Why 20% of the agency retainer you are paying is lost to you

This post is by Darren Woolley, Founder and Global CEO of TrinityP3With his background as an analytical scientist and creative problem solver, Darren brings unique insights and learnings to the marketing process. He is considered a global thought leader in optimizing marketing productivity and performance across marketing agencies and supplier rosters.

Sitting through another agency presentation of Excel spreadsheets full of agency hours, explaining why they are spending too much time on the account. Adding up the over numbers to justify why the client needs to top up the retainer by so many hundreds and thousands and millions of dollars. The marketing and procurement team is increasingly frustrated as they ask questions about what the agency did with all this time. And the agency explaining it was meetings and admin and briefs and stuff.

But underpinning this whole approach, there is an incredibly misleading and deceptive practice – and it could be that the agency is trying to recoup a bonus of up to 20% on their retainer. Or at the very least the client is losing 20% of the time they are buying for any given person. Let me explain, as it all has to do with billable time.

Billable hours

The number of hours an employee works that can be billed to a client is the billable hours per year. There are lots of factors that go into calculating this, including hours per day, days worked each week, holiday leave, public holidays, and even sick leave.

You can read about the methodology here and watch a video explanation of how it is calculated here. You can even calculate it yourself using the TrinityP3 calculators here.

The reason this is so important is it is how you calculate and agree on the number of hours to represent a full-time equivalent (FTE) employee. 100% of an FTE is someone working on the account full time. 50% of an FTE is someone working half their time and so on. This needs to be clear before you can understand how you are losing 20% of the value of the retainer.

Hours or percentages?

Where the trick occurs is in the constant switching between hours and a percentage. To avoid confusion, let’s use the most ridiculous number of billable hours per year. That is 2080 hours per year. Why is this ridiculous? That is 40 hours per week and 52 weeks per year. This means the employee is 100% billable for every working hour of the year including holidays, public holidays, and any sick days. So, they work 8 hours a day, all year round, work every public holiday, don’t have any annual leave, and no time for vocational training. This is the stuff that leads to burnout, mental health issues and premature death.

It is important to note that billable hours per year can run from 1540 per year to 2080 or more per year. The principle still applies. And the more billable hours per year, the lower the hourly rate.

So, in this example, the resource (an account director) is on the account for 60% of their time. They are 0.6 of an FTE. They work full-time and keep a timesheet for the various clients they work on. But over the year they work 2496 hours. This is another 1.6 hours per day. In the office by 8.30 am and out the door after 7 pm. Sometimes they work some of the weekends too.

Not all these extra hours are billable. Some of it is working on pitches and agency in-house projects. But the time-sheets for the account director on this client show 1498 hours for the year, which is 72% of their time based on 2080 billable hours a year. But it is 60% of their time if they are averaging 9.6 hours a day on their time-sheets.

The agency goes to the client and shows that the account director is working an extra 200 hours on the account, which is effectively 0.72 FTEs, 20% over the 0.6 the client is paying. Multiply this over the number of staff working on the account and suddenly the agency’s $50,000 claim for extra hours becomes millions of dollars in extra charges. Here are the calculations laid out.

The contract Working 20% more
Hours per day 8 9.6 1.6 more hours
Hours per year 2080 2496 416 more hours
Hours expected to work 1248 1248 At 0.6 FTE
Annual salary $185,000 $185,000 Cost to agency
Billing rate $200 per hour $200 per hour 2.2 multiple
The annual fee to the client $249,600 $249,600
Hours worked 1498 1498
Over 250 extra hours 60% of their actual hours 0
Charge for overs $50,000 (additional agency profit) $0 The client pays 20% more

Who should pay?

Here is the conundrum. Is the retainer payment for hours worked? If yes, there is a good reason for the client to pay for the extra hours worked. But if it is about the agency recovering their costs, the issue is more complex. The extra 416 hours the account director worked are effectively unpaid.

Overtime is rarely if ever paid by agencies. Therefore, this extra time has no financial cost to the agency. (It may have health and well-being costs to the account director.) If the client pays the extra $50,000 this is effectively revenue for the agency and goes straight to the bottom line. Imagine a 20% boost to the profit margin…

The agency may be doing this to recoup their non-billable time. But why is it some clients must pay this, and others do not? After all, there is already an allowance for unbillable agency resources in the overhead.

The question therefore arises – what was the account director doing during those extra 250 hours recorded on the timesheet? Was it a 20% rounding error as that email that took 10 minutes is recorded as half an hour? Or was there a 20% increase in the demand on the agency during the year?

Always a difficult discussion, unless you are also tracking the workload of the agency and measuring what they produced. Measuring agency outputs is the most accurate way of tracking workload to understand the extra hours the agency is claiming. But as most agencies and most clients do not track workload or outputs, then often the resolution is some agreement to pay a percentage. Let’s say in this case it is a 50/50 split. The agency just added $25,000 to the bottom line.

Strategies for maximising value

There are several strategies to avoid this discussion on agency resource use and arguments over time-sheets.

  1. The most effective strategy is moving to an output-based fee or pricing model.
  2. At the very least make the retainer type fee based on outputs.

If all of this sounds too hard and you are stuck with a traditional retainer:

  1. Make sure you are retaining everyone at 100% FTE, so any overtime is at no extra cost. If they work 20% over full time it is no cost to you.
  2. Have the agency report on agency resource use (time-sheets) and workload (outputs)
  3. Go to project fees but be prepared for the discussion to happen after every project.

But, if you are like me and tired of looking at agency time-sheets and listening to claims about overwork and underpay by the agency, then the way to go is an output-based pricing model for agency fees.

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