Why the hidden OUCH! Factor cost of advertising agency pitching is not financial

If you have not seen the OUCH! Factor research, it is definitely worthwhile to watch the Mumbrella360 Short video here and download the report here. The research report and the video were the work of Julia Vargiu, founder and Managing Director of New Business methodology.

Trinity P3 was invited by Julia to assist with the research and provide industry commentary on the results around the cost of agency pitching. As pitch consultants, we are aware of the cost to both agencies and advertisers, and we try to minimise these in our management of the process. But this was an opportunity to quantify the cost.

Our concerns are that while both clients and agencies who participated in the research are rightly shocked by the findings, little or nothing will change in industry practice – and for one very good reason. The real cost of pitching is not a real cost to advertising agencies, except in the mental and physical health of their staff. Let us explain.

What is the OUCH! FactorTM

In Julia’s own words “The OUCH! Factor™ is a formula, created over a decade ago, designed to measure the soft costs of pitching that are rarely tracked or truly known by agencies. It quickly exposes the commercial impact of pitching for agencies that have not instilled the discipline of rigorously tracking and evaluating the resources it continuously invests in pitching: time and talent”.

The survey was sent out to the TrinityP3 and New Business Methodology database of agencies and advertisers to generate interest. The results were analysed and a summary of the typical agency pitching experience and results is presented on page 41 of the report thus:

On average, an agency spent a total of 175 hours, that’s 22.2 days’ worth of staff time, on each pitch they entered. This is the equivalent of one employee working one full working month on just one pitch. The typical agency did this 11 times a year. And only won 48% of the time. They spent nearly 2,000 hours a year pitching but only won 5 pitches, so they needed to pitch for nearly 400 hours before they won anything.

The bottom line is that each pitch, on average, requires $44,000 of non-billed agency hours. That is shocking enough, considering most advertisers either do not pay a pitch fee, or if they do, it is much less than $44,000.

In the words of Brent Smart, CMO at IAG, That’s interesting that $44,000 figure, because I don’t think many clients would pay a $44,000 pitch fee, but that’s the average of time spent. I know we certainly always pay for pitching and we wouldn’t pay that much, but that’s an interesting figure to have in your mind when you think about, okay, I want to pay agencies for their time, then you got to be paying about 40 grand as a pitch fee, spread that around sort of five agencies, it’s a significant investment from clients to pitch, but you don’t see that from clients. That’s part of the problem”.

But is this really a hard cost to the agency? Or is it simply an opportunity cost? To answer this question, we need to look at the advertising agency business model.

The advertising agency business model

From the time agencies moved from the media commission fee model and embraced the time and cost model for charging their clients, the agency financial model has changed to a cost-recovery approach. The single biggest expense for any agency is the staff. Therefore, to be profitable, the agency must recover its cost in fees to the clients, either in billable hours or the overhead.

Once the agency cost is recovered, everything else is profit. Particularly as agencies do not pay overtime to their staff. So, extra hours are not a financial cost to the agency. This may go to explain why the industry has a prevailing culture of working long hours and weekends.

Now, this may sound simple, but in a saturated, poorly differentiated, increasingly commoditised market, it can be incredibly difficult to make the size of profit to justify the effort. Therefore, some agencies turned to other sources, such as third-party suppliers, like media owners and production suppliers, to supplement their income.

What this means is agencies must ensure their staff are 100% utilised and paid for to maintain any hope of remaining profitable. So, the question is, where are the resources to work on the pitches? Who, on average, is available for 11 months a year to work on the pitches? You could simplistically suggest the agency has a new business resource in its overhead. For the larger agencies, this may be true, but the requirements of pitch draw on resources across the agency disciplines, be it media, creative or digital.

The bottom line is that pitches are largely resourced by the unpaid overtime of the agency staff. If Brent was encouraged to pay a pitch fee of $44,000 per pitch, the sad reality is this would go to the agency bottom line, perhaps to cover some of the out-of-pocket expenses involved in pitching, such as take-away pizza for those working into the night.

As Melissa Hopkins, CMO at Optus said, the true cost actually for me is when you talk of hidden costs, is not just sort of time and that cost impact, but actually the impact mentally and culturally on both marketers and agencies that are involved in that process. And that is almost something you can’t put a dollar figure on”.

Opportunity cost lost

While the cost of pitching, calculated by the survey results, may not be a hard cost, it is certainly an opportunity cost. If you are going to work your staff for unpaid overtime, there are better choices for the task for them to do than pitching.

As Brent Smart offered I think if they put the same amount of hours and energy into organic revenue growth from existing clients that they did a pitch in, I think they’d see more growth out of their existing clients and would be less reliant on pitching. It’s a real Catch 22. But I think that’s a significant amount of hours out of which could come, I think ideas on existing clients that would grow revenue”.

After all, as the OUCH! FactorTM report tells us, on average, agencies are winning just less than half the pitches they enter, meaning that nearly 400 hours are required before the agency gets a return on that investment in unpaid agency time. A better approach would be to invest in generating ideas to increase the share of the budget from existing clients. Billing clients for unpaid overtime provides revenue that goes straight to agency profit.

Our bottom line is for the advertising industry to become sustainable and not rely on the unpaid efforts of agency staff, then the fee model must change. Until then, charging people out for their unpaid time is causing burnout in an industry of highly talented and creative people.

If you have not seen the OUCH! Factor research, you can watch the Mumbrella360 Short video here and download the report here.

If you would like to know more about more sustainable agency fee models, you can read more here.