Is This The Most Dangerous Agency Spreadsheet?

Anyone who has dealt with procurement will have seen a version of this spreadsheet. The column headings will look something like this;

Salary  +  Overhead  =  Cost  /  No. Of Days  @  Margin (x%)   =  Charge Out Rate

It’s a simple cost plus model. Salary plus overhead divided by number of days with an agreed margin to allow the Agency to make a profit.

The reason this is the most dangerous spreadsheet boils down to a simple truth. Agencies do not sell time. Agencies sell their intellectual capital. Their intellectual capital might be creative; it might be technical. Whatever it is it certainly isn’t simply the passing of time in front of a Mac or PC.

What clients are really paying for and should value most is the application of this intellectual capital to solve a problem, whether it is building a brand or increasing sales. In essence to deliver value to the client in excess of the cost of the service.

There is no reason to commission any marketing activity unless you are going to get a return on the spend. Agencies, to survive, must deliver significant value to clients. Clients, to thrive, should employ Agencies whose intellectual capital provides the greatest return. Not the cheapest.

Without demonstrating sufficient intellectual capital Agencies will be treated as a supplier of a commodity. To be bought at lowest cost. Agencies need to challenge the cost plus model by demonstrating their point of difference; how they add value and, if possible, how much.This can be by showing an improved return on investment, increased sales or higher brand awareness.

If, after listening to your arguments about why your service demonstrates value over and above the cost components your procurement contact still insists on the completion of their beloved cost plus spreadsheet then how do you demonstrate your value, your intellectual capital in this restrictive model?

There are a limited number of ways (setting aside the padding of costs that the model encourages) if you decide you need this piece of business even though your potential client isn’t focussing on the real business issues.

Short of inserting a column for an intellectual capital multiplier (now there’s a thought) the most obvious one is to challenge the margin allowed. I would advise doing this in a selective way. If there are elements of your offer that are more delivery focussed and require less intellectual capital then think about reducing the margin for those elements. Naturally this goes hand in hand with increasing the margin for those elements where the application of your intellectual capital will make the biggest difference to your client.

This will tend to be on your most expensive, most talented and most experienced people. A bigger margin here will go some way to sharing the value you generate for your client. It’ll push up the overall cost to your client and you’ll have to be prepared for an argument but the better your argument about the value you provide the better the chances of shifting away from a lower cost plus to a more value based fee.

The Client Agency Contract

A disclaimer here. I’m no lawyer and I’m certainly not offering legal advice.

However I have read a lot of contracts over the years and whilst I do read all of them to make sure there are no nasty surprises lurking I am drawn to a few key clauses.

Whose Standard Contract do you use – theirs or yours?

Not technically a clause but it’ll have an effect on every clause later on so it’s a key decision. Not surprisingly I will always try to get in first with our terms and conditions if possible. More and more though you will be expected to agree to the client standard contract as part of the pitch process so this pre-emptive strike is getting harder to do. Worth a go though. With this tactic though it is hard to have a sensible contract negotiation so it’s worth considering if there are any real deal breakers in the pro forma contract.

Duration and Termination

The basics. If the relationship is going to last more than 1 project (when it’s more likely you’ll get standard terms and conditions given to you) then I’d always try for an evergreen contract. It’s always best to assume it’s going to be a long lasting and mutually rewarding relationship.

 If the contract is for a set period then I’d also try to get an automatic rollover unless written notice is given by a set day.

 Termination is usually by given written notice. I’d always make it a two way clause, you might want out. However you agree the contract an unhappy client won’t want to give you any work so you should concentrate on how the agreement is wound down. If it is a big contract with a substantial monthly fee I think it’s reasonable to ask for payment of the fee during the termination period (as long as you can negotiate). The argument here is that you’ve got people who you recruited to work on the business and you need an orderly wind down.

 If the contract is for project work then you’ll be harder placed to argue for this and it’s unlikely you’ll get much, if any, work during the notice period if your client has made their mind up. However you must have a provision to be paid for the value of any work that gets cancelled part way through. This is true even outside of the termination period.

 My favourite Indemnity Clause

“In no event shall Agency X be liable for any lost data or content, lost profits, business interruption or for any indirect, incidental, special, consequential or punitive damages arising out of or relating to the Services.”

 I would also try to limit any liability to the client to the total fees paid by the client. Preferably just for the project.

