an advertiser reviewing their business. I am sure many marketers wish that their new product launch or their campaign results attracted the same level of media interest that a pitch does. But this is why running a review or agency selection is not something to be entered into quickly.

It is important that before you even contemplate contacting an agency that you agree on some fundamental processes and issues including:

1. WHAT is the purpose of the review
2. WHAT process you will adopt
3. WHO will manage the process, and
4. WHO will be involved in the decision making

For the purposes of this discussion, lets limit ourselves to the process, but we are happy to discuss all of the issues associated with pitching at any time.

Define your requirements – what are you looking for?

The process you adopt depends on the objective of the review and desired outcome. If, as is often the case with Government Communication Campaigns, the desire is to have a creative strategy and execution to a specific brief, then having a group of short listed agencies respond to the specific brief is a legitimate approach.

But it would be worth considering paying pitch fees to compensate the agencies for their efforts and paying fees if you require the agencies to assign their IP to you whether they are successful of not.

But if, as is more common, you are looking to select and engage a provider who will be engaged over a period of time to work with you to develop innumerable communication solutions to a wide number of briefs, then the ability to respond to a single brief or a number of briefs is not necessarily the best process of selection.

A process of elimination – separate the wheat from the chaff

Of course, there is rarely one criteria on which a service provider is selected, and especially not in an area as complex and diverse as marketing communications. Therefore it seems ridiculous to expect a single selection process such as a traditional tender to effectively sort out the preferred provider from the rest.

It makes more sense to have a series of stages that focuses on evaluating and selecting the preferred providers on specific and discreet criteria. In this way you can cast the net as wide as possible initially and then quickly and efficiently reduce the preferred providers down for more detailed and rigorous evaluation.

At the widest point you would look at agencies that have the reputations and experience in the areas you are looking for and then you would next look at their capabilities in more detail through case studies before evaluating the potential relationship chemistry of each of the agencies with the marketing team. Consider this the John West strategy, in that it is the providers that you reject at each stage that make the ones left the best.

The role of workshops – take the agency for a test drive

While creative pitches are still popular in Europe and the US, increasingly marketers and consultants, aware of their limitations are moving to alternatives. These limitations include the risk of providing confidential information to the agencies, not seeing or knowing who is doing the creative work, concerns over the pitch team not being the people working on your business if the agency is successful and the time and cost of the process.

Instead of using creative to select agencies, they are taking the shortlisted agencies (two or three) for a test drive in a full day strategy planning day workshop.

In this way the marketers can see how the agency thinks, but more importantly identify the valuable thinkers within the team as there is nowhere to hide. See how the agency and the client team work together. Ensure the agency supply the people to the planning day workshop who would be working on their business if successful.

Equally the agency can see how the client thinks, works and communicates and the whole process reinforces the importance of relationship compatibility.

What is the industry best practice?

While there are certainly many mistakes to be avoided, there is not one process considered industry best practice either here or overseas. As stated, the right process depends on the purpose of the review or selection process and the desired outcome.

We have extensive experience managing search and selection projects across all marketing communications including creative and digital agencies, media planning and buying, and marketing services including public relations, direct marketing, event management and the like.

In my experience, while understanding the various methodologies and processes is essential, in most cases we customise the process in some way to suit the needs and circumstances of the client.

No matter if it is TV, cinema, radio, online, print or digital, we invariably notice that budget over-runs, blowouts and increases are caused by changes in the specification of the task during or after the production process rather than in the concept or pre-production stage.

In one case we had client-mandated changes as more than 30% to the approved cost of the production and when the brand manager was confronted with the costs they engaged us to assess the proposed costs. In most cases the blowout could have been avoided with some careful planning up front.

Increasing options in media, regions and durations

While this has been an issue for as long as advertising itself, it has recently been exacerbated by the increased number of media channels, the regionalisation and globalisation of markets and advertising, and the fast pace of change in business and marketing, making more and more executions more short-term and disposable.

The increasing time and resource pressure on marketers and their agencies has lead to an increasing number of shortcuts to meet these deadlines, which further impacts this increased complexity.

Time pressures appear to overcome the need for cost consciousness

Of course, cost reduction is no reason to sacrifice creative impact or effectiveness. Just as poor planning and lack of due diligence is no reason to pay more than is required.

But in the pressure to deliver outcomes, due diligence is often overlooked or discounted. This means that instead of looking for the most cost effective way of delivering the outcome, often only the most expedient and invariably the most expensive production process is used.

The need to clearly articulate all your needs and requirements

The best solution is to develop and implement guidelines for campaigns prior to commencing the process. We have found that often in the heat and pace of campaign development, many considerations are overlooked in the shortcuts to meet the deadline and deliver the outcome.

Our recommended guidelines include:

1.  Defining all the media channels to be used for the campaign both short and longer term. This is not just the initial media but also possible longer term uses so that rights can be negotiated up front and paid if and when required.

2.  Defining the media execution required up front in terms of size, duration and number, and have this estimated up front. Invariably the production cost of additional executions after the fact is more expensive than having these produced at the time.

3.  Hold your agency to the defined requirements agreed up front. Once these parameters are established on each and every project, the agency and other creative and production providers must then be engaged to competitively quote and fix the cost and timeline of delivery.

