Five ways to use the Scope Metric Model to more effectively manage agency fees

This post is by Darren Woolley, Founder of TrinityP3With his background as analytical scientist and creative problem solver, Darren brings unique insights and learnings to the marketing process. He is considered a global thought leader on agency remuneration, search and selection and relationship optimisation.

Since the mid 1990s Michael Farmer has been developing and using the Scope MetricTM Units (SMU) model to measure agency productivity against advertiser scope of work for content agencies such as creative, digital and activation. Three years ago he became the Chairman of TrinityP3 USA and realised that the data that TrinityP3 had been collecting on media agency scope of work for almost two decades would allow the company to create a media version of his trademarked Scope MetricTM for media, or the Media Scope MetricTM Unit or MSMU.

To understand how each of these is developed and what this represents can be read in the White papers written on the SMU and MSMU here. You can also read about the development of the SMU in Michael’s award winning business book, Madison Avenue Manslaughter, Third Edition.

But this is about the various ways marketers and advertising agencies can use both SMUs and MSMUs to not just measure the units of resources required to deliver the outputs or deliverables, but to use this to create a fair, sustainable and accountable agency fee model that is value based rather than simply resource cost based.

These five applications of the Scope MetricTM model include:

  1. Reconciling agency fees to outputs and deliverables
  2. Efficiently calculating agency project fees
  3. Developing a value based pricing model
  4. Calculating agency retainer fee with and without a scope of work
  5. Measuring and improving client / agency productivity

What are SMUs and MSMUs

The easiest way of thinking about SMUs and MSMU is as a specific and defined package of agency resources required to deliver a particular outcome or deliverable. Within this package are all of the resources required in capability, mix of skills and seniority required to deliver that specified output.

Creatively this would be account management, strategy, creative and production. For digital and technology this would also include technology and digital specialists and for media it includes account management, strategy, digital and customer analytics, media planning and buying and more.

The more outputs required the more SMUs required to deliver the total output. But the number of SMUs it takes to deliver a specific output also depends on the complexity of the output and if that output is being originated, refreshed or adapted from pre-existing work.

SMUs are also calculated for parts of the process required to deliver the output, with the ability to calculate strategy, creative/ideation and production independently of each other. This means that if a project is split over two financial years or abandoned in mid project the SMU reflects the agency resources for the work to date.

Therefore the number of SMUs and MSMUs required by the agency will depend on the level and mix of the specific outputs from the scope of work being done by the agency. Likewise with the media model the MSMUs will be dependent on the media investment by channel and the level of complexity of the media spend, along with other complexity considerations

1. Using SMUs and MSMUs for reconciling agency fees

One of the biggest challenges facing agencies and advertisers is the reconciliation of the agency retainer. The problem is that the retainer is traditionally related to retaining a particular mix and level of agency staff and is rarely if ever based on the productivity of that agency team.

This resource retainer is rarely linked to the work the team is expected to deliver. This is because for many marketers it is difficult to plan a year’s scope of work. But even for those marketers that are able to provide a detailed scope of work, reconciling the agency retainer is often difficult against the agency spreadsheets of resource quantities taken from often questionable timesheets leaving marketers often bewildered at why everything appears to take the agency so long.

If only there was a more effective way of being able to reconcile the agency scope of work and the deliverables against the retainer?

Well this is where SMUs and MSMUs are ideal.

By mapping the scope of work that has been delivered, the Scope MetricTM model will calculate the SMUs and MSMU required to deliver the outputs and this can be compared to the actual resource utilisation recorded using the agency timesheets. This provides both parties with an industry based benchmark against which they can reconcile differences.

But the process of capturing the scope of work must also capture not just the deliverables but also if those deliverables were originations or not and if the whole or part of the process was delivered in the retainer period.

2. Using SMUs and MSMUs for calculating project fees

Those advertisers and their agencies that have moved from a retainer fee model to project fees often report the increased time and effort that goes into calculating and negotiating the agency fee on a project-by-project basis. Plus if the scope of the project changes after the original project and fee is agreed it can be difficult to recalculate the revised agency fee to accommodate either an increase of decrease.

Again, the Scope MetricTM model is ideal for calculating and managing project fees for both advertisers and their agencies.

In this case the advertiser and the agency agree the scope of the project and the deliverables are placed into the Scope MetricTM model and it calculates the number of SMUs and MSMUs for the project and the associated cost.

But what if during the project it is decided to either add additional outputs or delete some of the deliverables, for whatever reason. Well then it is simply a matter of changing the outputs required and recalculating the SMUs of MSMUs and changing the project fee to reflect the change.

But lets say that up front the advertiser is unsure of the scope of the project and wants to engage the agency in developing a strategy and creative first before agreeing on the particular channel specific creative. In this case the initial scope of work is calculated for the strategy development and creative ideation using the Scope MetricTM model.

