While paying agencies with retainers is still a popular fee model, project fees and hourly rates are becoming more popular.
While we have previously shared thoughts on comparing rate cards with retainers and the considerations before moving from retainers to project fees, we have not provided a comparison of the pros and cons for advertisers and agencies.
With this trend to project fees, we have assisted an avalanche of advertisers who have asked us for help changing 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 is a significant factor in the move from agency retainers to project fees. But beyond this ongoing financial trend, there are substantial operational trends impacting the way marketers work with their agencies that have taken project fees into consideration. The first is the relative inflexibility of 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 every week, making it difficult to commit to an annual retainer. This is exacerbated by the increasingly common cuts in marketing budgets that occur in response to poor sales performance and the shift of marketing budgets in some organisations away from marketing to the business, which dictates the marketing needs.
Marketers are also not working with one Agency of Record (AoR) but at its most basic two, with media separated from the creative agency. Then you add a digital specialist, perhaps PR, a trade or B2B specialist and a 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 if 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, marketers are challenged to justify the cost of the number and mix of those resources, particularly if procurement takes the contract to market. An agency competitor or even the incumbent will take on the task for less money and fewer 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 in various ways. It is worth reviewing these project fee models to understand that not all models are equal.
Hours–Based—The Project is defined and briefed, and the agency prepares a proposal based on the number of hours to complete it, often calculated at a blended hourly rate. This may be a fixed fee or a variable fee based on the hours completed along the way.
Budget-Based—The overall project budget is divided into parts based on past budget splits and the project’s requirements. This takes into consideration a split for media, and the media agency fee is a split of the total media budget. Creative and production are split and often related to the media investment under the traditional working / non-working ratios, etc.
Value-Based—Similar to the budget-based model, if you assume that the budget is based on the project’s business or marketing value, this model splits the project budget into fees for services based on the perceived value, either financial or strategic, of that service to the project. Often, these perceptions are informed by past projects.
Output or Deliverable Based—This sets a price or value based on the specific outputs required. These outputs can be tangible (production outputs) or intangible (Ideas, concepts, and strategies). The price is set by the value of the work and informed by past behaviour. Often, to avoid the ‘quoting’ or ‘proposal’ stage of the project process, these can be negotiated and agreed upfront and placed into a pricing matrix.
Performance-Based—In direct response or direct acquisition projects, the model pays the agency based on leads or sales.
There may be other project-based fee models, but this covers the basics.
The benefits of project fees
For the Advertisers / Marketer
| Benefit | Issue | Consideration |
| Flexibility | Structured properly means marketers can place projects with the right agency for the job and not simply with the AoR to maximise the retainer investment. | Managing multiple agencies across the roster takes time and discipline to ensure optimal performance and brand/communications consistency. |
| Seasonality | Ideal for seasonal businesses where it does not make sense to retain an agency for 365 days a year when they are active on the business for only part of that time. | It may sacrifice continuity of agency resources as each season, agency staff may have left or moved to other accounts, but this can happen with retainers as well. |
| Accountability | Individual marketing teams or business units pay for the agency services they use rather than having the retainer come from a central budget or having to manage disagreements over how the retainer is funded. | We need to ensure that all stakeholders access the agency services at the same value and cost to achieve maximum value for the volume of spend. |
| Efficiency | Under the project fee, marketers stop receiving many of the services you obtain under the retainer that they didn’t need or want or even knew they were paying for. | It is important to consider all of the tasks and services the agency provides under the retainer before moving to a project-based model. |
For the Agency / Supplier
| Benefit | Issue | Consideration |
| Revenue Increase | Moving away from hourly rates to value or output models can allow agencies to compete against smaller and cheaper competitors to consolidate the budget and increase overall client revenue. | This requires the agency to have the flexibility to run multiple stream cost offerings to align the delivery to the value of the project at hand. |
| Resource Flexibility | Depending on the size of the client, it can create opportunities to utilise agency resources that are not 100% committed to other clients to generate incremental revenue. | For large clients with a high volume of projects, this becomes an issue as if you need to recruit additional agency resources. You may not have the certainty of revenue to justify this. |
| Accountability | Each project is like a mini–retainer and, therefore, easier to manage and hold the client accountable for restarts, missed directions and changes in the scope of work to ensure payment for the project delivered. | Project-based work requires a high standard of account management and a particular focus on client relationship management, project management, and discipline. |
