Why it is so important to have an agency scope of work

This is the final in our series of articles on agency scope of work management. Managing the scope of work for your agency is possibly the easiest and fastest way to increase the buying power of your marketing budget by removing the duplication and uncertainty as much as possible from the agency work. In this way you are able to get more for your agency budget without simply driving down the rates and prices.

The concept of scope of work could be foreign to some marketers, considering that since the global recession a decade ago, agencies have been willing to discount their fees and take on additional work at no extra cost, simply to maintain the client relationship.

This encourages the client to be like the proverbial “pig at the trough” as they can eat as much agency resource as they like for the cost of the agency retainer. But the fact is that agencies are businesses that need to make profit to survive and so in these circumstances agencies will find ways to increase revenue and maintain profit.

This has put incredible pressure on the relationship between advertisers and their agencies. This is especially obvious in the media space with the issues regarding rebates, kickbacks and the lack of transparency in the digital media ecosystem and the ways media agencies and holding companies have profited from this.

But likewise the Department of Justice investigation of the production process in the USA is evidence of the potential lengths that agencies will go to increase revenue and maintain profits in the face of continuous downward pressures on agency fees.

The agency scope of work in annual negotiations

More than a decade ago a CMO contacted us because their annual fee negotiation had stalled with significant distance between the agency’s position and the marketer’s budget. The problem was that the marketers had reduced their agency scope of work by half in empirical terms as they were facing significant budget cuts. I say empirical, because they had cut the marketing plan from ten campaigns across the various brands to five. But the agency believed that this would result in a fee that was only 10% less than the previous year.

The problem was the scope of work for each of these campaigns was very open and ill defined. Therefore the agency argued that although the total number of campaigns was half, the complexity of the five chosen was significantly higher and more labour intensive.

With our resource benchmarks by output or activity, we could have simply calculated the resources and costs using our scope of work calculator. But this would not take into consideration the level of productivity or efficiency within the relationship, as the scope of work calculator is set at the median and then adjusted based on the performance of the current relationship.

Therefore we first looked at the previous year’s scope of work, as being historical we had actual data for the outputs and the resources required to deliver this work. The interesting insights during this process were:

  1. The extensive amount of work and the huge variability of work from brand to brand and campaign-to-campaign.
  2. The productivity of the agency varied significantly from brand to brand with significant differences in account management resources to deliver the same volume and mix of outputs.

Both of these observations were a surprise to the marketing team and especially the Marketing Director who requested that we did further analysis to unearth the underlying reason for the significant variations.

Taking these insights we were able to accurately calculate the agency resources required to deliver the scope of work defined for the coming year. First we made the assumption that the outputs for the campaigns in the coming year would reflect the outputs in the previous year. We also calculated the fees based on the median and also the adjusted benchmarks to reflect the variance in the productivity efficiency identified in the benchmarking of the previous year.

The result of the process calculated that while the agency had overcompensated for the scope of work, it was certainly not by half. Using the median benchmark the fee was approximately 65% of the previous year and adjusted for the existing productivity it was over 70% of the previous year’s fee.

Why the difference? To answer the Marketing Director’s question, we went back and reviewed the results, which led us to ask further questions of some of the brand teams and the agency. What we found was that those brand teams with larger budgets and more activities were more efficient in briefing and dealing with the agency than the brands with smaller budgets, who had less efficient briefing and approval processes.

The agency scope of work in agency tenders

Agency tenders are usually competitive in nature, especially when it comes to proposing agency fees. Without the detailed scope of work it is virtually impossible for the agency to calculate or propose a fee, beyond a guess. This guess will be more about winning the business with the lowest quote required yet not so low that it would ruin the agency financially. But sometimes we wonder about this when we see some agency proposals.

To allow the agency to prepare a sustainable and realistic financial proposal we work with the marketers to develop a detailed scope of work. If a scope is proving difficult to define we will often use the previous year scope of work as a starting point. We then use the Scope of Work Calculator to calculate the median resources and cost for that scope of work.

Working with a major consumer goods client, we asked the brand teams involved in the tender, to prepare a scope of work, which we then calculated a cost. The resultant calculation was more than double the budget and the previous year’s fee for those brands. We presented the calculations to the brand teams who revealed that it was more a ‘wish list’ than a realistic scope. We then worked with them to revise the scope of work to a level they could afford.

We provide the scope of work and the resource plan calculated by the Scope of Work Calculator to the agencies so they can prepare their quotations or proposals. They complete the resource plan and they have the option to provide their own resource plan to the scope of work.

For the consumer goods client the proposals came back from the three shortlisted agencies. The incumbent, who was included as a courtesy, their proposal was less than half the fee calculated by the Scope of Work Calculator. Reviewing the resource plan from the incumbent, it was clear that they were providing all senior resource for free and had significantly reduced the seniority of the agency staff across all disciplines. On the principle of “What you do not pay for you do not get” this was a low cost and low value proposal.

The other two agencies were both highly credentialed and desired by the marketing team based on the credentials, chemistry sessions, strategic workshops and creative work. One was very close to the calculated benchmarked fee and the other, higher performing agency, was 20% higher. This provided tangible and objective assessments of the proposed financial value that could be compared to the more subjective desire to work with one agency over another and become the basis for a more informed and productive negotiation.

This was only achievable by having a defined and detailed scope of work.

The agency scope of work in end of year reconciliations

Both agency and advertiser at the end of the financial year and the start of the New Year often overlook this. The focus is usually on the year ahead, but it is important to review the past year as part of the preparation of the coming year.

Beyond the usual performance and relationship review, which should be undertaken at least once per year, if not twice, it is important to review the financial performance of the part year to identify the productivity of the relationship. This can only be done if there is a baseline scope of work for the past year.

By comparing the planned scope of work to the work actually delivered and the agency resources required to deliver that scope you can assess how efficient and productive the agency relationship is.

The reconciliation can also identify jobs that were started and failed to progress or jobs that commenced and then significantly changed, expanded or contracted in delivery. Why is this useful? It helps to identify the areas in the marketing process that are most prone to change and therefore require particular attention in their management.

The annual reconciliation process is also the ideal preparation for the annual planning for the year ahead. It allows you to review the performance and cost of the various activities from the previous year to focus on the higher performing and cost effective activities in the coming year and to either review and reinvent or drop those activities that proved to be a problem either in execution or in the delivery of results.

This is especially important in organisations using Zero Based Budgeting (ZBB) but it is worthwhile for all marketing organisations that measure performance.

The importance of agency scope of work management

Managing the scope of work for your agency is important because:

  1. It provides a fact based and objective baseline for agency resources and remuneration to set fees and manage changes
  2. It allows you to remove duplication and uncertainty as much as possible from the agency work
  3. It becomes the basis of setting cost against activity for Zero Based Budgeting
  4. It provides a measure of efficiency for the client / agency relationship
  5. It provides accountability to the delivery of the marketing plan
  6. It forms the basis of activity based return on investment metrics

While uncertainty of scope, for whatever reason, is often what stops marketers being able to commit to providing the agency with a detailed scope of work, it should not be overlooked. The fact is that the scope of work allows you to manage the changes driven by the uncertainty, lets you operate in a more accountable and efficient manner with your agency, and drives value in the client / agency relationship.

TrinityP3’s Scope of Work Management service evaluates your current agency scope of work and recommends the best approach, calibrated to your needs and benchmarked against the industry.

Why do you need this service? Learn more here