Retained AOR or project fees? Which one is best?

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.

I received an email today from my friend and industry colleague, Francisco Escobar, who said

“Just looked through your newsletter and blog posts for the past 18 months or so and did not see anything on comparing AOR/Retainer versus Project-based.  Have you opined on this subject with any pros and cons?”

While I have previously shared thoughts on comparing rate cards with retainers in 2008, ways to improve retainers in 2009 and most recently the considerations before moving from retainers to project fees in 2016 , I have not actually provided a comparison of pros and cons for advertisers and agencies.

Yet in the past five years we have had an avalanche of advertisers asking us for help moving their agency remuneration from retainers to project fees.

So based on all of those projects and all of those discussions with marketers, procurement and agencies regarding retainers or project fees, here is the current state of play from a TrinityP3 perspective:

Why marketers are considering project fees

The downward pressure on marketing costs and the introduction of Zero Based Budgeting as a way of achieving cost reductions are significant factors in the move from agency retainers to project fees. These trends have been quoted several times by Sir Martin Sorrell as the drivers for the falls in revenue seen at WPP.

But beyond these financial trends there are significant operational trends impacting the way marketers work with their agencies that have bought project fees into consideration. The first is the relative inflexibility with the retainer model, which is typically set either on an annual basis or by a contract period to retain a particular level and mix of agency resources.

Marketers are increasingly finding themselves having to react to their competitors and the market and respond to changes in business strategy not on an annual basis but on a weekly basis making it difficult to commit to an annual retainer. This is exacerbated by the increasingly common cuts in marketing budget that occur in response to poor sales performance and the shift of marketing budget in some organisations away from marketing to the business, who dictate the marketing needs.

Marketers are also finding themselves not working with one Agency of Record (AoR) but at its most basic two, with media separated from the creative agency. Then you add on a digital specialist, perhaps PR, a trade or B2B specialist and brand activation agency and suddenly there is a roster of 6 – 8 core agencies or marketing suppliers.

Most of these specialists beyond creative and media do not have a retainer and instead work on a project basis. This means that the AoR is not on retainer then the marketer could move projects to these specialist agencies with little or no financial impact.

Finally, marketers struggle with understanding and therefore justifying the value of the AoR retainer when challenged by the CFO or procurement. As the retainer is based on retaining a number of agency resources of a particular mix, then they are challenged to justify the cost of the number and mix of those resources, particularly if procurement takes the contract to market there will be an agency competitor or even the incumbent that will take on the task for less money and less resources to win or keep the business.

The various project fee models

Just as there are various configurations of agency retainers (full service retainer, account management and strategy only, etc) there are various ways of calculating and managing project fees. The difference is that while retainers are usually calculated the same way (cost of resources by overhead by profit margin), project fees are calculated a variety of ways. It is worth reviewing these project fee models to understand that not all models are equal.

Hours Based – Project is defined and briefed and the agency prepares a proposal based on a number of hours to complete, often calculated at a blended hourly rate. This may be a fixed fee or a variable fee based on hours completed along the way.

Budget Based – The overall project budget is divided into parts based on past budget splits and the requirements of the project. This takes into consideration a split for media and the media agency fee is a split of the total media budget, creative and production are a split and often related to the media investment under the traditional working / non-working ratios etc.

Value Based – Similar to the budget based model, if you make the assumption that the budget is based on the business or marketing value of the project. Here the project budget is split into fees for services based on the perceived value, either financial or strategic of that service to the project. Often these perceptions are informed by past projects.

Output or Deliverable Based – This sets a price or value based on the specific outputs required. These outputs can be tangible (production outputs) and intangible (Ideas, concepts and strategies). The price is set by the value of the work and informed by past behaviour. Often to avoid the ‘quoting’ or ‘proposal’ stage of the project process these can be negotiated and agreed up front and placed into a pricing matrix.

Performance Based – In cases of direct response or direct acquisition projects the model pays the agency based on leads or sales.

There may be other project based fee models, but this covers the basics.

The benefits of project fees

For the Advertisers / Marketer

Benefit Issue Consideration
Flexibility Structured properly means marketers can place projects with the right agency for the job and not simply with the AoR to maximise the retainer investment. Managing multiple agencies across the roster takes time and discipline to ensure optimal performance and brand / communications consistency.
Seasonality Ideal for seasonal businesses where it does not make sense to retain an agency for 365 days a year when they are active on the business for only part of that time. May sacrifice continuity of agency resources as each season agency staff may have left of moved to other accounts, but this can happen with retainers as well.
Accountability Individual marketing teams or business units pay for the agency services they use rather then the retainer coming from a central budget or having to manage disagreements over how the retainer is funded. Need to ensure that all stakeholders are accessing the agency services at the same value and cost to ensure achievement of maximum value for the volume of spend.
Efficiency Under the project fee marketers stop receiving many of the services you obtain under the retainer that they didn’t really need or want or even knew they were paying for. Important to consider all of the tasks and services the agency provides under the retainer before you move to a project-based model.

