The traps and pitfalls of setting agency remuneration during a pitch

It became very fashionable, especially amongst less enlightened procurement professionals, to run a pitch or tender during the GFC as a way of reducing agency costs. But many of the advertisers who actively pursued this strategy are already suffering the consequence.

The competitive environment of the pitch or tender is incredibly powerful, and those who are naively under-estimate this, expecting marketing dynamic to ensure a sustainable floor level for rates, will be shocked and surprised.

In the past 12 months, agencies of all types, (media, digital, creative, promotion, experiential etc) have been competing heavily for business with huge discounting, especially on retainers.

Retainers and head hour rates 30% and 40% below our benchmarks have been common, especially on the larger accounts.

BENCHMARK NOTE: (People often question the validity of our benchmarks, but it is reassuring that in pitches they appear approximately 10% – 15% too high and 10% – 20% too low when reviewing remuneration for incumbent relationships).

But before you excitedly put your account up for pitch lets look at what is happening a few months down the track:

But before you excitedly put your account up for pitch lets look at what is happening a few months down the track:

1. High turnover of staff – as agency resources are stretched thin to maintain profitability

2. Senior resources go missing – as they are moved to more profitable account and replaced by cheaper, less experienced staff

3. Higher than average production fees – with estimates inflated trying to increase margin on the account

4. Agency requests for remuneration increases – when all of the above has failed and the CEO or MD confronts the issue head on

But it is more than just the impact on the agency and client, it also impacts the agency’s other clients. Every time an agency discounts their rates below a sustainable level to win new business, the other clients with the agency will suffer:

1. A drain of senior staff – called off their account to help settle the new client into the agency

2. Financially subsidising – with the agency needing to increase margins across all clients to make up the loss of profit

3. Loss of key personnel on their account – as they are drafted to the new account as a “reward” to staff

I had a conversation with a less than enlightened procurement professional who maintained it was the responsibility of the agency to ensure that their remuneration proposal was deliverable and sustainable. They said this in the same breath as admitting that they leveraged the competitive process to drive the lowest possible cost.

In the face of losing millions in revenue or slashing your fees by 30%, there is not too many agency heads that would even bat an eyelid and get the razor out. After all, they have their quarterly reports to the head office and holding company and increased revenue looks much better, even if it comes with decreased profit.

Besides, they all believe they will be able to make up the short fall once they have the client bedded in and under their spell.