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.
In the last post on the recent CIPSA Category Management Week held in Sydney, we looked the value created by agencies and the role of marketing procurement in identifying and maximising the delivery of this value.
In this post we get answers to questions on the issues associated with agency remuneration and third party costs from our panel of marketers and agency leaders including:
- Digital Media – Nic Hodges, Head of Innovation & Technology, Mediacom (NH)
- Digital Agency – Mike Hill, CEO, Holler (MH)
- Marketer – Jon Bradshaw, Director, Brand Traction (JB)
- Creative Agency – Paul Williams, Group CEO, BWM Group (PW)
- Media Agency – Angus Frazer, General Manager, Carat (AF)
The questions I posed on agency remuneration and third party costs were:
- What is the most common type of remuneration you use?
- What is a fair profit margin for agencies?
- How important is it for agencies to be transparent?
- What challenges do you face with setting remuneration?
- How important is benchmarking in agency remuneration?
Third parties costs
- What percentage of your income is paid to third parties?
- How do you manage these third party suppliers?
- How can the marketer and procurement know you are delivering best value?
- What opportunities are there to reduce costs and increase value?
- How relevant are measures like working and non-working spend today?
What is the most common type of remuneration you use?
PW – Retainer and occasionally retainer plus PBR. Most PBRs however are quite hard to manage.
MH – Time and Materials. Retainer + Time and Materials. Retainer + Time and Materials + Bonus based on KPIs being reached. Although payment for performance has long been discussed in Digital Marketing we haven’t seen it effectively implemented. It is also difficult to measure as Digital Marketing effectiveness can be reliant on channels the agency does not always have control over e.g. Media, original strategy/ideas.
JB – Head hour recovery model
What is a fair profit margin for agencies?
NH – Whatever allows both the client and the agency to grow their business optimally.
PW – Most well run agencies should be aiming for 20%.
MH – I’m not playing this game.
JB – Hard to assess but 10%-20% is common practice
How important is it for agencies to be transparent?
NH – If transparency is used as a tool for procurement only, it’s likely you’ll find most agencies (particularly around social/data/etc.) not being interested. On the other hand, if it’s win/win then transparency is the optimal state – we do this with most of our global clients and it allows productive, positive conversations around remuneration from both sides.
PW – Transparency always breeds trust, and trust is key to long term partnerships. Sharing broad cost structures in servicing businesses is always helpful for clients to understand, but recognise there are privacy limitations around details of individuals.
AF – Clients trust agencies to invest millions of dollars every year, transparency is vital to maintaining trust and a productive partnership. Agencies need to be upfront about the ways they create revenue and should not be secretive or apologetic.
Clients need to be comfortable that they understand how an agency derives its revenues. They must also remember that agencies are businesses that, like any business, need to create a profit in order to grow and remain sustainable.
MH – It is important for both agencies and clients to be transparent. This is what the relationship is built on. Both parties should want the businesses to be viable and rewarded for effective relationships.
Honesty is a core principle of our business. Unfortunately the heritage of advertising has totally screwed our reputation as honest businessmen. It’s something we need to change. I recently read we are the most hated industry above lawyers!
JB – The best clients respect and reward transparency. It can however be used as a negotiating tool by clients looking for value over talent.
What challenges do you face with setting remuneration?
NH – The increasing scope of what a communications agency should be providing.
PW – The core challenge in retainer based arrangements is less often around rates of roles, but around predetermining the correct amount of resource to service a business. A mechanism to safeguard the partnership is advisable, if indeed the business requires more resource than the estimated allowance.
MH – Client/procurement understanding of services and value that will be provided by a Digital Agency. Client understanding of resource structure and rates within Digital Agencies. Client underestimating the percentage of time required of resources.
Clients underestimating the operational/admin time required by staff when on project T&M which is difficult to recover (e.g. attending all agency WIPs, attending brand inductions and updates etc.).
