Many advertisers have moved from the old fashion media commission and service fee to retainers based on retaining a set resource, the cost of which is calculated based on the direct salary costs of those resources, multiplied by the overhead cost of the company and then multiplied by the profit margin.
Retainers are generally considered to be easy to manage as for most advertisers they are set and forget. But two recent case studies highlight why retainers are not the ideal advertising agency remuneraion model and that the best remuneration model depends on their needs and circumstances.
CASE STUDY 1 – PROBLEMS SETTING THE RIGHT LEVEL
In negotiating a new remuneration model, the marketing team was unable to provide a definitive scope of work as much of the activity requirement was driven by the business, with marketing managing the execution. P3 suggested using the previous year’s activity as a base line and adjusting the remuneration model up or down depending on the actual scope requirement, reviewed throughout the year. The agency proposed, what appeared on the surface, to be a more attractive “all you can eat” model with a 10% increase on the previous year’s retainer but the agency would take on all marketing requirements.
Within six months the agency was complaining because the resources were more than 40% over utilised. P3 was again engaged to determine why, because the marketing team could not identify any significant change in the level of work required.
P3 discovered that two problems were responsible. Firstly marketing was using the “all you can eat” model to outsource admin and non-core functions to the agency such as the preparation of powerpoint presentations, dressing the client offices for major internal presentation and providing staff on secondment during leave.
Secondly, the resource utilisation efficiency (the volume of resources required to execute an advertising deliverable) had decreased with account management and creative running 30% and 20% higher than expected. It appears that as it was all covered by the retainer, the marketing team was more likely to send the agency back to do further concepts more often.
So while the “All you can eat” model looked attractive, within six months the agency maintained it was unsustainable without a 40% increase. This was difficult to dispute as the marketing team was unable to provide a defined scope of work.
CASE STUDY 2 – DIFFICULT TO ADJUST
The advertiser had in place a retainer agreement with their agency over many years and this had previously been adjusted to the consumer price index. This situation was sustained by the fact that the advertisers scope of work was relatively consistent each year.
However, a new CMO and a new advertising strategy required a significant drop in the scope of work and naturally the CMO expected a similar drop in the retainer with the agency.
The reduction in scope of work was considered by the advertiser to be in the region of 30% and they also wanted to reduce the additional reporting and co-ordination functions to achieve a 50% reduction in the retainer.
The agency’s first response to the reduction in scope of work and removal of the non-core services was a small 10% reduction in account management only. P3 was engaged by the client but the problem was that no previous data had been collected on the scope of work undertaken or the level or resources required to deliver it.
The agency contract meant that the retainer could not be reduced until the annual review (10 months away) so the agency had time on their side. However, P3 undertook an analysis of the scope of work delivered for the past two years from the agencies financial records and used this with our benchmarks to calculate the level of resources typically required to execute this same.
This then became the baseline from which we were able to project the reduction that would be expected based on the changes required by the CMO. While it did not support the 50% reduction, we were able to prove to the agency that the reduction was higher than the 10% they maintained.