The weaknesses of project fees
For the Advertisers / Marketer
| Weakness | Issue | Consideration |
| Variable Resources | Some agencies cannot guarantee the consistency of personnel on your account without a retainer. This may be account management or a favoured strategist or creative. | Smart agencies will continue to allocate a consistent lead to your account with the sole responsibility of increasing the number of projects awarded to the agency. If there is preferred agency staff, a small retainer may be considered. |
| Increased Administration | A retainer is paid monthly meaning 12 invoices per agency per year for the fees. Project fees can mean additional estimates for approval, purchase orders and invoices for each project beyond those associated with production. | Look for ways to minimise administration by streamlining or consolidating processes. Agreed output or deliverable based project fees eliminates any procurement process to have agencies competitively tender for projects. |
| Transition Issues | Moving an AoR from the security of a retainer to project fees can be difficult. The process will be time consuming and can potentially fail if the AoR actively undermines the process. | Consider transition phases moving to a smaller retainer when introducing project fees with a view to reducing or dropping the retainer completely at a later date. |
| Lack of discipline | Retainers are like a smorgasbord for marketers, while project fees require careful consideration and discipline in management. There is no retainer to hide your indecision, missteps and clunky approval processes. | Be prepared for issues to arise in the marketing team as the loss of the retainer reveals issues on both sides of the relationship. Look to frame this as an opportunity to improve performance and encourage greater accountability. |
For the Agency / Supplier
| Weakness | Issue | Consideration |
| Loss of security | Retainers provide cost recovery for your agency resources, but often come at a reduced margin for those resources. Nevertheless security is often better then the uncertainty of project fees. | The greatest fear is loss of revenue or loss of the client. However it is possible to increase share of the client budget and increase revenue on that client by proving value and providing flexibility. |
| Increased administration | Rather than 12 monthly retainer payments the agency finance department and account management team could be preparing and administering estimates and invoices for hundreds of projects. | Investigate working closer with the client finance team to short cut administration processes and streamline estimates, invoices and payments. Agreed pricing for common tasks is one way to achieve this. |
| Transition Issues | Just as the change to project fees from retainers is a change for the agency it is also a change for the marketing team who will be used to the agency being available at their beck and call. | Suggest a smaller transition retainer for account management to deliver the level of service the marketing team expect. Use this time to manage expectations and build volume and gain foresight into projects coming. |
| Resource Management | Ensuring cost recovery and optimising resource revenue generation across the agency team is more complex and time consuming without a retainer to cover off these costs. | Timesheets become critical, not for billings as much as resource optimisation, revenue generation and cost recovery. Look to manage resources on projects to minimise under utilisation across the agency. |
The composite or hybrid models
As mentioned there are a range of project models and also a range of ways these are implemented and managed. We have seen this transition made from retainer one day to all project fees based the next and others who have moved form full retainer to a reduced retainer and project fees.
Some marketers have put in place a small retainer to secure a core account management team to manage the relationship and the workflow, while the strategy, creative and production is based on project fees.
Others have retained a percentage of agency management and senior agency heads to a “Strategy Team” to be available to the senior marketing team for overall direction and guidance, while the agency, including account management is paid on project fees.
Of the various project models, the output or deliverable model creates the least amount of administration but requires the highest level of discipline from the marketing team and the agency. It also means that all agencies across the roster can we working to a common project fee, creating a level playing field where strategically important projects are paid more than the less important ones.
The hourly fee based model is similar to the retainer with the agency proposing a number of hours to deliver the project and then reconciling hours used against it with the client.
Picking the right model
The fact is there is no right model that suits all advertisers. Maintaining a retainer or moving to project fees depends on the requirements of the marketing strategy and the ability of the agency to deliver those needs in the most effective and cost efficient way possible. When moving to project fees, the model selected depends on the scope and range of projects being considered.
It also depends on the volume and frequency of those projects. One or two agency projects a year is very different to a recent client’s requirements of more than 2,500 projects per year. In a world of content marketing and social and digital media, tens and hundreds of thousands of deliverables is becoming common.
The choice of the agency fee model depends on careful consideration of the marketing requirements, the agencies needed to deliver those requirements and the expectations and capabilities of the marketing team.
You can explore your options with our Agency Fee Decision Tree. Or learn more on how our Agency Comercial Assessment Service can create the right agency fee model for you.