Beware the dangers of the cookie cutter approach to benchmarking agency remuneration

One of the topics that regularly occupies conversations with marketing services and procurement teams is benchmarking their existing agency arrangements. This of course is something that we have been doing for more than a decade across multiple regions and markets.

But also across multiple disciplines including media, digital, public relations, social media, shopper marketing, event marketing, sponsorship management and even call centres.

I have written previously about the flawed application of benchmarking and it goes without saying that this applies here. But more importantly it was the belief that benchmarks could be used to actually create an agency remuneration model that represents the complexity and nuance of the client / agency relationship.

But to do this you need to take a more granular approach than many benchmarking methodologies.

Benchmarking resource rates

It is surprising the number of people that think that benchmarking begins and ends with resource costs. Sure, the cost of agency resources is important. Assessed properly it lets you determine how the agency positions itself in the marketplace.

This is why we built the Ad Cost Checker system to allow agencies, procurement and marketers to instantly see how the agency resources and fees compare to the market against high, medium and low benchmarks.

The problem is that this benchmarking provides no real measure of value beyond the cost of these resources. What is it that the resources are producing and how long will the resources take to produce it and what will be the quality of the outputs being produced?

None of these are questions are answered by this benchmarking approach. The other issue is that often the same benchmark rates are used across all agencies even though the actual agencies may be configured and positioned very differently in the market.

In many ways it is like benchmarking motor vehicles on the basis they have four wheels and get you from point A to point B and then looking at the price and determining the best value simply on price. If this was valid and the only way of assessing the value of motor vehicles then there would be no prestige or luxury vehicles sold ever again.

Assessing resources by FTEs

Another common approach is to benchmark resources based on average cost per FTE. That is taking the total agency cost and dividing it by the number of full time resources.

By way of example, if Agency A is proposing a fee of $1,000,000 and Agency B a fee of $900,000 then on cost alone you would choose Agency B. But if Agency A is proposing 10 full time staff and Agency B is proposing 8 full time staff then which one is better value?

Well the average cost per FTE benchmarking would say that Agency A is $1,000,000 / 10 which is $100,000 per FTE while Agency B is $900,000 / 8 is $112,500 per FTE and therefore Agency A represents the best value for money as you get more staff at a lower price per full time staff member.

This approach to benchmarking provides no insight whatsoever into the value the agency represents.

Without taking into consideration the quality, experience and expertise of those resources it simply measures human resources as if all are of equal quality and value. This approach is what makes many in the industry question the value of the procurement process when it reduces the very core of the process, being the practitioners, to a commodity.

Benchmarking without scope outputs

It is interesting when we are managing a tender process and we ask the marketing team to define their scope of work for the successful agency. Many times they struggle with defining the precise requirements for the year ahead.

That is fine as there are many ways to overcome this and while it is not as predictable and as manageable as a remuneration model based on a scope of work, each alternative is workable.

The issue arises when a marketer or their procurement team ask us to benchmark their current remuneration model with their incumbent agency yet there is no definition of what has been produced. Sure, they have details of how much has been paid to the agency and the agency will have provided a very detailed report on the timesheets to demonstrate the level of resources used to justify the fee.

This is the issue with most financial systems. They capture spend to the very cent with each supplier, assuming that the cost codes are correctly applied. But there are almost no financial systems that accurately capture what specifically was purchased, especially when the agency invoicing process rarely defines anything more than the cost and possibly a job number.

Imagine if you looked back on your credit card statements for the year and discovered you had spent more than $100,000. How would you determine if you received value from that expenditure if all you knew was who you spent the money with but had no indication of what you actually purchased?

A better way to benchmark

As I said at the start, to benchmark agency value you need to consider a set of multiple criteria including scale and scope of work, strategic importance, value of the outputs to the brand and business and then the level of quality required.

These are often factors overlooked when considering agency remuneration and therefore many agency remuneration models are not aligned to the actual requirements of the marketing team and their strategy.

Many marketers will feel that their agency is too expensive because they have a remuneration model that is designed around creating high-end brand communications when in actual fact much of the work being done by the agency ends up being sales support, shopper, point of sale or similar important work, but with a much lower investment level expectation.

This situation has been exacerbated by the rise of digital and social media and content marketing. This is because these channels and their strategies often require high volumes of work for often lower investment levels and at a much faster speed to market.

We hear agencies complaining that their clients are requiring more work at faster rates and lower costs. This is true and is a consequence of the changing media and channel mix.

At the same time the most common agency remuneration models are still based on out dated advertising models that had more time to focus on creating the big idea that then had a significant level of budget invested in it.

Now this is fairly straight forward if you have either a traditional media requirement or a digital media strategy. But what if you have a combination strategy that combines traditional and digital media? It is highly likely that you do.

Then it could be that you either require two agencies but more likely a two-speed remuneration model. This is where our mode granular approach to remuneration benchmarking allows us to dive below the cookie-cutter approach most use and create a more aligned remuneration model. A remuneration model aligned to the strategic and investment value of the specific outputs required.

This is a more complex approach, and therefore it is usually more costly, but the output model is customised to the advertiser’s requirements and delivers increased cost efficiencies to both the advertiser and the agencies.

The fact is that marketing and therefore advertising has become increasingly more complex. It therefore requires a more sophisticated approach to remunerating your agencies to deliver these more complex outcomes.

While we see and hear of marketers still relying on these simple cookie-cutter approaches, it is largely wasted time, because it cannot possibly deliver anything better than a cost assessment and benchmarking is only worthwhile if it can be used to increase value and not simply reduce the cost.

Because it is true that in the end you only ever get what you pay for.

TrinityP3’s Agency Remuneration and Negotiation service ensures that the way in which you pay your agency is optimal.

Why do you need this service? Click here to learn more