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.
Reading the trade media on the trend towards agency project fees, you would think that the agency retainer is dead, (along with the Agency of Record). And while the ANA Agency Compensation Survey shows that the retainer is not as common as it once was, it still accounts for a significant proportion of major agency remuneration models and is well and truly alive and well.
But lets be honest, while the agency retainer is often set and forget, it has a few problems especially with the way many of these retainers are set up and managed. In fact while many advertisers and their agencies often default to the retainer model it has more problems then most are willing to recognise. Makes you wonder why it became so popular in the first place.
But then again it is simply a matter of working out the resources you need, the base salary cost and then multiplying this by the overhead and profit margin to get the annual fee and dividing this by 12 to get the monthly retainer. What could go wrong? Well here are a few problems marketers have with retainers. Can you think of any we may have missed?
1. Retainers are inflexible
While annual marketing plans are important, marketing implementation is becoming more agile and responsive to the customer and the competitive set. This means marketers are looking for agency arrangements that are able to flex and provide the agility they need in their go to market plans.
Yet retainers are, by their nature, locked in with retaining specific agency resources for a year or more. So that when the marketing needs change it is difficult to flex the retained agency resources. This is not just the level or resources, but also the mix of capabilities and mix of seniority and experience, unless you are willing to pay more.
2. Retainers encourage unpaid overtime
When you retain 100% of an agency resource, while it should mean that they only work on your account, the fact is that it means all of the billable annual hours. This could be 1600 hours, or 1800 hours or more. But what happens when agency staff work excessive overtime beyond these annual billable hours?
Well firstly the agency staff members do not receive overtime payments, so this is effectively free. Secondly in some cases the agency will use these hours to claim additional fees or use the resources to work on other business even though they are supposedly dedicated to one account. Either way the agency profits at their employee’s expense.
3. Retainers do not secure key agency staff to your account
Many advertisers mistakenly believe that the retainer guarantees specific agency resources working on their account. While specific agency staff members will be promised to win the business, agency personnel will either move accounts within the agency or change agencies.
This is a fact of the business with some agencies having a 30% churn in staff. Retainers cannot stop this. Even if you have the names of the agency personnel specified in the contract, it would always have an allowance for this to change by mutual agreement.
4. Retainers are difficult to calculate value
If the CFO or procurement challenge the CMO on the value of their agency retainers, how should they respond? After all most retainers are basically payment for a particular number of agency resources of various disciplines and capabilities so how do you prove the value of these resources?
You have the cost of the resources and the number of resources to provide a cost per resource or FTE, but is this a measure of value or simply seniority? This is why some companies will take the agency to a market pitch simply to test the price value of the agency resources only to find an agency willing to take on the account for less or have the incumbent cut their fee even lower.
5. Retainers are difficult to reconcile
Similar to proving value is the inevitable round of agencies presenting the timesheets for the past 12 months trying to demonstrate that the agency has provided more resources than paid for in the retainer. But it is not that simple to reconcile.
Often these timesheets do not capture the projects the agency resources were working on making it difficult to know if the hours appear too high or not. It is also difficult to know who in the agency actually provided the service.
Were the hours allocated to a senior person to do the work of someone more junior effectively increasing the cost? There are so many variables inside a retainer agreement, it makes it difficult to reconcile.
6. Retainers rarely make both client and agency happy
In more than 18 years of analysing agency remuneration it is difficult to recall a time when both client and agency were happy with the retainer. This is most likely a sampling issue as we are usually involved when there are problems.
But it appears to me that when the agency is very happy with the retainer the advertiser is concerned that the retainer is too generous and when the agency is complaining it is not enough, the marketer is happy they are getting good value.
In fact I asked a marketer how they set the agency retainer and they told me that it was set on the number of agency people they believed they needed to do the work and then they just increased the workload until the agency complained.
7. Retainers do not incentivise agency performance
Retainers are a straightforward way for paying for agency resources. They provide the agency with the surety of knowing they will recover the cost of the resources in the retainer and allow the agency to commit those resources to the client’s account.
But beyond proving that those resources and hours are delivered, it does not really incentivise the agency to improve performance. In some cases it can incentivise the agency to make processes more complicated and time and resource consuming as a way of proving the value of the retainer, but it does not reward improvement in either quality or quantity or overall performance at all.
8. Retainers hide all types of advertiser inefficiencies
One of the reasons marketers prefer retainers is that it becomes like an agency smorgasbord where the marketer simply feasts on the services on offer until they are either satisfied or the food runs out on the table.
In fact, it often doesn’t matter if the agency services consumed are wasted or misguided as it all comes out of a pool of resources that is difficult to reconcile beyond the agency calling when enough is enough. Poor briefing, cancelled projects, prolonged approvals and multiple changes all consume agency resources with no accountability or consequence to the marketers responsible.
In fact the agency is complicit in this as it helps them to justify an increased retainer for the coming year.
9. Retainers commoditise agency capabilities
Under the retainer every member of the agency is reduced to an FTE (Full Time Equivalent) and a job title. The Account Director is an Account Director and is assigned a monetary value for their time, along with any other Account Directors.
If they have a specialist skill or expertise they are still considered an Account Director. But what makes an Account Director different from an Account Manager, who is assigned a lower monetary value?
Is it the number of year’s experience? Their job responsibilities? Or is it related to their specific expertise? Rarely are these considerations. And so it goes through the job titles, irrespective of their specific capabilities or value. Is it any wonder many feel the agency business has been commoditised? And not because of procurement but because of the way agencies chose to be remunerated.
10. Marketers are unsure of the alternatives to retainers
Once the media commission and media accreditation disappeared the main fee model for creative agencies and many media agency was the retainer. It became the new standard replacing the media commission model and is the same model used by law firms and accounting firms, giving it validation.
The fact is that many other specialist agencies including digital, public relations, brand and shopper activation and the like have been using project based models all this time. There are an increasing number of remuneration models and hybrids of the basic agency compensation models to choose from and to customise to your needs.
While there is no one-size or model to fit all situations, there are some basic accepted models and some innovative adaptions that can help advertisers and marketers achieve better value for their agency fee, either by encouraging improved performance, increased outcomes, greater accountability or better results. And we have worked with all of them.
Our Scope of Work Management service evaluates your current agency scope of work and recommends the best approach, calibrated to your needs. Read more here