What is more important in assessing agency fees, productivity or price?

If Oscar Wilde was alive today, would he write that a marketer “is someone who knows the price of everything and the value of nothing” in regard to the state of the advertising industry?

There is an enormous focus on the cost of advertising and the cost of the agencies.

  • Agency rate cards are benchmarked.
  • FTEs are counted.
  • Costs per FTE are assessed.

This is a great discipline if you are simply buying people. Especially if you want to buy people at the lowest rate possible. But why do you need these people? To deliver the requirements you need to deliver your marketing plan? In which case wouldn’t you be better off measuring the productivity of the agency rather than the price?

Price is the cost of the agency people you need. This is a focus on agency resource plans, direct salary costs and direct cost multipliers, billable hours and timesheets.

But if you are engaging these people and the agency they work for to produce the outputs to support your marketing investments, then you would be far better to be measuring productivity.

Productivity is what the agency people produce for that price. This is a focus on the outputs and deliverables the agency produces, the quantity and quality of those outputs and the cost, which is what is needed to assess value.

So which one is more valuable or important to high performing advertiser / agency relationships?

Measuring price

Price is the most common way of assessing agency fees. It is usually a price per unit of resource. Hourly rates, day rates, cost per FTE, retainer and project fees. These are all costs. Costs that are used to evaluate agency value, but in fact it is simply a measure of the price of the agency.

It has also become the default measure for many marketing supplier relationships. With marketers facing increased options and requirements in their marketing plan, increased expectations of delivering top-line revenue growth and sometimes decreased budgets in real terms there is enormous pressure on reducing the cost of marketing.

Reducing the cost means that the marketers stretched budget goes further. But if the lower price leads to lower quality and in fact lower outputs this is effectively false economy. One of the issues we often hear from marketers is that agencies are often not as good as they were, and yet there is no recognition in this that – as highlighted by Michael Farmer in his award winning book, Madison Avenue Manslaughter – agency fees have fallen in real terms by 65% since 1995.

If this cost reduction was supported by improvements in agency efficiency, it would mean that there was no reduction in agency output quality. But even anecdotally, the issues of high agency staff turnover, marketer dissatisfaction and diminishing agency tenure is evidence that agency quality has not been maintained in the face of this significant cost reduction.

Cost Example:

A tender receives the following responses from the three shortlisted agencies to a detailed scope of work

Agency A Agency B Agency C
No. of FTEs 15.5 12.4 8.8
Proposed Fee 1,700,000 2,300,000 2,100.000
Cost per FTE 109,677 185,484 238,636

Agency A has the lowest cost per FTE so you get more resources for your money. But the average salary for Agency A is $50,000 so expect a significant number of junior staff on your business.

Agency B is the most expensive but with an average cost per FTE that equates to a reasonable average salary of $90,000

Agency C is the mid-price option but a low resource level makes average cost per FTE high either because of more senior resources or a higher overhead and profit multiple.

Measuring productivity

Productivity is a measure of the outputs of the agency / advertiser relationships and the resources and resource cost to produce those outputs. This means being able to define and measure the scope of work. While we have discussed the importance of scope of work in the past, the fact is that many marketers and their agencies have difficulties either predicting the scope of work to be delivered, or even keeping a track of the scope of work that is delivered.

The development of the Scope MetricTM model means that both advertisers and the agency can either propose a scope of work and then track the delivery, or simply track a scope of work to measure the productivity.

But why is productivity a more valuable measure than the price alone? This is because if you are only measuring price, which is the usual approach in the industry, then improvement is simply based on lowering the price or cost without a corresponding measure in the productivity impact of that cost reduction. If you are measuring productivity, then you can look for the opportunities to drive economies and efficiencies to increase the outputs of the relationship without increasing the number of resources required.

Some of the issues impacting productivity are the complexity of the client organisation, the number of people involved in the process and the efficacy of the process. This is beyond the agency responsibility alone and in fact is dependent on the interactions between advertiser and agency and third party suppliers.

Productivity Example:

A tender receives the following responses from the three shortlisted agencies to a detailed scope of work which using the Scope MetricTM model calculates a requirement of 12.2 FTEs

Agency A Agency B Agency C
No. of FTEs 15.5 12.4 8.8
Proposed Fee 1,700,000 2,300,000 2,100.000
Cost per FTE 109,677 185,484 238,636

Agency A is over resourced but possibly requires these extra resources as they will be largely inexperienced and require significant management.

Agency B has the right resourcing at an average salary rate of $85,000 pa.

Agency C is cheaper than Agency B but with a 30% lower level of resources and an average salary cost of $105,000 pa.

Not productivity or price but both

While marketers and their agencies continue to focus on the price the only improvement is lowering cost. The problem with cost is there will always be another agency willing to take on the client at a lower cost, especially if this is the deciding factor in appointing an agency. But how can a marketer ever know if the price is effective? Because a reduced price without a corresponding improvement in efficiency will lead to lower quality service and outputs, which appear to be plaguing the industry.

Embracing and measuring the productivity of the agency relationship allows both the marketers and the agency to be able to review their processes and find ways to improve the efficiency of the ways of working to decrease resource requirements, speed up time to market and lower costs. This is a much more sustainable way of managing this commercial relationship and all it requires is a commitment to measuring and managing the scope of work and the outputs.

Some advertisers struggle with defining the scope of work either planned or delivered by the agency but the Scope MetricTM Model allows both parties to define and agree the agency deliverables and the resources required and the cost of those resources. This is a measure of agency productivity, which is more based on value than the cost of the agency fees alone.

Want to know more?

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