Too many times oversights in the production process lead to cost blowouts that are paid for by the advertiser and not the suppliers.

No one wants to be paying too much for their advertising. But likewise, there are downsides to paying too little.

We see it all the time, advertisers call us in because they are unhappy with the performance and service levels provided by their agency. When we benchmark the agency remuneration, we find they are hopelessly underpaid.

The cost considerations

Many retainers are calculated on a resource, overhead and margin model. This is based on determining a set of dedicated agency resources, taking the direct salary cost of these resources and multiplying this by an overhead factor.

The overhead factor is to cover the indirect salary costs such as support staff like the receptionist and accounts, plus accommodation and utility costs and business development, IT and capital expenses.

This overhead factor can vary from 60% to 120% depending on a number of factors. Then to this cost there is a profit margin of anywhere from 10% to 25%.

Of course if the salary rate is overstated then this adds to profit as the overstated cost is multiplied by the overhead factor and the profit margin. Understated, it cuts into the profit margin. Likewise with the overhead factor and the profit margin.

Paying too much

Many advertisers feel they are paying too much because they have compared their costs with what a colleague is paying. Unfortunately, with the complexity and diversity of remuneration models they are not often comparing like with like.

While overpaying the agency will make the agency senior management happy, it can lead to complacency developing between the agency and the advertiser. After all, the adage that the squeaky wheel gets the oil applies here, and if the agency is achieving a higher than average profitability from the client with little or no extra effort, they can apply less attention to this client over another who is demanding and underpaying the agency.

Paying too little

Paying too little forces the agency management to find ways to increase the profitability of the account.

Typically there are a number of ways to achieve this:

1. Reduce the calibre and number of resources working on the business. By reducing the direct cost of servicing the account you can increase the profit margin. Replacing an account director with a senior account manager can go unnoticed if they have the same title on the business card and thereby save $10K – $15K per annum. This can become self-perpetuating as the staff on the account turn over more frequently due to burn out – having to deliver the same with less.

2. Increase the charges outside the retainer agreement by increasing the number of changes made during the production process to increase production charges on each job thereby increasing the “extraction rate” for that client. If you are underpaying the agency they will need to find a way to increase revenue and manage costs to increase profit.

Pay for the resources or the outcomes

At the end of the day what you actually want is outcomes and results, not just resources. If you just wanted the people, why not employ them directly. The overhead factor will be a lot less.

So if you want to pay for outcomes, firstly you need to define the outcomes you need for any period and the results you want these outcomes to deliver. Then you can strike a retainer or project fee for the agency to deliver the outcome and then a value based remuneration for delivering the results.

This is a value based model that pays the agency a fee for the delivery of the services and outcomes and then provides a significant and variable profit based on the achievement of results.

Getting the formula right

Some advertisers find it difficult to implement a value based model because they think of agency costs in terms of a cost for people. In the TrinityP3 model the agency is paid to deliver the services, but shares in a significant and higher profit margin if they participate in delivering higher than expected results in sales, market share growth or some other significant business measure.

Sitting with a client and their agency, I was talking about the cost in time, resources and dollars being consumed by their convoluted approval processes. You see, we had identified that for most projects there were eight people involved in approving each stage of the creative and production work. For major processes this number rose to fourteen and dragged down the agency and marketing departments speed to market.

We had undertaken a benchmarking exercise and identified that the briefing and approval process was driving a 15% over resourcing in account management. This represented a $120,000 per year impact on the retainer.

Changes are driven by multiple stakeholders

Most organisations have a collaborative culture, which encourages more people to be involved in each process. This, and a flattened organisational structure means that multiple people of similar authority can be involved in the approval of work as part of the advertising output. The problem is that each approval potentially, and usually, involves a change to the current work. This process works also more effectively if all those involved in the process are working to the same brief (but that is another issue altogether).

Changes to artwork is a revenue bonus for the agency

The issue is that every set of changes can be a bonus revenue opportunity for the agency. While some agencies are on a fixed fee for production, most agencies are on head hour rates for production. In the most extreme case we were asked by an advertiser to investigate their agency’s costs because it cost $7,000 to provide the client’s logo for a balloon printing. What we found is that the size of the logo on the artwork was changed more than 12 times by the six stakeholders involved in the approval process. Each set of changes cost $650 in studio time, plus print outs, pdfs, archiving, etc…

A rigorous process is the secret to minimising production costs

All advertisers should review their approval processes to:

1. Map the current process to ensure it is as direct and rigorous as possible
2. Identify all stakeholders and the role they play in the process (Use the RACI or similar process)
3.  Look at reducing or consolidating the number of stakeholders where possible

Processes can be reinforced by software and online systems

Back to the meeting we had with our client and their agency. Once we had discussed the cost of the approval process we went on to talk to the client about the many online approval systems that help to manage the approval process when you have a large number of stakeholders.

The agency added that they currently used one of these approval systems with some of their other clients. You could hear a pin drop as the client wondered why this had not been offered to them, and lead to a 15% reduction to the retainer they were paying the agency.

Which processes within your organisation are the most time consuming? Let me know, as these are usually the ones with the greatest opportunity for improvement.