Client underestimating importance/value of services such as data analysis, testing, project management. Face to face negotiations
JB – Calculating scope of work is a painful, inaccurate and frustrating process.
How important is benchmarking in agency remuneration?
NH – From a media pricing point of view – critical. From a technology point of view though this is an under appreciated area – I’d love to see a model around innovation, technology, and tools developed. Many agencies make big claims about technology and tools throughout a pitch process, but there’s very rarely any real rigour around their true performance and value.
MH – Benchmarking only works if agencies are transparent in the first place and the benchmarks are based on a ‘known quantity’. E.g. benchmarking a digital project can show huge variance depending upon many assumptions/dependencies e.g. technology approach, third party relationships, integration etc.
Price does not tell the whole story – consideration needs to be given to experience, service and broader value provided by an agency.
JB – Crucial in ensuring the client feels ‘fairness’ in the negotiation.
What percentage of your income is paid to third parties?
NH – On the media buying front – obviously a lot. On the technology, social, content production side – it can be up to 50% on some projects.
Increasingly we’re trying to build in-house capabilities for core competencies, but what we do gets broader and broader – and so we involve specialists to ensure our clients get the best outcome possible in the market.
PW – 30% approx..
MH – We like to keep production in house. As soon as I see it creeping over 20% for any given service we look at hiring the skills in house.
How do you manage these third party suppliers?
NH – From a technology point of view the relationships are the most critical thing. Objective, frequent, and rigorous reviews of technology and tools is also imperative – the landscape for these things changes on a quarterly basis.
PW – From a quality pov, they are usually creative talent that we have a proven track record with….we know they can deliver a great product. From a cost pov, nearly all our externally sourced work is competitively quoted.
MH – Third party suppliers are engaged on an as required basis usually hosting, email platform or specialist skills e.g. video production.
Usually identified and engaged by the agency and where appropriate three quotes obtained to compare price and service.
How can the marketer and procurement know you are delivering best value?
NH – Relationships – measured through our client approval scores. Hard metrics – media value, ROI. Long metrics – experiments, tests, successes and failures.
PW – Is the work good, is it meeting KPIs, is the relationship healthy… and is pricing broadly within market parameters? That’s as close to it as you’ll get.
MH – 360 degree evaluation by a third party – if either party is uncomfortable with that then that should ring alarm bells. Cost, service, effectiveness, KPIs, IP/assets/platforms
What opportunities are there to reduce costs and increase value?
NH – Value can be increased through utilising full agency offerings – and that will deliver cost savings. For example we have run more studies than any other agency in the Australian market around online and catch-up TV. The result is a model that tells us exactly how much to shift from a TV budget into these new online channels.
At the same time we often move investment from SEM to Facebook, or from DSPs to SEM because we identify efficiencies. It’s only because we look after the full spectrum of services that we’re able to do that. When agency scope is still “media buyer” it limits our ability to deliver this type of thinking.
MH – Ensuring efficiencies when engaging the agency e.g. knowledge sharing, clear client briefs and client project management etc so agency can deliver effectively.
Contractual terms – length of contract, retainer vs. t&m, bonus payments etc
Building an effective relationship, defining boundaries for all agency partners and driving collaboration
Outsourcing low end production work.
How relevant are measures like working and non-working spend today?
NH – Irrelevant – measurable, accountable marketing communications can be ‘working’ and can be ‘non-working’. We’re in the age of an abundance of earned media, while paid media still attempts to create the illusion of scarcity.
JB – It’s still highly relevant. The terms are tarnished with the smell of ‘old world’ marketing. But the concepts are relevant. Securing an audience remains the crucial part of marketing. Securing a digital audience is even more crucial than a broadcast one because it is harder.
Overinvesting in production and underinvesting in media is still a common error. Even if the words ‘production’ and ‘media’ mean different things today than they did ten years ago.
Would love to hear your thoughts on these questions.
Leave a comment here with your answers to these important questions.