The hidden waste buried inside many agency retainer agreements

While the reported trend is to move away from the resource-based retainer, it continues to be popular with agencies because of the guarantee of cost recovery and cash flow and with advertisers because of the “all you can eat” and “set and forget” convenience.

The reason for the move away from the popular retainer is because of the increasing fragmentation of the advertisers scope of work requirements, resulting in an increased number of agencies on the roster and a diminishing in the prevalence and importance of the Agency of Record (AoR). There is also the continued downward pressure on costs in an attempt to drive greater cost efficiencies and ultimately cost reduction in marketing.

In our work helping advertisers move from the current cost based remuneration to a value-based model, we have found a consistent flaw in the application of the popular retainer model. This flaw goes some of the way to explaining why many advertisers have consistently reported a perception of poor value from their agencies, even with the agencies providing extensive timesheet proof of that value.

Let me explain the flaw.

Linking retainer to scope of work

The best practice methodology for developing a retainer model is to link the specific scope of work to the agency resources required to deliver the scope and then the direct salary cost multiplied by the overhead and profit margin.

The flaw in developing a transparent retainer is not just in the ability to define the specific scope of work, which can be a challenge for some marketers, particularly in highly volatile categories, but in making sure the scope of work covers all of the requirements of the marketers up-front.

Previously we have written about the scope of work being like the blue prints or plans for a home. Making sure the detail is specified up-front is important for managing costs. Later additions usually come at a premium and last-minute changes can be expensive.

Therefore the lack of a very detailed scope of work means that the proposed retainer has flexibility, or more accurately contingency, to ensure the agency has adequate resources to cover the unforeseeable requirements. While this lack of specificity in the scope of work and the deliverables of the relationship may appear insignificant, let me demonstrate later the impact this has on the value of the retainer.

Effect of the top down approach to retainers

Outside of the scope of work definition is the business imperative of the agency, especially in the case of network agencies owned by holding companies. These are businesses in their own right, with owners, shareholders, all wanting to achieve revenue and profit growth.

Considering their revenue comes from the income of the client, the main opportunity, outside of the expensive and risky process of new business wins, is to ensure you get incremental increases in the current client retainers.

This is particularly obvious for us when we see a significant decrease in the client’s scope of work year-on-year and the agency retainer proposal is at best a marginal decrease or at worst a small increase. In one case the advertiser decreased the scope of work by more than 80% only to have their long-term rostered agency propose a 5% increase year-on-year.

In the discussions with the agency, even in the face of the sheer logic of the argument for a retainer decrease, the agency would not budge on the negotiation as they had already committed to their revenue projections to their regional head office and did not want to retract the amount if at all possible.

The problem is that the agency processes are not always aligned to their clients, and when the agency management is required to commit to revenue projections before the client has even briefed them on their requirements the agency is in a position of protecting their current position.

This is top down budgeting. The agency looks at the revenue or income from the client in the previous year and budgets for an increase to meet their organisational expectations for growth.

The marketer’s scope of work

What we have found from transitioning agency remuneration from cost based retainers to value based models is that the process is misaligned between the requirements of the marketers and the delivery by the agency. This presents itself as a very core scope of work from the advertisers and often quite a detailed and expansive delivery from the agency.

By way of example, lets look at a brand that requires a new brand campaign and from the advertiser or brand manager’s point of view, all they require is for the agency to develop a new brand idea and execute it across three of four channels including television, digital, magazine and the like.

The other channels, such as point of sale, shopper marketing and the like, will be managed by other agencies on the roster, with executions that will be developed based on the core creative concept or ‘big idea’ to the agreed communication strategy and campaign brief.

The requirements are straightforward and understandable. The brand manager has agreed to pay the agency for participating in reviewing the brand positioning, helping in develop the communications strategy and then developing the big idea based on the communications strategy.

The agency will also be paid for then taking the big idea and developing expressions of it in the agreed media channels across television, magazine and digital display ads. But from the agency’s perspective it is not enough, because there is more to what they do than just create advertising strategy, creative concepts and production.

The agency’s hidden scope of work

Over time the agency has been adding to the scope of work they deliver for their client. This process is more organic and less formal or strategic. But as the advertiser expresses needs or casual requirements the agency is happy to take these on under the existing retainer.

The range of services can be extensive, depending on the duration of the existing relationship and the range of needs of the marketing team. It can include preparing competitive reports or industry reports, developing PowerPoint presentations for internal or external use, or providing training or delivering industry updates of research, on-boarding new marketing team members etc.

The issue is that often these are not specifically requested on an annual basis, but over time they have informally become part of the agency’s scope of work. Some of these could be considered services the agency should offer free of charge as an investment in business building. Often the agency will tell the client they are doing this for no fee, even though it is effectively built into the current retainer.

Is it value if it is unknown and unwanted?

But if the agency is providing services and as a marketer you do not know you are paying for them, do you still see the value in these services when suddenly these services cost you money?

The retainer system encourages the agency to provide services under the retainer as a way to justify the retainer. But when we dismantle this system and make the remuneration more accountable and value based, do those services still represent value?

One agency suggested that the global research they had presented each year, under the existing retainer, now required the marketers to pay a fee to cover the cost of the time for the agency to present this. The marketers were happy to sit through the presentation when they thought it was free. In fact they actually saw it as indulging the agency in business development.

This is the flaw in the current retainer model. There is usually a misalignment in the expectation of the marketer and a motivation for the agency to provide additional service to the advertiser without establishing if those services are actually valued by the client.

Value based agency remuneration

The process of moving from a input based cost model of agency remuneration to a value based output model often challenges these issues. It is because the output-based model is very accountable to what are the specific requirements of the relationship and places a value on those outputs.

The input based cost model traditionally is about delivering services to justify the level of resourcing and the associated costs proposed, irrespective of the value of those services to the marketer paying for them.

The trouble is that under the current cost model, value is rarely considered, because the discussions centre on the cost of the agency services and not the value of those services. Therefore adding additional services justifies additional cost. But if that cost is hidden and not specified then the value of those services is also hidden.

While we do not believe you need to transition from the cost based model to the value based model to identify and correct these flaws in the current model, we would recommend that if you feel your current retainer is under-delivering on value, then the best way to address this is to change the focus of your remuneration model from cost to value.

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? Read on to understand more