That comes to…

Agencies will have to take a fresh look at the way they bill clients. Some have been a bit excessive with mark-ups for services and they may have to switch to fee-based billing.

Sales promotion agencies used to make a comfortable living by charging commission on services they bought in on behalf of clients. Fortunately for clients, those days are all but over.

There has been a lot of talk about the move to more transparent working: if commission is charged, then it must be made clear exactly how much. In the new suggested provisions for client/agency contracts drawn up by the Sales Promotion Consultants Association, The Incorporated Society of British Advertisers and The Chartered Institute of Purchasing & Supply, one clause states: “The client shall receive the benefit of all commissions, discounts and rebates [obtained by the Agency] [derived from the handling by the agency of the accounts under this agreement].”

Mark Beasley, planning director of promotions agency Perspectives, is on the board of the SPCA and helped draw up these provisions. He says: “Historically, some agencies have been a bit over the top on mark-up, and there’s now a recognition that these things should be fee-based. It isn’t automatic that there’s no mark-up now; it’s just that it should be made clear.”

He points out that the contract establishes the sales promotion agency as a principal in law in a contract with a client, which means that the agency is taking on risk and responsibility and therefore should be remunerated accordingly. It’s also acting as a banker. If it is buying in services on behalf of a client – perhaps print production, illustrations or merchandise – it will probably have to pay its bill before the client pays the agency. Some mark-up may be charged to take account of this.

One factor that has helped to see off agency commission is the rise of clients’ in-house procurement departments. When the economy was unstable, a lot of companies closed these departments to cut overheads, but now the economy is buoyant, they are reinstating them. “We see a bit more in-house control and management these days,” says Paul Biggins, managing director of Tequila Manchester. “There’s no point having a resource internally and asking someone else to do your sourcing.”

Now that the lion’s share of agency income is on fees rather than commission, it is up to agencies to prove their worth by offering strategic, creative consultancy and ensuring that clients see sales promotion as a profit boost rather than an overhead. But even here, the return of in-house procurement departments is having an influence, explains Matthew Hooper, chairman and chief executive of Interfocus, who worries that some agencies, under pressure from the client’s money men, cave in to demands to lower their fees or accept creative accounts as loss leaders.

Apart from the fact that some companies have gone to the wall as a result of underselling themselves, it makes it harder for other agencies to charge realistic fees because clients have a false picture of how much things cost. This is a particular problem at the moment when salary inflation is running high. Few sales promotion agencies (or client companies, for that matter) can match the &£28,000 starting salary plus &£6,000 golden hello that Andersen Consulting, for example, is offering to high-flying graduates.

Filing timesheets

“More than half of an agency’s overheads is its people, but there are fewer people coming into the industry,” Hooper explains. “Students these days have big overdrafts, and want to work in other industries such as IT or finance or dot-coms. There is a reduced pool of talent, and good people carry a premium.”

To gain a better understanding of the costs incurred on an account, many promotional agencies now ask all staff to complete timesheets. While these are usually offered to clients for inspection, they are generally refused; clients are much more interested in the outcome of the hours worked, rather than the number. But they do help an agency to work out where its money is going.

Triangle managing director Nick Hoadley says his agency charges its staff out according to the SPCA recommended hourly rates: about &£140 for a board or creative director, &£100 for an account director, &£75 for an account manager, and so on. He points out that production managers come in at &£65 an hour, so that even if an agency is no longer charging the mark-up for procurement of services, it can charge for the time it spends doing that work. Based on these rates, Triangle calculates how long it thinks its staff will be working on an account over a year, and comes up with a total annual bill for the job. This is then chopped up into a monthly retainer charged to the client, which makes budgeting easier for everyone. If the volume of work changes substantially, monthly rates may be reviewed but, he says, “We’ll never be like solicitors, where working an extra hour incurs an extra charge.”

Beasley at Perspectives says he has seen a move away from retainers for “a defined amount of work over a defined amount of time” towards fees for individual projects, programmes or campaigns. “A project is more accountable,” he says. “You know exactly what is expected.”

Perspectives also tots up the time it estimates different members of staff will work on a client’s business and comes up with a fee, though it’s not always easy. “The issue with hourly rates is not the rate itself, but the amount of time you spend on a client’s business that you actually get paid for,” says Beasley. “It’s sometimes hard with a new client to work out how efficient the relationship will be. In a complex organisation, you might have to deal with a labyrinthine structure.”

Project basis

Agency WDPA also has some clients which prefer to pay for work on a project basis, often for internal accounting reasons, says managing director Russell Abbott. “If there is a monthly retainer, it probably comes out of the central marketing budget, whereas if you pay a project fee, you can allocate it to a specific brand budget.”

However, paying by the project does not mean the relationship between the agency and client is necessarily any less secure, says Abbott. In fact, he finds his clients are keen to foster longer-term partnerships, in which they receive high-level strategic and creative input from senior members of the agency’s staff.

Agencies are having to battle harder than ever to prove their worth, and one way of doing this is to offer a contract that includes some element of payment by results. The SPCA is starting to look into it, as are many individual agencies.

Interfocus has quite a lot of clients with whom it practises some form of payment by results, says Hooper, adding that the objectives may be hard, quantifiable ones, such as an increase in sales or brand awareness, or they may be softer aspects, such as the ability to work well with other marketing agencies or manage an account efficiently.

Triangle has also struck a few deals involving an element of payment by results. Hoadley says these have mainly been with dot-coms looking for a specific, measurable objective, such as an increased number of registrations on a website.

For the softer aspects, extra time and investment may be needed up-front to identify the performance criteria, work out how to measure them and then thrash out a formula for payment, but this process can help focus everyone’s minds on what a sales promotion programme is aiming to achieve. The agency has a chance to show its mettle and the client can see exactly what it is getting. This is particularly helpful when set against a background of recent research from the London Business School into sales promotion effectiveness, which suggested that few projects are properly evaluated.

External influences

Some agencies are wary of contracts involving payment by results, however, since there will always be outside influences that can affect the results: a competitor slashing its prices, for example, or dreadful weather during the course of an ice cream promotion, or another agency on the marketing roster failing to do its bit effectively. “Not many marketing activities work in isolation,” says Biggins at Tequila.

Some clients are wary too. They may be working to a fixed budget and reluctant to shell out a supplementary payment, no matter how successful a promotion.

There may also be cash-flow issues on the agency side: the success of a sales promotion programme may take some time to assess, during which the agency has to sit on its hands and wait for payment. However, bonuses will never replace the entire fee for a project; at most, they represent about 20 per cent. If evaluation and measurement are the key to agencies proving that they are indeed a valuable investment rather than a cost, then the wait should be well worth it.

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