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Getting Paid for All of your Work…

A New Structure for Agency Fees

April 11, 2011

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Executive Summary Dramatic and negative change in agency remuneration

over past two decades Separately, workloads have grown in volume and

complexity

Much more work for much less money Negative consequences for agency headcounts, salary

levels, training and status Yet, workload is still handled as a “service issue”. This is nuts!

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.

Madison Avenue Manslaughter!

Aiding and abetting are:– Client CMOs– Client Procurement Officers– Search consultants– Benchmarking consultants…

and– The Victim !

“Lower your costs!”Clients

“Deliver more profits!”Holding Company

Unappreciated again !

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From Clients: Sound Familiar? “Let’s wrap up the fee negotiations. (The Scope is still

being worked on, but no matter…..)” “We’ll be doing more digital, so the fee will go down.” “Those extra timesheet hours were pure agency

inefficiency.” “Sorry, but that’s all we have in our budget this year.” “We’re going through a benchmarking exercise. Please

give the consultants your full cooperation. They’re very experienced.”

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From Agencies: Sound Familiar? “We’re in the ideas business” “We’re known for our creativity” “We don’t have clients. We have relationships” “We do what’s required.” The work. The work. The work “We’re known for our service” “We’re special”

– Our history and founders. Our people. Our capabilities. Our work. Our awards. Our network. Our clients….

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What is the economic transaction?

“Workload” is assumed

Fees (prevalent)Commissions (rare) or

Commitment / relationship Creative ideas / intellectual property Service

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Agency Remuneration ‘per Ad’ 1992-2010

Source: Farmer & Company clients. Farmer & Company measures agency workload in FSUs.

$100

$150

$200

$250

$300

$350

$400

1990 1995 2000 2005 2010

Inco

me

per F

SU ($

Tho

usan

ds 2

010)

Farmer & Company Clients -- Income per FSU (1992-2010)

Fee per Farmer Standardized Unit (FSU)(Constant $2010)

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Farmer Standardized Unit (FSU)

Scope of Work (SOW) with varied Projects

Scope of Work in ‘Farmer Standardized Units’

Workload

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The FSU concept is not original!

10 FSUs 5 FSUs

0.01 FSUs

0.10 FSUs

1 FSU

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A 2010 Scope of Work -- $5.2 million fee

Project Count

FSUs % total

FSUsOnline - Ad Units / Banners 33 8.0 21%Online - E-mail 2 0.7 2%Online - Web 14 3.2 8%OOH 3 1.6 4%Print - Non-Traditional 25 4.6 12%Print - Traditional 13 6.4 17%Radio 3 2.2 6%Strategic / Research 4 - 0%TV 31 8.8 23%Video 7 2.5 7%Total 135 38.0 100%

Media Type

2010

$ 135,000 per FSU

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A 2011 Scope of Work -- $4.2 million fee

Project Count

FSUs % total

FSUsOnline - Ad Units / Banners 52 8.7 19%Online - E-mail 4 1.8 4%Online - Web 4 2.3 5%OOH 2 - 0%Print - Non-Traditional 43 7.8 17%Print - Traditional 12 9.5 21%Radio 5 3.9 9%Strategic / Research 5 - 0%TV 32 10.4 23%Video 1 0.5 1%Total 160 44.8 100%

Media Type

2011

$ 93,000 per FSU

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The obvious questions

Is the fee too low? (Definitely) Is there too much work? (Definitely)

Only one of these is ‘negotiated’ (the fee) Workloads are uncalculated and are generally

unknown when fees are set

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Consequences Growing workload, declining fees

– Requirement for more output with lower costs – Annual downsizings– Unrealistic productivity levels, especially for creatives– The productivity increase cannot continue without

compromising quality The gap between workload and fees can only get worse

What strategic response is required?

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The agency as a “service provider?”

All You Can Eat neon by Jeremy Brooks/Flickr, used under CC license

CLOSED

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Paradigm Shift: From ‘Service’ to ‘SOW’

Agency New Point of View:1. Scopes of Work will be planned, negotiated, tracked

– SOWs defined by deliverable type – Use of structured SOW templates – Master SOWs updated as they change

2. Agency resources will be calculated from SOWs– Requires “resource standards” for different types of projects– Projects will be quantified: for number of creative teams, rework,

FTEs, and costs or fees

3. A fee will be proposed for the entire SOW

4. If the fee exceeds budget, the SOW will be trimmed

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Typical Agency Structure

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

ClientService

Planning

Creative

Approximately equal in cost

Production

Approximately equal in cost

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Two Differentiated Capabilities

1. Strategic brand diagnosis and advisory services Plus relationship management,

coordination, etc.

