The negative impact of overworked agency staff on agency remuneration

Overworked agency staff

Any work related death is a tragedy. But the death of a young woman at Dentsu Inc in Tokyo on Christmas Day, 2015 was shocking.  Even more so because the official cause of death was overwork. Her sad demise has resulted in a major rethink of the culture at the agency and contributed to the CEO announcing his resignation early this year.

But this is not an isolated incident with a young copywriter dying from heart failure due to overwork and an overdose of energy drinks in Indonesia at the end of 2013.

This culture of working often ridiculously long hours is not new to the advertising industry. I remember as a copywriter and especially as a creative director often working 12 hour days and longer, including weekends if we were working on new business pitches.

You had not just your existing client work, but then on top of this you were working on concepts for the pitches too.

But it does pose the question, that when advertisers are still primarily paying their agencies based on the hours the agency staff are working on the client’s business or are retained to work on the client’s business, what impact is this having on the agency culture of overworking and what impact is a culture of overworking having on the advertiser’s remuneration of the agency.

What is considered overworking?

Lets start with the fact that most retainer agreements are based on an agreed number of billable hours per annum. The TrinityP3 Remuneration Calculators  and the Resource Rate Calculator Phone App both allow you to calculate the number of billable hours per year for your particular market.

The reason being that the billable hours per year is impacted by the standard working week, the number of public holidays per year and the standard holiday leave per year. It can also be impacted by the amount of agreed sick leave and other entitlements too. You can find a detailed explanation and example of how to calculate billable hours per year here.

But for the sake of simplicity, let’s say the standard working week is 40 hours per week and there are two weeks annual leave and two weeks of public holidays per year. This would equate to 40 x (52 – 2 – 2) = 1,920 hours per year.

But this is billable time and does not include any hours for agency admin, professional development or any other non-billable activities. Based on a forty hour week and additional 10% for non-billable activities it is just 4 hours per week or 48 minutes a day. An additional 25% is 10 hours per week or two hours per day and so on.

But what would be reasonable overtime? Well we once benchmarked the agency remuneration where the Group Account Director was billing more than 3,200 hours per year or almost double the number of agreed billable hours.

That is overtime with an average of 72 hours per week and involved working every Saturday (but more on this later). In the week leading up to the death of the young copywriter in Indonesia it was reported that she had worked 3 days straight without a break. Crazy overtime.

The impact of overtime culture on advertisers

The death of anyone is sad and tragic, but the fact is that excessively long working hours has an impact on performance. Several commentators on the Dentsu situation have been quick to point out that this woman was working for the Digital Division that was later subject to a public apology to more that 100 clients who had been over charged, including one of Dentsu’s longest client relationships with Toyota Motor Corporation.

This is not coincidence as research has shown that long working hours backfire on both the individuals and for the companies they work. This Harvard Business Review of the topic of overwork found that no matter what the cause, the desire to get ahead or fear of not performing in a culture that supports overwork, the results are a disaster for the individuals and the companies.

Yet within the advertising industry there is still a culture that encourages overwork. This article about a senior industry manager defending long working hours was published just weeks before the death in Indonesia. The question is why is this so entrenched?

The issue is money, specifically the advertiser’s money

So, as an advertiser you are paying for the agency resources by the hour, be it charged to actuals or retained. But the fact often overlooked is that in agencies the staff get a salary and do not get paid overtime, so if they work their 1,920 hours a year or they work 3,200 hours a year that human resource costs the agency the same amount.

The agency needs to ensure they recover the cost of that salary so they need to ensure that the resource is billed out for the agreed number of billable hours per year at the agreed rate. In this way they recover the salary cost for that person, plus the overhead cost (See what is covered by the overhead here) and the profit margin. So if the resources bills 100% of their time the agency not only covers their cost they also make a profit.

But what happens after that? What happens if they bill that resource out for another 1,920 hours? Well now that resource becomes a huge profit centre because as you remember, agencies do not usually pay overtime to their staff. Instead they create and support a culture where the staff will feel obliged to work extended overtime hoping for advancement or even worse, to avoid being fired.

So once they have recovered their costs, overheads and profit, every dollar they bill becomes revenue and ultimately profit for the agency, making the culture of overworking a significant financial windfall and perhaps an incentive to encourage this practice.

A prime example of the cost

Take the Group Account Director mentioned earlier. He was 100% dedicated to the client as part of a retainer and cost $528,000 per year. This was salary, plus $200,000 in overhead recovery and $88,000 in profit.

The reason we were engaged was because the agency was claiming that the additional 1,280 hours he logged on the account required the client to pay an additional $352,000. Now, this is a lot of overtime – about 12 hours a day, six days a week. But the only person paying for this overtime was the Group Account Director in lost free time and his health and well being, because the agency was not paying an extra cent.

The client’s contract capped the payment to the agency at 100% of any fully retained resource, because we advised on the contract and did this to make sure there was no financial incentive for the agency to squeeze their employees into working overtime and short change the client on the range of resources retained.

What we mean is that we have seen agencies have staff on retainer and they overwork some members of the client team to free up others to work on other accounts while claiming that they are all working on the account.

The real question we were brought in to answer was to determine the value of the additional 1,280 hours to the client. Now remember that all of the research shows that when people work excessive overtime their productivity falls dramatically, so the first issue was that we needed to reduce the hours the Group Account Director claimed they were working.

I say ‘claimed’ as timesheets are notoriously inaccurate in advertising. In this case as they were 100% retained in the account there were no timesheets, just a number of hours they worked each day.

Based on the scope of work delivered it was clear there was a small increase in agency resource requirements, but it was difficult to understand the significant increase in the Group Account Director’s billable hours. Even taking into consideration the changes in the agency team over the year it was clear that the value was not being delivered to the client.

Don’t fund the agency exploitative culture

The single most expensive cost for most agencies is its people. Yet the agencies have become very good at squeezing the value out of these expensive resources. Overworking on clients or across multiple clients. Working on new business or other business.

It simply increases health issues for the staff, reduces productivity, increases mistakes and lines the agency with additional profits not passed on to the staff in overtime payments. But there are things you as the advertiser can do to ensure you are not encouraging this exploitative culture and at the same time make sure you are maximising the value the agency delivers:

  1. Change your agency remuneration away from the cost based model to a value based model
  2. If you do continue to pay retainers, only retain full time staff and make it clear they are not to work on other accounts
  3. Use scope of work to manage workflow expectations and ensure peaks and troughs are handled

Of course it is not up to you the advertiser to tell your agency how to run their business, but the fact is that the culture of overwork within agencies ultimately ends up costing you, the advertiser.

The teams working on your business are becoming less productive, making more mistakes and you may end up paying more for less and simply making the agency more profitable.

While it may all seem too hard and you feel you are overworked too, we can help you.

Update February 24, 2017. A report from the Philippines states another agency employee has died, possibly from overwork.

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

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