Retainers have become the most popular type of remuneration model for all types of advertising agencies including media, creative and increasingly digital and other marketing services. These retainers are based on resources being supplied by the agency to deliver the needs of the client.
But what is the retainer based on? What is the level of resources? What is the mix of resources? What is the cost base of the retained resources? And is the level and mix of resources at the right level?
Many marketers would say that this is irrelevant if the agency is delivering the outcomes required. But without these fundamental remuneration principles in place it is impossible to know if you are getting value for money – a question being increasingly asked of Marketing by CEOs and if they don’t get an answer they are satisfied with the CEO is increasingly turning to procurement for the answer.
Three types of remuneration value
There are 3 ways to measure value in remuneration:
1. Resources: This is simply a calculation of the direct salary costs of the resources provided, multiplied by the overhead cost of the supplier and their profit margin. This is a measure of the costs of the resources.
2. Outputs: This compares the outputs or deliverables of the resources against the resources required and then applies the direct salary costs, overhead and profit. It is a measure of value of output than just the cost of the resources.
3. Effectiveness: This looks at the results generated by the outputs delivered by the resources retained, which is then multiplied by the direct salary costs, overhead and profit multiple. It is therefore a measure of the value generated as a function of the value of the outputs and the costs of the resources used.
What is the value of these calculations?
With a Resource Based Retainer how do you know you have the level of resourcing you need or the right mix of senior and more junior resources. You may be paying the right market rate for those resources, but if you have more than you need you could be paying too much. Or if you have too little you could be paying for resources that are overstretched, overburdened and underperforming.
The Outputs Based Retainer provides you with a way of measuring the level of resources for the outputs or deliverables required. As your requirements change in volume and complexity you can then manage the resource level and mix required to deliver your new outputs. It means that you have more insight and transparency and therefore more control over the resources and the cost of the retainer.
The Effectiveness Based Retainer requires the marketer to put performance metrics in place to track the effectiveness of the activities and outputs provided by the agencies under retainer. This provides an important layer that takes the retainer beyond a simple equation of cost of service to a true value for service. In fact, the remuneration model could be adjusted to see the retainer become a base fee with the majority of the profit component of the remuneration payment becoming a bonus, providing a huge incentive to align the agency’s activities to the results achieved.
How do you move from cost of service to value based retainers?
The level of transparency, accountability and control of the value obtained from your agency retainers comes down to the level of measurability the marketer has in place.
The three key measures are:
1. Spend – How much is spent on what – head hours by function and role, production costs, and third party costs
2. Outputs – What is to be delivered against what is delivered in both type, volume and complexity
3. Results – What was achieved in relation to achieving key performance metrics including brand and marketing metrics, cost per lead and acquisition, but also sales and profit
Many marketers are singularly focused on the budget. But spending without a measure of outputs delivered provides no insight into value.
Spend against outputs delivered provides insights into the cost efficiency of these outputs and therefore the value of the outputs delivered.
Ultimately the result of these outputs against the cost provides marketers with a true measure of the value, efficiency and effectiveness.