2. Creation and production of advertising outputs

Smart, creative ad factory

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

ClientService

Planning

Creative

Approximately equal in cost

Production

Approximately equal in cost

Retainer

Variable

Variable

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Resource Modeling – Ad Factory (1)

Creative Timeduring

Creative Development for

this brief

Creative Headcount for

Creative Development

Baseline time for one Creative Team on one average complexity

brief by media

± Use of greater / fewer Creative

Teams

± Effect of low or high creative complexity

+ Effect of more than zero rework

Media Type

Baseline time for one Creative Team on one average complexity

brief by media

± Use of greater / fewer Creative

Teams

± Effect of low or high creative complexity

+ Effect of more than zero rework

Media Type

Hours per yearUtilization rate

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Resource Modeling – Ad Factory (2)

Creative Timeduring

Production for this brief Creative and

ProductionHeadcounts in

Production

Baseline time for one Creative Team

on one brief by media

� Effect for Orig’svs. Adaptations

Baseline time for TV / Print Production

People by Media

� Effect for Orig’s vs. Adaptations

Media Type

Hours per yearUtilization rate

Production Timeduring

Production for this brief

All Types of Production

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SOW Template (by deliverable)

Project characteristics that drive agency resources– Media Type (TV, Video, Radio, Print, OOH, on-line banner, ad

units, email, web, other, etc.)– Media type detail (print examples: advertorial, banner, brand

book, brochure, calendar, collateral, catalogue, DM package, FSI, insert, letter, poster, etc.)

– Project type (origination, adaptation)– Creative complexity (low, average, high)– Rework expectations (creative rework, production rework, etc.) – Number of versions (one, two, twenty, etc.)

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TV Creative Development - Modeling

TV Originations -- Creative Development Model

Low Complexity

Average Complexity

High Complexity

Baseline Creative Team-Days 7 11 16Standard Number of Teams 1 1 2Hours for Standard Number of Teams 56 88 256

Standard Rework Rate (one team only) 0.5 1 2Hours for Standard Rework 28 88 256

Total Creative Development Hours 84 176 512Total Creative FTEs (@ 1800 hours) 0.05 0.10 0.28

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The Process: Templates + Tracking

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Scope of Work Tracking: Essential!: online SOW tracking, maintained by agency

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Regular SOW Updates for agency & client

Detailed Workload Reconciliation Reports

Detailed SOW Profiles (by Business unit, Brand, Campaign, etc.)

Financial Reconciliation

Reports

SOW changes Workload

changes Resource

implications Fee implications Recommendation

s

Financial Reconciliation

Reports

SOW changes Workload

changes Resource

implications Fee implications Recommendation

s

Financial Reconciliation

Reports

SOW changes Workload

changes Resource

implications Fee implications Recommendation

s

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New Agency Business Model

1. Brand strategy & performance. The agency diagnoses brands and recommends marketing communications programs that address brand problems. Goal is to improve growth and profitability.

2. Marketing communications execution. The agency develops and produces ads (across all relevant media ) that solve the agreed brand problems.

3. Business model. The agency gets paid for its work and the ideas imbedded therein. (Part can be purely performance-based.) Metrics are fully transparent.

4. Billing rates. Each project has a defined fee. The agency bills out at X-times the cost of its resources for the SOW. The billing multiple quantifies the value-added of the agency.

5. ROI. Results are expected to be a substantial multiple of the fees involved.

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Conclusion: Hard Work Ahead

1. Understand your economics and your workloads by client2. Make Client Heads accountable for SOW3. Establish agency policies

– “Every client will have an agreed and tracked SOW”– “Resource standards will be determined for each project type”– “Prices will be developed for each project type”

4. Client Heads and their SOWs / Resources will be reviewed internally by Office Heads, CFO’s, and other senior execs

5. Efforts will begin on a case-by-case basis to renegotiate with clients and convert contracts from fee retainer to SOW-based

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But wait! Here’s more!

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But wait! Here’s more! Callers in the next 30 days will get this special offer!

– Free from Farmer & Company! SOW template! One hour consultation (phone) on SOW nitty-gritty! Don’t wait! This is a one-time offer!

Email or call: Michael Farmer (mfarmer@farmerandco.com) +1 (212) 909-2650 www.farmerandco.com

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Now – go out and do it!

Transform yourselves!

From Service to SOW…

…and get paid for all the work

you do!