Why lower agency retainers lead to higher production costs

It is common to have creative agency, and increasingly digital agency fees, broken into two component parts. First is the fee or retainer paid to the agency for account management, strategy and creative ideas up to approved concept. Second are the fees to be paid for the production or implementation of these approved concepts in the form of production or technology build and project management.

While a lot of time is placed on ensuring the agency retainer or fees are set at the right level at the time of appointment, less focus is placed on the production costs, except when there is a perception that the production costs are higher than expected.

In our work benchmarking agency remuneration, both the retainer and production fees, we have noticed that more often than not, where there are lower than benchmark agency fees paid for the former there is higher than benchmark fees for the latter. In other words, where fees have been squeezed, production costs flourish.

Here is the hypothesis as to why.

Fees and retainers are incredibly competitive

Many agency retainers are set at the time the account is pitched and awarded. The tender process is a highly competitive time and there is significant commercial pressure bought to bear on the successful agency to propose the best possible price.

This is where the simplicity in the way the agency retainer is calculated magnifies the impact of this competitive pressure. If you remember, the agency retainer is basically calculated on the direct salary cost of the agency resources being retained multiplied by the overhead and profit mark up.

There are basically a few moving parts to be negotiated. From the procurement perspective the purpose of the negotiation is to maximise the number of resources and minimise the cost by negotiating down the salary cost and the overhead and profit multiple. In fact a procurement director in Canada once explained to me that we made the process far to complex with our benchmarks to calculate the resources required, as he believed his job was to maximise the resources and minimise the costs. And he did.

In the face of potentially losing a pitch, it is not unknown for an agency to accept this pressure and minimise their fee to a commercially unsustainable level, rather than losing the pitch and all revenue. Besides they are hoping to make it up in the production area anyway.

Fees and retainers are regularly reviewed

Then once the retainer is set and locked into the contract, it may not be reviewed at all during the life of the contract, unless of course the marketer wants to effect a simple and effective cost reduction. It is far easier to enter into a negotiation with the agency on the fee as this is a one off process that will yield an immediate result over the remaining life of the contract.

Of course it could be that the agency requests a review of the retainer, with the view of increasing the payment beyond the unsustainable level they accepted to secure the business at the time of the tender.

But any one-off increases will potentially leave the marketer feeling that the agency is expensive. And besides, in these circumstances it is up to the agency to prove that the fee is unsustainable and all they have by way of proof is the agency timesheets.

Production costs are rarely reviewed

On the other hand, production costs are rarely reviewed. This is because there is usually little time for a formal review of production costs, as the deadline for the production estimate approval looms against the ever-closing delivery date. There is simply no time to undertake a detailed assessment, beyond perhaps the most cursory review of the agency rates.

Also most big-ticket production items like major digital builds and television or film productions are incredibly complex and variable making like-for-like comparisons difficult, except by highly skilled and experienced industry experts. When simple total cost comparisons are undertaken the agency is quick to point out that the advertiser is not comparing apples with apples and the discussion quickly becomes bogged down in technical jargon and conjecture.

Even when rates are reviewed, the smart agency is quick to lower the rates knowing that on an estimate by estimate basis it is easy to recoup the loss in the rates with additional application of the hours required to get the cost back to, or even exceed, the previous production totals.

And knowing that the brand manager will be too focused on meeting the deadline to worry about the incremental increases in the individual estimate costs will mean that this strategy will often go largely unnoticed.

Competitive pressure is less than obvious

Production is also an area where many agencies fail at the most basic step of procurement due diligence in obtaining three competitive quotes, except under duress from the marketing or procurement team. And in fact it is more likely to be the procurement team as the marketers are more focused on delivering a quality product on time, rather than on budget. The reason being is that no one will remember it was on budget if the quality of the actual work is substandard.

The best excuse an agency can provide for avoiding a properly constructed and robust procurement process is the most common one in advertising agency production, lack of time. If a truly competitive process delivers a modest 10% saving on the production cost, this is still infinitesimally small compared to the cost of missing the media deadline and having to drop and charge the booked media.

Therefore production is an ideal area where agencies can and do make up for the margin lost on the retainer through increased production costs.

Actions marketers can take

There is something marketers can do to address this trend.

  1. In co-operation with their procurement team they can review the agency retainer and ensure that the retainer and the underlying agency resources, are reasonably linked to the scope of work the agency is delivering. Rather than looking to simply maximise the resources and minimise the cost, as proposed by my Canadian procurement director, you work to strike a fair, reasonable and sustainable fee for the outputs delivered.
  2. Develop an annual review process with the agency or agencies on their performance and their fees to make sure these are linked and adjusted to changes in the scope of work.
  3. Include the agency production costs in the retainer. In fact retaining production resources, if the scope of the production work is known, can deliver significant reductions in cost as the agency trades margin for increased and guaranteed cash flow.
  4. Implement a production management process, with a framework to ensure that all production costs, but especially any significant production costs are reviewed at the budget setting stage, the briefing stage, the concept approval stage and the production stage. This includes ensuring the production timeline is managed carefully to avoid running down to the deadline, allowing time for a robust and properly constructed production procurement process.

The fact is that the Golden Rule, “the man with the gold makes the rules”, means that as the advertiser it is primarily your responsibility to ensure the rules are constructed to deliver the most effective and efficient go-to-market process. To think that the agency would do this when the rules on retainer price competitiveness and a lack of rigour around production cost management means you are providing an incentive not to do this is naive at best.

So what are you going to do?