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Before you move forward with agency remuneration, make sure you look back

Improve agency remuneration
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This post is by Darren Woolley, Founder of TrinityP3With 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.

For more than a decade we have been helping advertisers to benchmark and improve their agency remuneration arrangements. We do this using our extensive database of agency resource and remuneration benchmarks along with the TrinityP3 Scope Monitor. This can be done a number of ways:

  1. Review the current remuneration model against benchmarks
  2. Calculate the remuneration going forward using the benchmarks

Typically, many marketers are more interested in what they should be paying their agency, rather than looking back on what they have paid in the past. But in fact when looking at agency remuneration you should ideally look back to the recent past to understand your current situation before you move forward.

“Those who don’t know history are destined to repeat it.” 
Edmund Burke (1729-1797)

Here is why.

Looking back to learn

While the TrinityP3 industry benchmarks offer low, medium and high benchmarks for rates, resource levels and mix, the application of the right benchmarks provides insights into the current relationship being assessed.

1. The cost of the individual resources (agency personnel) is indicative of the seniority and level of expertise providing the advertiser with insights into the individuals on their account.

2. The mix of the resources by seniority and by discipline provides insights into the alignment of the resources to account requirements including volume and strategic importance.

3. The level and mix of resource by discipline against the scope of work indicates the efficiency of the relationship.

By reviewing the current remuneration we are able to determine the specific terms of the relationship. To do this we collect details on the specific outputs for the past year, the agency resources required to deliver this scope of work and the costs associated with the delivery of the scope of work plus we review any agreements or contracts in place covering the relationship.

Using this information, because it has happened, as opposed to being planned for the future, so we can confidently benchmark the current relationship against the specific market benchmarks for the category.

The only time this is unadvisable is if there have been any major recent changes in the past 12 months, such as a change in agency or a significant change in process.

To demonstrate the insights of this process let’s looks at some examples of the outputs.

Lessons from the past

Lesson 1

A financial services company was concerned about the low quality creative and strategic outputs of the agency. The benchmarking showed that the agency was well resourced in the level of resources but for the relatively low volume of work the agency had skewed the mix of resources to the junior level, especially in the creative department.

The fact was that the agency needed to apply more creative resources to the account. The other insight was the junior creative resources led to high levels of reworks, which was impacting on the level of account management, which was almost double the level expected and was driving the agency to ask for an increase in fees.

Lesson 2

An automotive client was in negotiations with their agency, with the agency requesting a significant increase in retainer. The level of resources in account management, strategy and creative were significantly higher then the benchmark for the scope of work.

In fact the level of agency resource used indicated a fee that was almost 80% higher than the current retainer. When we looked at the number of iterations of creative concepts it was almost 6 times higher than benchmark.

Further investigation revealed that the approval process within the organisation encouraged the high number of reworks with the senior marketing team often vetoing the work approved by their team.

Lesson 3

A consumer goods client had a significant reduction in budget and therefore cut the scope of work from 8 major campaigns to four. Expecting a corresponding 50% reduction in agency fees they were shocked when the agency proposed a fee of only 5% less than the previous year.

We benchmarked the previous year and then used this to calculate the new-year scope of work resources. The mix of the campaigns was not linear in complexity and so the final benchmarked resources and cost was around 35% less than the previous year.

The benchmark variables

Beyond low, medium and high benchmarks, we have assembled and collected data by market and by advertiser category. We also have benchmarks for a wide range of agency types from media and creative to digital and public relations and everything in between. We even have benchmarks for call centres and content production hubs.

Benchmark types:

We have benchmarked almost all outputs or deliverables from the obvious such as landing pages and television commercials to the more complex like e-commerce sites and mobile apps. The range is wide and within these categories there is a huge amount of granularity to allow us to provide you with the benchmark you need.

Markets:

Working with regional and global marketers we have data for more than 20 markets available through our Ad Cost Checker on-line. We also have data for another 30 markets, but not to the statistically significant level required to be included in the Ad Cost Checker database

Agency Disciplines:

Account management and management, strategy, creative, digital, technology, production and more.

Resourcing benchmarks:

We have distinct benchmarks for various advertiser categories such as automotive, alcoholic beverages, consumer goods, entertainment, financial services, telecommunications, retail and more.

Setting the benchmark

By comparing the actual scope of work with the historical resources used and the costs with the benchmark resources and costs across the various disciplines and analysing not just the level of resources, but the mix too, we are able to create a benchmark profile for the agency and client.

We then discuss the findings with the client to understand if there are any anomalies and to delve into the underlying processes to account for the variations against the benchmark.

In this way we can create a unique benchmark profile, customised to the client and agency process and expectations. This then becomes the basis for calculating future agency resources and costs based on the proposed scope of work.

Occasionally the client will ask that we adjust the benchmark profile to better align to the industry benchmark, but this is only advisable if there are plans in place to change the processes to support the benchmark levels. In the case of the automotive advertiser above, it would be to streamline the briefing and approval process, which was going to take time.

Simply adjusting the benchmarks to the industry benchmark and not the customised benchmark profile will not change behaviour, it will simply pay the agency less and this will lead to the agency making adjustments to protect their margins and profitability in areas that could have substantial impact on quality and output.

Over time the benchmark profile can be revisited to ascertain how the process optimisation is impacting the efficiency of the agency output and then it can be adjusted accordingly.

Moving forward

The alternative to looking forward is to assume that the relationship between the advertiser and the agency is optimised and to apply the industry benchmarks in a “cookie cutter” way without any consideration or adjustment for the peculiarities of the current arrangement.

We can do this of course, but it is important to understand the shortcomings. Usually it is simply to check or justify the proposed agency fee or to be used in the negotiation.

The danger is, as above, that if the current relationship is not optimised and not working efficiently, then the industry benchmark will simply not reflect this and the shortfall on the agency fee will not be the incentive to become more efficient, it will simply incentivise the agency to cut their costs.

An agency’s biggest cost is people and so the quality and number of people on your account will decrease.

This is why we recommend that instead of simply calculating the fees for the future scope of work, it is always worthwhile to stop and look back to the immediate history to determine how efficient the current relationship is performing.

TrinityP3’s Agency Remuneration and Negotiation service ensures that the way in which you pay your agency is optimal.

Why do you need this service? Read on to understand more

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Darren is considered a thought leader on all aspects of marketing management. A Problem Solver, Negotiator, Founder & Global CEO of TrinityP3 - Marketing Management Consultants, founding member of the Marketing FIRST Forum and Author. He is also a Past-Chair of the Australian Marketing Institute, Ex-Medical Scientist and Ex-Creative Director. And in his spare time he sleeps. Darren's Bio Here Email: darren@trinityp3.com

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