There is a distinct market trend occurring in the way marketers and advertisers are compensating their agencies and suppliers. Along with the Agency of Record (AoR) we are seeing a trend away from retainers to project based fees.
This is due to a often long held belief by many marketers that the retainer does not deliver value, while most agencies believe that marketers are getting more then their pound of flesh under these arrangements.
But many companies are finding the process of transitioning from retainers to project fees a frustrating one that will often not deliver the increased value, lower cost or greater agility they expected. In our experience this is because they will often make some fundamental errors in the process, largely due to a lack of consideration as to how the current remuneration model works.
From our experience there are seven important considerations, which if managed, can lead to a successful transition.
1. Agency loss of cash flow
The first thing to realise is that most agencies love a retainer. But the retainer is often a double edged sword for the agency. On one side the retainer is guaranteed cash flow and is directly linked to the cost recovery of the single biggest expense – human resources.
But on the other, there are only limited opportunities for incremental revenue growth. This is why the agency will often recommend a partial retainer, usually around account management and creative concept, to allow for incremental organic growth in fees.
But moving to a project only fee takes away the certainty of the retainer and often the agency will resist this, even suggesting that project fees will effectively cost more in overhead if you are unable to guarantee payment to secure the resources you need. Even in a situation where none of the FTEs are 100% retained on the account.
2. Incomplete scopes of work
Often when considering moving from retainers to project fees, the modelling is based on the core scope of work, that being specifically the scope of projects that are core to the agency’s capability. Typically creative agency scopes will include brand strategy, comms strategy, television and other media outputs and more.
What is often overlooked is all of the tasks an agency often undertake; preparing presentations, assisting with events and the like, that all use agency resources, but are not accounted for on a project or output basis.
This is why project fees often look like they reduce agency costs, but in actual fact they simply remove many of the additional services agencies provide their clients.
3. Increased costs
The opposite can also happen when you move from a retainer to a project-based model because retainers can often hide economies of scale within the scope of work. This is particularly relevant in services accounts such as financial services and telecommunications, with high volumes of activities across multiple business units.
When the client moves to the project fee model paid on outputs, the sum of the outputs can quickly end up costing more than the retainer that was previously in place. This is why it is important to undertake a comprehensive review of the current remuneration to ensure you understand the impact of the new model before you proceed.
4. Seasonal peaks
One of the issues with a retainer is the fact that the same fee is paid monthly, which is fine if the scope of work is reasonably consistent throughout the year. But if the work is seasonal, as it often is with some food products or events, then you will find that for some months in the year the same fee is paid for little or no work and other months it is paid for peak work.
For the agency, the project fee pays for the resources used at the time they are seasonally required. But unlike the retainer, it does not pay for the resources when they are not required and therefore it becomes an issue for the agency and therefore needs to be considered.
5. Loss of agency commitment
One of the key issues is the concern that the agency will not show the same level of commitment as when there was a retainer in place. This is because the project-based fees are seen as more transactional and therefore not encouraging a longer term relationship.
This is an interesting perception as our experience is that the project model is inclined to heighten the agency focus on the project and future projects.
But if this is a concern, then we have also adapted and implemented hybrid models that allow for a retainer to secure core service resources in account management and make the strategic, creative, tech/digital and production resources remunerated on a project basis.
6. Project payment terms
Another issue for the agency is managing their cash flow with the project fee model. After all some projects may be small and completed in days or weeks. Others may be longer and more complex and therefore take months and even more than a year. Also projects may extend over financial periods from one financial year into the next.
A key consideration is how will the project fees be paid to the agency. Is it on completion? Or half up front and half on completion? Or do you smooth out the bumps by adding up the project fees in a period and then pay monthly, much like a mini retainer? It is important to resolve this to ensure the agency is paid in a timely manner for the services provided.
7. Increased administration
An often hidden consideration is the cost of the financial compliance. This is especially important in high volume relationships as you could be effectively moving from one monthly retainer invoice, to be replaced by hundreds of project invoices. And this can be doubled if you pay 50% up front and the balance on completion.
This effectively doubles the paperwork for not only the client’s finance department but also the agency’s finance and accounts department. Neither will thank you for the extra work your new remuneration model has forced upon them.
How to move from a retainer to a project fee model
1. Detail your current scope of work that you place with the agency and consider how this may change going forward.
2. Review the schedule of work to identify potential peaks and troughs in the calendar and consider how the agency can manage this variation.
3. Benchmark the current remuneration model and understand the cost and value of the various project types that you place with the agency.
4. Consider how you are planning to pay the agency. Is it project by project? Is there payment up front and on completion? Will you use the project fees to create a retainer? What works best for your schedule of work and the agency cash flow.
5. Plan your approach to the agency on the change and make sure this is seen for the benefits to both parties.
6. Make sure the model is fair and sustainable for the agency and not just a cost reduction exercise.
7. Ensure that the project fee model does not bog down either your, or your agency’s, accounts and finance process.
Finally, if in doubt, talk to us as we have successfully implemented a Value Based Remuneration model that is ideal for projects many times.
TrinityP3’s Agency Remuneration and Negotiation service ensures that the way in which you pay your agency is optimal.
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