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.
This is the third in a series of articles on agency scope of work management. Managing the scope of work for your agency is possibly the easiest and fastest way to increase the buying power of your marketing budget by removing the duplication and uncertainty as much as possible from the agency work. In this way you are able to get more for your agency budget without simply driving down the rates and prices.
- Article 1: How to define an agency scope of work to deliver increased value
- Article 2: The impact of economies of scale on scope of work cost
Being able to plan all of your requirements of the agency for the coming year is an ideal situation. But the world and the market is often an unpredictable place and your brand strategy needs to be able to frame how your responds to the changes in the market place. Luckily there is a way to frame your agency scope of work in a way that lets you obtain the benefits of the increased efficiency.
Managing change and uncertainty
When we are working with advertisers on their scope of work for the agency, either as part of a tender or as part of their annual planning, one of the obstacles is a lack of certainty in the plans for the coming year. Of course it is natural that things can change. Nothing is more certain than change itself. But the causes of change vary significantly: change in strategy, change in market circumstances, change in requirements, change in marketing leadership and more.
But sometimes the lack of certainty is because the planning and requirements are decided outside of the marketing team and within the business. This makes it incredibly difficult to be able to plan the requirements, unless you are able to engage those areas of the business that create the demand in the planning process.
One of the ways we have had incredible success in doing this is being able to demonstrate through financial modeling of the agency process, the savings that can be obtained by deploying a more rigorous and certain planning and scope of work process.
Bringing certainty to uncertainty
Without a scope of work plan it is impossible for the agency to know what resource they require and when, therefore it is impossible for the advertiser to know how much the agency work will cost. In the absence of a scope of work plan the agency will logically allow for resources to be available under a retainer, even if they are not necessarily required, the agency will need to recoup the cost of those resources.
Therefore even in the face of great uncertainty it is worthwhile for the advertiser to prepare the scope of work plan for the core requirements that are reasonably known. We were working with a consumer packaged goods company who had a core scope of work, but they were reticent to commit to the full scope of work as the ability to deliver this would depend on a release of further marketing budget based on a quarter-by-quarter performance review.
Rather than leave the agency completely in the dark in regards to the scope of work for the coming year we worked with the brand team to map out the core work that had an approved budget and then what they would want to deliver should the extra budget be released based on sales performance.
The difference between the two was about 55% of the scope of work and therefore we reviewed the additional work and categorised this into certain / core and uncertain. In this way we were able to confirm around 75% of the scope of work, being the 45% core work and about 30% highly likely work. Considering the brand team initially believed that none of the scope could be confirmed, this was able to provide the agency with reasonable certainty for three quarters of the annual scope.
Even having defined 75% of the agency scope and knowing that while highly likely, about 30% was subject to revenue performance being met, the agency was able to allocate resources throughout the year to deliver the scope of work. It also allowed us to be able to calculate the agency fee based on those resources to deliver 75% of the total scope and 100% of the highly likely scope. If the business achieved the revenue performance required and the full marketing budget was released then there would be additional funds for the agency if the other 25% of what we classified unlikely work was delivered.
In actual fact this mechanism of linking marketing budget to the revenue performance acted as an incentive for both the brand team and the agencies and the brand delivered their revenue growth objectives and the marketing budget was released in full that year.
Dealing with the changes that happen
But what if they did not realise their revenue objectives for reasons beyond the control of the brand team and the agencies and the scope of work had to be cut or changed? What if the strategy and plan was under delivering and needed to be revised and significantly changed, what happens to the scope of work then?
This is an issue that confronts many marketers, especially if their category is particularly dynamic or if their strategy is to be responsive to the market. How do you manage the changes in the scope of work if the volume and scope of work changes dramatically over the year?
Often in these situations it is usual to not provide a base scope of work because it is seen as pointless, especially as major parts of the scope will change. We hear this quite often, especially in high volume and fast moving services categories. But the fact is that this creates huge issues for both the advertiser and their agency, as there are no baseline requirements against which to allocate resources and no baseline against which cost can be apportioned and managed.
But let’s say that an agreed retainer and an agency resource plan is put in place at the start of the year and the work commences. Then as the year progresses the scope builds as there is no defined or agreed scope of work. The agency keeps track of the resources and their hours working on the account until the agency flags with the client that they are over the agreed number of resources and hours and therefore cost. There may be disagreements over the number of hours and the client may challenge the agency and their spreadsheets of hours.
The whole process is built on two dimensions of resource hours and cost, but not linked to the third and more defined dimension, which is the outputs of the process and these define the specific scope of work.
The way we work with our advertiser clients is to use outputs in the scope of work to apportion agency resource and cost up front. Effectively we create a scope of work. If the advertiser is unsure of the scope for the coming year we will often use the previous year outputs as a base line and adjust or reduce to the essentials to create the scope of work baseline. This is then used to calculate the agency resources required and the associated cost.
As the year progresses and the work is created we are able to reconcile the outputs against the planned scope of work and monitor the projected resources and costs. If the scope of work changes require the equivalent of the agency resources projected by the scope of work (give or take 10% – 15% variation) then little or no adjustment to the agency fee is needed.
However, if there is a significant change (greater than 15% or 20%) in the scope of work and the associated agency resources, then an adjustment is made to reflect this in the agency fee. The tolerance of these variations is dependent on the amount of flexibility built into the agency overhead and profit margin in the fee calculation.
The frequency of monitoring of this process can be simply on an annual basis as a reconciliation at the end of the year or more frequently depending on the volume of work and the speed of change in the category.
Is a scope of work worth the effort
One of the key areas of conflict between agencies and their clients stems from the remuneration model. Either because the agency believes they are underpaid for the work they do or the advertiser believes the agency is overpriced or worse, under qualified as the agency replaced more senior and experienced resources for lower cost, more junior resources. Does this sound familiar?
But rather than simply relying on resources and cost, the scope of work provides a more tangible and less subjective measure of agency productivity and value. The concern that there is no point defining a scope of work if it is going to change, ignores the fact that the scope of work sets a baseline from which changes can be managed more effectively.
Each year should start with a defined scope of work, even if it is simply a version of the pervious year’s scope and then end with a reconciliation of what was delivered and what was not. This should be part of any rigorous governance and performance review process, the absence of which negates the opportunities for improvement.
TrinityP3’s Scope of Work Management service evaluates your current agency scope of work and recommends the best approach, calibrated to your needs and benchmarked against the industry.
Why do you need this service? Learn more here