Running a profitable agency business has only gotten harder in recent years. Most large agencies routinely downsize every 4th quarter, just to balance for the lost margins. The business model has been under attack for some time now with loss of AOR business, the move away from long term Retainers to shorter fixed bid or T&M projects, fragmenting client relationships, and the worst of all - the decline in productions fees. Per a recent 4As survey, the average length of a client/agency relationship in the 1990s was 8 years -- but now, it's 3-years (if that). Coping with this new business model is making agency execs heads spin. The top three concerns I routinely hear from agency execs are:
- How much work are we going to do that we won't get paid for?
- Which of my relationships will disappear next year?
- When can we expect to get paid back?
Quantifying your value and effort upfront: Agencies aren't used to keeping track of the financial definition of value. They don't like to think of themselves as the factories that crank out awesome advertisements. They are being forced to change that attitude with the diminishing profit margins. Even when they are putting together a comprehensive campaign strategy, it still requires time and investment. This needs to be quantified to clients.
The reimbursement rates have stayed flat or gone down: Surveys suggest that agency workloads are growing 3% compounded each year. Yet, most brand managers demand a reduction in agency fees every year. This assertion should be challenged with data. The deliverables are more complex. We have far more distribution channels and all the messaging has to be correlated across channels.We see more scope creeps each year, yet the agencies do not get paid for the extra work. In the past they could re-work a deliverable until they got it right. Unfortunately that idea has still stuck around without the compensation tied to it. The agency execs feel the pinch but with limited bookkeeping, that can’t quite articulate it well enough (and in time) to ask for compensation. That means agency teams are stretching far more to produce work and at much lower rates. This is where the model breaks, clients leave and then the agencies downsize.
One way to solve this death spiral is by having a standard way to manage job estimation, billing and compensation. This isn’t about perfection but it is about the model moving in the right direction. I have been in the Services business for a while now where, we document the scope of work in a seamless manner across hundreds of clients with the intent that the fees can be calculated and explained in a rational manner. Agencies have to agree upon uniform ways of doing things across clients. At some agencies it's common to have 20 different ways to estimate and of producing content. They should clearly communicate who they are. This leads to uniformity in the way you approach your clients.
I invite you to share your experiences with me.