What is included in your advertising agency overhead cost and what is not?

This is a guest post by Esther Selvanayagam, a Senior Consultant with TrinityP3. Esther is a Chartered Accountant with over 15 years experience largely in the Marketing & Media sectors. Her market knowledge and industry credentials are second to none with her most recent role as the CFO for the International Division at Photon Group (now renamed Enero Group).

One area of agency remuneration that creates confusion for many marketers, procurement and even agencies is the calculation of the agency overhead.

Overhead is the indirect cost of business and is usually presented as a percentage of the direct salary cost. Agencies traditionally had overheads of 100% or higher. That meant that for every dollar of direct salary cost the overhead was a dollar or more.

But with greater efficiencies of operation and the competitive pressure of the market place, the overhead has fallen.

But apart from the disagreement that often arises between procurement and the agency on the overhead level, the next disagreement is what is included in the overhead.

What part of an agencies overhead operating costs should the advertiser pay and what should the agency fund?

What is in?

It is generally accepted that overhead includes indirect business costs that are incurred in the day to day running of the Agency.  However, where they are discretionary costs, they should also not be unreasonable or exorbitant in nature and if they are considered to be, should be omitted for the purposes of calculating overhead.

What is disputed?

Some clients may expect some indirect salaries (finance/admin/legal) and indirect time of management where they work on Corporate matters and indirect time of direct staff to be excluded from overhead. However, agencies should include them in the overhead as these are genuine business costs incurred by the business.  The other area of dispute can be on what is considered an “exorbitant” or “unreasonable” amount of discretionary expenses.

What’s not included?

  • Severance Entitlements
  • Bonuses that aren’t a part of annual remuneration i.e. Sign on bonuses, discretionary bonuses, LTI, Profit sharing, stock options
  • Cars
  • Any expenses incurred specifically for other clients (i.e. training for a specific client, entertainment spent on other clients)
  • In-house Entertainment
  • New Business Costs (where non-recurring or extreme)
  • Donations / Charity contributions
  • Fines / Penalties / Damages
  • Gifts
  • Extraordinary items – M&A, bad debts, Relocation, loss on sale, cost over-runs
  • General market / media research costs

Do you agree? Or do you classify overhead costs differently? And why? Leave a comment here as I am interested in understanding why there is often so much dispute about what is in and out of the agency overhead.

 

Related Posts Plugin for WordPress, Blogger...

About Esther Selvanayagam

Esther is a Chartered Accountant with over 15 years experience largely in the Marketing & Media sectors. Her market knowledge and industry credentials are second to none with her most recent role as the CFO for the International Division at Photon Group (now renamed Enero Group). Esther is a highly experienced professional who has both the commercial and marketing experience to help TrinityP3 clients achieve their maximum growth potential. Read Esther's TrinityP3 bio
This entry was posted in agency remuneration / compensation, agency solutions, interesting observations, resource rate calculator and tagged , , , , , , , , , . Bookmark the permalink.

6 Responses to What is included in your advertising agency overhead cost and what is not?

  1. Hi

    We find in the uk that most advertisers do not have a conversation with their agencies about overhead at all never mind drilling down to the granular detail of what’s included. I find this very surprising considering the vast majority of UK advertisers pay their agencies a retainer based fee with overheads playing a big part in the calculation.

    We produced guidance many years ago now to prompt discussions, and have found agencies reluctant to discuss detail with their clients, especially large network agencies where their overheads are dictated at group level.

  2. Dan Jeffries says:

    Great subject to get a conversation started. I encourage my team to have these conversations with agencies, if for no other reason than to understand more about how their businesses work. When an agency is either unwilling or unable to share this information it should set the alarm bells ringing. As Debbie alluded to in her comment, many UK based agency relationships have a retained fee element as part of their remuneration so it is essential to understand the make up of that as best as possible.
    Transparency in this space should encourage a more grwn discussion about account profitability rather than seeing agencies make up lost margin out of inflated overheads.

    Dan Jeffries

  3. Anne Miles says:

    Perhaps the most controversial overhead is the cost of pitching for business. I've not seen many businesses factor this in as an overhead yet still agree to pitch unpaid. Additionally for job overruns – where they think it is creatively worthwhile for the showreel, or simply for a lack of understanding of the impact on the business overhead.

Comments are closed.