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.
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.