For the Agency / Supplier

Benefit Issue Consideration
Revenue Increase Moving away from hourly rates to value or output models can allow agencies to compete against smaller and cheaper competitors to consolidate the budget and increase overall revenue from the client. This requires the agency to have the flexibility to run multiple stream cost offerings to align the delivery to the value of the project at hand.
Resource Flexibility Depending on the size of the client, it can create opportunities to utilise agency resources not 100% committed to other clients to generate incremental revenue. For large clients with a high volume of project this becomes an issue as if you need to recruit additional agency resources you may not have the certainty of revenue to justify this.
Accountability Each project is like a mini –retainer and therefore easier to manage and hold the client accountable for restarts, miss directions and changes in the scope of work to ensure payment for the project delivered. Project based work requires a high standard of account management and particular focus on not just client relationship management, but also project management and discipline.

 

The weaknesses of project fees

For the Advertisers / Marketer

Weakness Issue Consideration
Variable Resources Without a retainer some agencies will not be able to guarantee consistency of personnel on your account. This may be account management or a favoured strategist or creative. Smart agencies will continue to allocate a consistent lead to your account with the sole responsibility of increasing the number of projects awarded to the agency. If there is preferred agency staff, a small retainer may be considered.
Increased Administration A retainer is paid monthly meaning 12 invoices per agency per year for the fees. Project fees can mean additional estimates for approval, purchase orders and invoices for each project beyond those associated with production. Look for ways to minimise administration by streamlining or consolidating processes. Agreed output or deliverable based project fees eliminates any procurement process to have agencies competitively tender for projects.
Transition Issues Moving an AoR from the security of a retainer to project fees can be difficult. The process will be time consuming and can potentially fail if the AoR actively undermines the process. Consider transition phases moving to a smaller retainer when introducing project fees with a view to reducing or dropping the retainer completely at a later date.
Lack of discipline Retainers are like a smorgasbord for marketers, while project fees require careful consideration and discipline in management. There is no retainer to hide your indecision, missteps and clunky approval processes. Be prepared for issues to arise in the marketing team as the loss of the retainer reveals issues on both sides of the relationship. Look to frame this as an opportunity to improve performance and encourage greater accountability.

For the Agency / Supplier

Weakness Issue Consideration
Loss of security Retainers provide cost recovery for your agency resources, but often come at a reduced margin for those resources. Nevertheless security is often better then the uncertainty of project fees. The greatest fear is loss of revenue or loss of the client. However it is possible to increase share of the client budget and increase revenue on that client by proving value and providing flexibility.
Increased administration Rather than 12 monthly retainer payments the agency finance department and account management team could be preparing and administering estimates and invoices for hundreds of projects. Investigate working closer with the client finance team to short cut administration processes and streamline estimates, invoices and payments. Agreed pricing for common tasks is one way to achieve this.
Transition Issues Just as the change to project fees from retainers is a change for the agency it is also a change for the marketing team who will be used to the agency being available at their beck and call. Suggest a smaller transition retainer for account management to deliver the level of service the marketing team expect. Use this time to manage expectations and build volume and gain foresight into projects coming.
Resource Management Ensuring cost recovery and optimising resource revenue generation across the agency team is more complex and time consuming without a retainer to cover off these costs. Timesheets become critical, not for billings as much as resource optimisation, revenue generation and cost recovery. Look to manage resources on projects to minimise under utilisation across the agency.

The composite or hybrid models

As mentioned there are a range of project models and also a range of ways these are implemented and managed. We have seen this transition made from retainer one day to all project fees based the next and others who have moved form full retainer to a reduced retainer and project fees.

Some marketers have put in place a small retainer to secure a core account management team to manage the relationship and the workflow, while the strategy, creative and production is based on project fees.

Others have retained a percentage of agency management and senior agency heads to a “Strategy Team” to be available to the senior marketing team for overall direction and guidance, while the agency, including account management is paid on project fees.

Of the various project models, the output or deliverable model creates the least amount of administration but requires the highest level of discipline from the marketing team and the agency. It also means that all agencies across the roster can we working to a common project fee, creating a level playing field where strategically important projects are paid more than the less important ones.

The hourly fee based model is similar to the retainer with the agency proposing a number of hours to deliver the project and then reconciling hours used against it with the client.

Picking the right model

The fact is there is no right model that suits all advertisers. Maintaining a retainer or moving to project fees depends on the requirements of the marketing strategy and the ability of the agency to deliver those needs in the most effective and cost efficient way possible. When moving to project fees, the model selected depends on the scope and range of projects being considered.

It also depends on the volume and frequency of those projects. One or two agency projects a year is very different to a recent client’s requirements of more than 2,500 projects per year. In a world of content marketing and social and digital media, tens and hundreds of thousands of deliverables is becoming common.

The choice of the agency fee model depends on careful consideration of the marketing requirements, the agencies needed to deliver those requirements and the expectations and capabilities of the marketing team.

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

About Darren Woolley

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

We're Listening

Have something to say about this article?
Share it with us on Twitter, Facebook or LinkedIn

This entry was posted in agency remuneration / compensation, agency solutions, industry news & trends, marketing process optimisation, marketing procurement, return on investment. Bookmark the permalink.