A marketer recently provided their extensive scope of work to their preferred agency so the agency could provide a remuneration proposal. The problem was that the proposal was almost double the marketer’s budget for the agency fee.
This budget was prepared using the fees paid to the incumbent agency, which was about to lose the account.
The marketer was concerned that the potential new agency was over-charging, and they had raised this with the agency. In the end, they agreed to engage an independent third party to resolve the issue. Enter TrinityP3.
We took the marketers’ scope of work and, using our Verificom Agency Fee Calculator, determined the level and mix of resources and, using the salary and medium and high-cost benchmarks for the market, determined that the agency fee should be between $2.1 mil. to $2.4 mil. The agency proposal was $2.35 mil within the benchmarked fee.
So why the discrepancy?
The marketer had been paying an “all you can eat” retainer of $1.2 mil per year to the incumbent for the past three years of the contract. With an “all you can eat” there was no reconciliation against the scope or volume of the work produced. The incumbent had been complaining for the past 12 months that they were under-recovering, but the marketer felt this was just a ploy to increase their fee.
We sat down with the senior marketing team and discussed the scope of work they provided as part of the review and asked them how much it reflected the previous year’s work. There was consensus that the scope was the same year on year.
However, when we went through the specific tasks in the scope, it became clear that there was an expectation that the new agency would take on extra work at no cost. We asked each of the brand leads to go away and score the elements of the scope of work based on ESSENTIAL/CORE or DESIRABLE/NON-ESSENTIAL.
When we benchmarked the core work, it correlated with the incumbent scope of work and was close to the scope of work on that the original contract with the incumbent was based. But over the subsequent three years, the marketing team added more and more tasks to the scope of work, and the incumbent agency took on this work. We collected data on the scope of work delivered in the prior year from the incumbent agency and were not surprised that the benchmark fee was closer to $1.9 mil. based on high salary costs.
There had been a 58% increase in the scope of work delivered by the incumbent agency between the first year and the final year of the contract three years later.
So here is the issue.
Rarely do marketers keep accurate track of the work delivered by their agency? Sure, financial systems within organisations will tell you within a cent how much you spent with a particular supplier. Still, we are yet to find a system that captures the volume, quality, quantity or complexity of the work delivered by the agency.
Therefore, with a retainer not linked directly to the scope of the work delivered, the marketers can increase their expectation of the agency output without any cost implication. The agency will respond by delivering the outcomes but will often take actions to minimise the cost impacts to maintain the margin.
The question is, where else can we allow our expectations to grow without any direct impact on cost? There needs to be an alignment in the remuneration model so that as the scope of work increases, the fee paid to the agency correspondingly increases.
It makes sense, right?
As for our marketing team, we locked in the retainer at $1.2 mil. to deliver the Essential / Core scope of work and then negotiated project fees for the Desirable / Non Essential work to be paid if the brand teams requested it.
We use our Verificom Agency Fee Calculator to do this.
How do you link the scope of work to the agency fee?