Tesdorpfstr. 11 – 20148 Hamburg – Germany
+49 (0)40 413 43 0012
Germany EN

The Frustrations of Agency Fee Negotiations

Stuart Pocock, Co-Founder and Managing Partner at Roth Observatory International

What makes negotiating Agency fees so difficult?

Well it might sound obvious, but the principle issue here is that when you’re  buying Agency services you’re not buying a predictable commodity – you’re buying people’s skills – thinking skills, business skills, and  creative skills – and that presents a whole set of complexities to negotiation.

To unravel this problem this article explains:

  • What the day-to-day needs, pressures and mind sets are that face those involved with fee discussions – Marketers, Procurement Professionals and Agency leaders
  • How the change from the commission system some years ago resulted in the shift to an imperfect fee-based system and how we need to get absolute clarity about what, and who we’re buying, and the barriers we need to overcome to get total understanding of that
  • What initiatives and trends we’re seeing from within the industry in terms of the way business are buying and paying for Agency services
  • And what do we need to do to make sure we’re doing what we can to make negotiation a smoother process?

Perception and reality in fee negotiation

Wherever in the World we go to market, be it in the States, Europe or across the Far East, we see attitudinal patterns that create a worrying pre-conception when it comes to fee negotiation.

Clients regularly perceive that their Agencies are expensive or are simply charging too much for the services they offer.

Agencies, on the other hand always believe that there are not being paid enough for what they do.  The truth, of course lies somewhere in-between.

But whatever the reality is, feeling robbed or wrangling over money is de-motivating for all concerned, and runs the risk of reducing the chance of creating business-changing solutions.

But for many that’s what they feel they are having to do all of the time.  So why is that?

A good place to start is to understand and frame the psychologies of those involved as they enter into discussions, because so often they can be caused due to the very different pressures they have, combined with a lack of understanding or, indeed, willingness to understand the very different need-states of their counterparts in the discussion.

The Marketers

They are under extreme pressure – and the comms related elements of their day jobs generally account for less than 8% of their time. They are tasked with working against a background of an increasingly complex world of marketing technology and resultant consumer behaviours which move at an exhausting pace. They are more accountable than ever and seen as the guardian of consumer centricity and, as such, need to make sure they are one step ahead at all times.

They are constantly challenged with delivering more for less and trying to do so with either flat or diminishing budgets, whilst at the same time being measured professionally and financially on the quality of results they deliver.

Pressure indeed.

Agency Management

They too are under pressure from all sides, not least of which is the need to deliver far wider services that are often alien to their roots. Agencies of all shapes and sizes are having to cope with convergence – modifying their offer and bringing together of a wide range of disciplines to make sure they can cope with the complexities of delivering ever expanding Client requirements in on and off line spaces. Management of that is difficult. It takes time and effort, particularly to make sure these disparate parties, with very different mindsets, all work harmoniously.

And they are under pressure financially.  Agencies are in business to be a business that makes a profit, and not just a business to produce communications. The demands on senior people and their teams in relation to performance, profitability and financial reporting are relentless. Margins are being squeezed, overheads have to be more tightly controlled, technology invested in and profit levels at the very least maintained to keep stakeholders and shareholders happy.

Added to that is the fact that new business opportunities are less plentiful than before – either because Clients are rationalising their rosters, or simply that they have moved away from retainer fees to project-based activities where there are no big prizes and it’s difficult to have sight of income and encourage talent at the highest level.

Talent in itself is also an issue. There’s a shortage – especially at senior level. Quite simply there’s a finite pool of good people around who can change the fortunes of both the Client and the Agency. This is why so often Clients see great people leading Agencies, very good people in the most senior senior management, but then quite a talent gap at lower levels where people lack the experience and knowledge to create game-changing work.

Procurement Professionals 

Procurement’s role is not an easy one. They are sometimes seen purely as cost cutters, whereas (as good one’s do) they should act as a bridge between Marketing and the Agency, operating more as an investment manager dealing with talent.  Of course they need to be sure that the Company is paying the best possible price for the services they require. But equally they should ensure the Agency is not placed in a position whereby they’ll struggle to deliver the scope and quality for the money. That will inevitably damage the Agency’s relationship with Marketing – who all too often step away from negotiations and lose sight of potential problems created by inadequate staffing levels and structure being put in place to get the scope of work in on budget.