On approval of the idea or concept the advertiser and the agency can then explore various combinations of outputs and the relative SMUs and associated costs as part of deciding on the final project scope of work.

In this way the use of SMUs and MSMUs streamlines the process of calculating the project fee based on outputs, allows both advertiser and agency to reconcile change in the project scope of work and work more collaboratively and iteratively in developing the scope of the project.

3. Using SMUs and MSMUs for value based pricing

A lot of advertisers and their agencies are discussing value-based fees but have struggled with agreeing the concept of value and setting the price to reflect this value. The problem is aligning expectations on both sides to what is a fair price for the value of the outputs delivered.

This is where the Scope MetricTM model provides a terrific opportunity for both advertiser and agency to pilot a value based fee model.

Above we have been talking about the way SMUs and MSMUs can be applied to a particular scope of work to calculate the agency resources and agreed cost. Based on the fact that the fee paid to the agency is related to the value under a value based model and not simply the cost of resources required to deliver the outputs or deliverables, then simply adjusting the agreed cost per SMU or cost per MSMU can create a pricing model.

Many agencies have implemented alternative cost tiers within the agency for high volume, low complexity work based on a perceived lower requirement for resources. But applying a tiered approach to the agency cost per SMU or MSMU can create a more convenient and easier model. In fact the Scope MetricTM online platform can create a menu of all outputs based on a number of agreed costs per SMU and MSMU and reconciled against the price created by the online platform for project fees or used to calculate a surrogate retainer based on an agreed scope of work of various tiers.

4. Using SMUs and MSMUs for calculating agency retainers

In managing a vast number of agency selection tenders we have seen that sometimes marketers are able to provide a specific and quantifiable scope of work for the agency to quote and other times the scope of work has been ill-defined and lacked the specificity required to accurately develop a resource plan.

The Scope MetricTM model can be used to assist in both approaches.

  1. If the advertiser CAN provide a quantifiable scope of work it is a simple matter of inputting that scope into the Scope MetricTM model and it will calculate the number of SMUs or MSMUs required. It is simply a matter of agreeing the cost per SMU and the agency retainer fee. It also means that using the online Scope MetricTM model, both the agency and the advertiser can enter and track the scope of work as the outputs are delivered and manage the volume of work going forward.
  2. If the advertiser CANNOT provide a quantifiable scope of work then a different approach is needed. This is to make the assumption that year on year the scope of work delivered in the past year and the scope of work required in the coming year will approximate each other, even though we acknowledge there will be some differences. Therefore it is a matter of capturing and quantifying the previous year’s scope of work and calculating the number of SMUs and MSMUs using the Scope MetricTM model. You then agree a cost per SMU and MSMU to create a proposed retainer fee for the agency. But the agency and advertisers monitor an actual scope of work delivered collaboratively by the using the online Scope MetricTM model. Then the proposed retainer fee is reconciled against the actual with adjustments made throughout the year if required.

Both of these approaches allow for unforseen changes in the scope of work, providing flexibility for the advertiser, but at the same time ensure the agency is paid for the outputs delivered.

5. Using SMUs and MSMUs for improving client / agency productivity

While it has become quite popular for procurement to drive ‘efficiencies’ through agency fee reductions, it is increasingly clear to many advertisers and their agencies that future efficiencies will only come from more productive working relationships. But what is a productive working relationship and how to measure it is often a challenge.

The fact is that both agency and advertiser are responsible for optimising the performance of the relationships. Often the structure and process on the advertiser side creates complexity and inefficiency, while the agency often mirrors the advertisers structure thereby multiplying the complexity and doubling the inefficiency in the hope of solving the issue.

But again the Scope MetricTM model can be used to measure the level of productivity within the relationship between advertiser and their agencies.

As the SMU and the MSMU is based on the typical agency resources required to deliver a defined output, it is simply a process of capturing the specific scope of work delivered by the agency over a specified time frame. This is used to calculate the SMUs and MSMU required, which can be easily compared to the agency resources reportedly used to deliver the scope of work during the same period.

If the reported agency resources are higher than the calculated SMUs and MSMUs then the relationship has low productivity as the agency is providing more resources than typically required. This means that both parties need to review where complexity is impacting the performance of the relationship.

If the reported agency resources are lower than the calculated SMUs and MSMUs then the relationship has high productivity as the agency is providing more outputs with fewer resources than typically required.

As we mentioned above, within SMUs there is a breakdown of Account Management, Creative, Strategy and Production and these can be used to compare with the agency actual hours to identify which areas within the agency resources are being over utilised.

Our Scope of Work Management service evaluates your current agency scope of work and recommends the best approach, calibrated to your needs. Read more here