Last year I was contacted by a major advertiser’s global procurement team asking if I would tender to provide them with agency hourly rate benchmarks across global markets. I declined. In the conversation I explained that simply looking at rates alone is a flawed process as it is not the hourly rate but the total cost that is important.
Nevertheless they had made up their minds that this was the approach they wanted to take. Eight months later I checked in with them to see how the project was progressing. Apparently I was right. All they ended up with is a list of rates by job title or service.
At TrinityP3 we have collected and analysed a significant amount of rate data across brand agency, media agency, digital, production, public relations, direct marketing, promotional marketing and more for more than 40 major advertising markets, mostly focused in Asia Pacific.
Now I am sure that there are many people who maintain that they can provide this information. But we have been analysing and maintaining this data for more than a decade and can tell you the average hourly rate for a Senior Account Director in Seoul, Shanghai, Singapore or Sydney. But more importantly we can tell you how this rate changes if the agency is small, medium or large and independent or a network agency and all six combinations.
To bring real cost insight to hourly rate benchmarks we have also developed Resource Benchmarks. What level and mix of resources is required to deliver a particular output? Beyond project type, the benchmarks are obviously influenced by the complexity, strategic importance and interestingly, advertiser category.
We have found in our analysis that the various advertiser categories are inclined to have different resource benchmarks. At the higher end of the range is alcoholic beverage and automotive. And while we do not advocate drinking and driving, it appears from the data that developing advertising for each of these categories is a time consuming and perhaps laborious process.
Next there are consumer goods advertisers, well known for their long and protracted development processes, with campaign development taking more than six months and in some cases more than a year.
Then come the services industries and the big ones are financial services and telecommunications. The types of activity here include brand, product and retail service offerings and these are indicated in the resource requirements.
At the very other end of the process is retailing. But even here there are two streams being brand building and retail offering. However, both streams are lower than even the services category for resource use.
Using these resource benchmarks and the hourly rates we can calculate the ‘should’ costs for a schedule of work, we can assess the efficiency of an agency against their scope of work and we can develop pricing models for agency services based on outputs.
Overhead and Profit Multiple Benchmarks
The overhead and profit multiple is used to convert direct salary costs into hourly rates. You can see the methodology here using our calculators or by downloading our Resource Rate Calculator smartphone app. Basically the overhead and profit margins, expressed as a percentage to direct salary costs are expressed as a multiple of the direct salary cost and divided by the number of billable hours in the year to calculate the hourly rate. The methodology is explained in detail here.
These mark up and profit margins and the subsequent multiple will vary market by market and agency type by agency type. In some markets and for some agency types it can be as low as 1.7 or as high as 4.5 times.
There are two main ways the agency may calculate the multiple:
- They will base it on the actual business metrics for the agency
- They will base it on industry practice and mimic this
Either way, understanding the underlying fundamentals provides you with an insight into the agency. The better approach is to base these fundamentals on the actual business metrics as we typically see highly inflated multiples in markets where there has been little scrutiny.
These fundamentals also allow you to calculate approximate annual salaries by role as a secondary check on the fees being paid. It also allows you to determine if the agency is running different pricing structures for retained and non-retained services. This is quite a common practice.
Applying the benchmarks correctly
No matter what benchmarks you are using, rates, resources or the fundamentals, it is the application of those benchmarks that will provide the insight.
- Rates will be an indicator of how the agency positions themselves in the marketplace based on price, but it will not tell you cost.
- Rate and resource benchmarks will allow you to calculate what the cost should be.
- The remuneration fundamentals of overhead and profit margin provides you with the ability to calculate the annual salaries behind the hourly rates and the agency business model.
As you can see, while rate benchmarks have some value, having the resource and the overhead and profit multiple benchmarks provide you with a more detailed and expansive insight into agency remuneration. Don’t you agree?