Interestingly, in many developed organisations Procurement has moved on from the focus on pure Agency fee matters, and, like their Marketing counterparts, they are also looking at digital systems and dynamic infrastructures to make savings far more significant than those that can ever be achieved from Agency fee discussions.

So there you have it. Three quite different groups of people, all with rather different issues, agendas and pressures. But all of them seeking to reach their individual and collective goals.

They are the cogs in the negotiation machine. Sadly, all too often those cogs don’t mesh together as well as they might and inevitably that will lead to eventual failure.

So what’s the best way to pay Agencies?

Back in the ‘good old days’ everything used to be simpler – the days when Agencies worked purely on commission. The problem was, of course that there was little in the way of transparency – not that many people cared during the glory days.

But that all changed with the onset of Media Independents back in the 1980’s and slowly but surely, whilst Agencies moved to a fee basis, only with the involvement of Procurement who looked for re-assurance and accountability did we start to see greater transparency in terms of what those fees comprised.

The resource package fee arrangement – the combination of costs for people and time they take to deliver a scope of work – has enabled Client businesses to get a far clearer picture of exactly what they are paying for – at least in terms of rates.

Making sure rates are appropriate by job title, checking that the overheads are appropriate for the type and location of the Agency, that the number of billable hours is appropriate for the Countries you’re trading in and the margin is at industry standards, is something that’s relatively easy to achieve (if you have the right data and you know what you are looking for).

Where it becomes a little more of an issue is when one comes to look at the degrees of resource that are attributed to the various scopes. Is the structure appropriate? Is there sufficient time allocated by skill set and seniority? Is the Agency allowing too much (or too little) time to deliver a particular Scope of Work? And, perhaps,  most importantly, are your own people providing high quality briefs – because if they aren’t then that can lead to a wastage of huge amounts of time with the agency, time which they’ll charge you for. We see that as a significant problem in all too many Client/Agency relationships.

The point is, its complex – and not something that can readily be worked out simply by looking at a spread sheet and agreeing the figure in the bottom right hand corner.

In reality, whilst it remains the simplest method of calculating costs, resource package fee arrangements are somewhat imperfect. After all they can reward a poorly performing agency in exactly the same way as a great one who’s really changing the dynamics of your Brand.

Which begs the question why has the resource package fee effectively become the default solution globally?

The alternatives

Many Agencies have tried alternative methods of remuneration with their Clients – taking stock in the Company, linking fees to business or sales performance, creating work and licensing its usage etc. But few of these have stood the test of time, let alone got off the ground.

One that seems to have worked came, of course, from the Client side.

The Coca-Cola Value Added system: something that many companies looked at with interest at its launch because for the first time it focused on outputs rather than inputs or Agency costs.

Coke pre-determine the value of a piece of activity and set fees that have a small in-built level of profit for the Agency – but gives the Agency an opportunity to earn more, dependent on the success levels of the activities and that creates a real incentive for Agencies to perform at max strength.

Absolutely crucial to this way of working is the fact that the Agency receives an exceptionally clear brief and detailed Scope of Work for each project – so all parties are very clear from the outset on the rules of engagement.

Whilst there was a high level of expectation from this innovative strategy from the wider Client community at launch, few other companies have adopted it for the simple reason that, unlike Coke, they find it difficult to pull together the information to be able to set the benchmark cost for the particular task required.

However, importantly, the one thing the Coke example does do is demonstrate the benefits of working on a Payment by Results system – with Agencies being incentivised by financial gain to deliver beyond expectation.

Increasingly Clients are adopting Payment by Results or PBR methodologies where they can earn beyond their basic fee for outstanding delivery of thinking, work and execution.

The WFA recently indicated that around 45% of Clients in North America and just over 40% in Europe are adopting this as a remuneration strategy.

This an area of real focus for us at Roth Observatory International – the majority of our Clients now having PBR schemes in place. All of these have the same basic components – an at risk monies element from the Agency with an opportunity for them to earn that back if they hit base KPIs and the capability to receive additional monies by exceeding those KPIs.

