The Association of Canadian Advertisers recently released Searching for a Marketing Communications Partner (authored by Stephan Argent, CEO of The Argedia Group), a guidebook that offers marketers insights on how to search for an agency partner following the basic principles of fairness and transparency. This excerpt offers tips on how client and agency can negotiate reasonable rates.
Read the first excerpt of How Not to Conduct an Agency Review.
Agency remuneration and negotiation are complex subjects that need to be raised and discussed early in your search process as well as at the conclusion when the winning agency has been chosen. Whether working with an internal procurement team, ACA, an agency search consultant, or setting up the financial arrangement directly with the agency, the following will help guide you through the process.
GUIDING PRINCIPLES
Before negotiating anything, teams on both sides should agree on some guiding principles to help set the tone and standard of the negotiation and, in turn, create an end result that is sustainable for both parties:
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1. Fair for all: Fair doesn’t necessarily mean lowest price for the marketer. “Fair” is about paying a reasonable market price for the services you are contracting – so you get a good deal and the agency has room to make a reasonable profit.
2. Straightforward: An agency remuneration agreement should be straightforward and transparent. Whether you are working on a fixed or variable fee structure, commission, time and materials, and/or payment by results, the goal is to create a muneration model that is straightforward and easy to understand.
3. Easy to manage: Your remuneration agreement also needs to be easy to implement, monitor and manage. If it looks like it will take incremental time to manage, ensure you have allocated sufficient resources.
4. Flexible: Agency agreements need to be flexible enough to accommodate changes as things evolve and marketers should consider splitting out fundamental remuneration, payment by results and other business terms.
5. Long-term view: Taking a long-term view when creating an agency remuneration agreement helps avoid having to re-architect a new agreement every year or so. Make the agreement flexible enough to be able to adjust, but incorporate a long-term view to help make annual negotiations that much easier.
6. Clearly defined success metrics: When including a payment by results model within a remuneration agreement, it is essential that agreement is reached on the specific, measureable success metrics that will trigger – or withhold – any remuneration that is subject to results. (For more detail, see the ACA publication A Report on MarCom Agency Remuneration Agreements 2012)
7. Defined responsibilities: Clearly defining boundaries and responsibilities ensures clarity of purpose and tasks required, keeping the agency focused, and billable time in line with everyone’s expectations.
FINANCIAL BUILDING BLOCKS
Because this is such a large topic with many variables unique to individual marketers and agencies, this section will touch on three universal building blocks that comprise any agency financial arrangement. These are:
• Scope of work: Any financial arrangement with an agency needs to be based on a marketer’s unique scope of work for the assignment. Basing the negotiation solely on a rate card on hourly rate, for example, leaves the marketer vulnerable to an open-ended agreement that may not fulfill all needs within budget. Marketers are advised to be as granular as possible in defining scopes of work before negotiating with agencies. Asking agencies to provide estimated costs for executing that scope of work as part of the ask in the short-list phase is a good way to open the remuneration discussion. By doing so, marketers will have the opportunity to compare a true cost for delivering their scopes of work on an apples-to-apples basis.
• Agency costs: The second piece of the puzzle is to look at agency costs in as much detail as possible to help understand how their costs are made up and define specific areas for negotiation. When asking agencies to bid or quote on your scope of work, advertisers should consider asking agencies for the following financial information: Fees/costs by position; billable hours in a year; hourly rates; overhead rates or multiples; profit margin or markup.
If there is push back from agencies to provide this information, marketers should remind them the purpose of knowing and understanding these variables is to ensure fair, equitable and transparent financial terms for both sides. In addition to the financial information outlined above, agencies should provide a detailed staffing plan by resource level to deliver on the scope of work. The staffing plan details how the agencies would deliver on the work, and enables marketers to compare total resources, resource mix and seniority of personnel.
TYPES OF REMUNERATION AGREEMENT
The type of remuneration agreement you develop varies from marketer to marketer and agency to agency. While the industry continues to evolve and search for new remuneration models, the most common ones are:
1. Fixed fee or retainer: The fee is negotiated for a specific project or time period and is usually paid out in equal monthly installments. All media, production and any other associated costs are usually billed to the client at net, with no markup.
2. Hourly fee fixed or blended: The fee is determined by the amount of time expended by the agency multiplied by one composite hourly rate reflecting the various personnel required to deliver the service. All media, production and any other associated costs are usually billed to the client at net, with no markup.
3. Variable hourly fee: The fee is determined by the amount of time expended by defined agency positions or titles multiplied by an hourly rate for each position or title. All media, production and any other associated costs are usually billed to the client at net, with no markup.
4. Commission–fixed: The agency is paid a fixed percentage of expenditures with suppliers, such as for media or production. Commission can be based on net or gross expenditures.
5. Commission–sliding scale: The agency is paid a commission that varies with the level of spending with the media or other suppliers.
6. Value based remuneration: The remuneration is established based on the value, not the cost, of the services and work provided by the agency. Agency staff time, costs and profits are not usually requested or reviewed as part of the negotiation.
7. PBR (Performance Based Remuneration): This is an augmentation of the basic remuneration model and is based on the degree of achievement of mutuallydetermined goals and measures. It involves both risks and rewards, meaning the agency will receive higher or lower than normative remuneration based on the degree of achievement.
8. Bonus: This payment differs from PBR in that the agency is guaranteed full payment and then rewarded incrementally based on achievement of goals and measures.
NEGOTIATION OF VARIABLES
Negotiating variables can take considerable time when finalizing financial terms. While the following list is not exhaustive, these are some of the most common variables that you and your procurement team should be prepared for during the negotiation process:
• payment terms
• currency
• bonuses
• out of scope work
• variation in scope
• out of pocket costs
• offshore resourcing
• minimum term
• PBR metrics and payment schedules
• criteria and schedules for any bonus payments
Read the first excerpt How Not to Conduct an Agency Review.