Generally the KPIs are broken down into a mix of three categories – ‘Hard’ measures which can be sales or footfall, click trough’s, dwell time etc., ‘Robust’ measures (which are probably the most significant measurement of how well an Agency is changing consumer perceptions) with KPIs such as tracking, propensity to purchase, shift in attitude, message recall etc., and then ‘Soft’ measures which are generally based around the Agency’s service level performance.

Importantly for PBR schemes to work well the KPIs need to be both simple and realistic and the upside prize motivating – that way the Agency will always be determined to go the extra mile.

Integration

Perhaps one of the biggest changes we’ve noted over recent years and which has big ramifications for costs has been the shift towards greater levels of integration.

We undertook a piece of research a few years ago and identified that the average Client was working with between 8 and 10 specialist or best in class Agencies on a day-to-day basis.

However, you only need an all-Agency briefing at the beginning of a major project and you’ll see that you’ve got an account person, a planner and a creative from each of your Agencies – so around 30 people to both pay for and organise.  And at a time when the brief is to maximise outputs for the budget available.  It’s not rocket science to spot there must be a better way.

Unsurprisingly, with cost pressures abundant, businesses have been quick to catch on and we’ve seen a significant move towards Clients undertaking architecture modelling and roster rationalisation, aimed at providing more efficient, aligned and, importantly, cost-effective integrated models to deliver the highest possible quality of work.

And whilst Clients have been looking towards higher levels of integration, Agencies are reorganising to make an integrated approach more accessible to Clients.  To that end some are looking at a different way to bill their Clients utilising blended rates to simplify costs across a set of very wide disciplines.

If calculated carefully blended rates can be a benefit however they can also be a problem.

The main difficulty with blended rates, which is essentially the averaging of the charge-out rates across the staffing mix of a complete account team, is that they can look like good value for money, but run the risk of inappropriate staffing of business.

The potential for the Agency to put more junior people on the business than senior people – especially when budgets are tight, is enormous. This can result in the quality of work falling dramatically.

So there are a number of contributory factors causing issues with getting negotiations right.

How to get it right

The most fundamental and important thing that’s needed at the start of any negotiation is to make sure that you’re laying down a very clear scope of work. This can often be complex and very time-consuming but it’s essential to be able to get the Agency to come back with a realistic costings.  One would never buy a car without specifying precisely what you need and then being able to understand what it will cost, so why should it be different for busy communication services?

And beyond that, once agreed, the Scope of Work should be detailed in the contract you have with the Agency and that scope should be re-visited and modified on at least a six monthly basis. If the scope diminishes, then you can ask your Agency to lower fees – if it increases, you should be prepared to pay more.

Also make sure that these relevant parts of the contract are shared with the wider team.  So often the contract is signed, and then goes into the desk of the CMO never to be shared with the team. But it’s really important the team understands what the scope of work the Agency has agreed to and have a clear understanding that if they exceed that scope – or ask for activities outside of it – it’s likely that the Agency will want to be compensated for it.

So to re-cap, to make getting to a good place easier, you should

  • Understand the dynamics and mind sets of the involved parties
  • Make sure you all work together to achieve the appropriate solution
  • Make sure you have a really detailed Scope of Work in place for the Agency to cost against
  • Ensure the structure the Agency is proposing is right for you needs
  • Make sure the time allocation has got the appropriate levels of staff to efficiently deliver the scope
  • Benchmark costs
  • Ensure the quality of briefing is good – that way you won’t burn time with the Agency
  • Look at the benefits of a good PBR scheme – and budget for it
  • Think very carefully before adopting blended rates
  • Consider the savings that might be achieved by greater levels of integration
  • And don’t be afraid to turn to experts in the subject matter to facilitate your requirements

Follow those simple rules – and you should find fee negotiation rather less of an up-hill struggle.

 

This article was previously presented by Stuart Pocock, Managing Partner and Co-Founder, at a Roth Observatory International event in conjunction with BME, to Marketing and Procurement specialists on 25thFebruary 2016 in Munich.

 

Roth Observatory International is the leading global management consultancy dedicated to helping companies maximise their marketing and communications resources.  We specialise in roster modelling, marketing team structures and capabilities and ways of working.  We invest heavily in understanding the agency and client landscape.  With over 25 years’ experience working with many of the world’s leading brands and agencies our casebook is full of best practice on how to get the most out of your marketing resources.

Back to Archive