 In addition be wary of the adapted pro forma contract where a ridiculously high limit on Professional Indemnity of £5 or £10 million is left in.

 Warranty Period

The long tail of amends and fixes can really hurt profitability as well as interrupting continuity of work on other projects. Once the client has accepted the work I would try to limit a warranty period to 30 days. I would exclude fixing anything that the client has changed and if you’ve delivered a sensitive or commercially important site I would agree a support fee on a use it or lose it basis.

 Payment Terms

These are getting longer and longer. The bigger the client the longer they will ask for. The bigger the client the bigger the effect on Cashflow so before agreeing to 120 days make sure you can go without cash from them for at least 4 months if not longer. This is especially true if you have to incur any significant costs up front i.e. recruitment fees, salaries or more floor space.

 One common complaint I’ve always had which I’ll get off my chest is that many, many larger clients will extend these terms by simply not providing a Purchase Order as they haven’t got sign off from multiple stakeholders. Only when you get a PO can you invoice and get the clock ticking. My least favourite experience was a client who changed systems on the 31st December and wiped out all historic data so everything had to be re invoiced and the clock reset. Frustrating.

 Intellectual Property

It seems standard practice to give away the intellectual property and I guess I understand that. However I wouldn’t give it away until you’ve been paid and I’d also exclude any pre-existing technology that is part of the end solution.

Also always reserve the right to use in any or all of your marketing materials.

 Dispute Resolution

9 times out of 10, if not more, most disagreements will be resolved informally. Usually because you want to keep the relationship sweet. Like pre nuptials the argument for dispute resolution clauses is that it’s always good to have an agreed escalation route agreed beforehand. Match off line managers where possible up to the MD and think about having a recognised trade body as the ultimate, neutral arbitrator.

 Non-Competition

There will be times when contracts will seek to stop you working with particular competitor(s). It’s a compliment in a way that they want to keep you to themselves. However it may also limit your potential for growth. I’d always try to keep this out or at the worst limit it. In return I’d ask for exclusivity in exchange. If they don’t want you working for anyone else I think it’s reasonable to ask for all of the work going. If you’re going on a roster of competing agencies I’d certainly negotiate hard to have as free a hand as possible.

 That’s a short summary of some of the top line issues I’d look for. What else do you look for? What clauses have caused you the most problems?  

Is Procurement asking the right question?

“If it doesn’t sell it isn’t creative” David Ogilivy                      

Person pressing head against wallI recently read a report about how the majority of procurement professionals at Europe’s biggest 200 companies believed there were significant savings to be made on marketing budgets by “driving out inefficiencies  to the tune of some €700 million.

Now I’m sure there are efficiency savings to be made and procurement can play a constructive role in making sure the client gets the best price for the work they commission.

My initial reaction though was that this is the right answer to the wrong question. The question procurement should be asking is not is our marketing spend efficiently used but is it effective? Does it drive traffic to our website? Does it result in a higher conversion rate once you get there? What is the response rate to the mailing?

I’ve worked nearly 20 years in marketing services and a lot has changed but one thing has remained constant and that is the main purpose of marketing has to be, ultimately, to sell more stuff.

During those years I’ve worked mainly in Direct Marketing, Digital and more latterly in Search. One thread which connects them all is that they are, or should be, measurable. Every mailing has a response rate; every website has more data than you can shake a stick at.

It is now more possible than ever to work out how effective your marketing spend has been for you. How many sales did the campaign drive? What was the incremental revenue and, holy of holies, what is the return on investment?

This vital information can then help direct your future spend to more productive channels with more suitable messages to ever better defined populations. In a sane and rational world this is what would happen but in my experience less and less procurement time is spent on the success or failure of the outcome and more and more on the unit cost of the inputs. The end result of this process is the cheapest price for the project but no guarantee that it will influence a single customer to buy.

Agencies should be accountable for the success of their work. If they fail to positively affect the business of their client they deserve to be sacked. If they help drive more and more sales they should be retained and rewarded. Unless you measure the effectiveness of your agencies how can you hope to drive any real efficiencies?

Real efficiencies lie in stopping spending on ineffective marketing and directing that expenditure to areas where it can generate a positive return.

Focussing purely on efficiencies will produce short term cost savings but not a real long term return on your marketing investment. By all means make sure that projects are delivered efficiently but shouldn’t procurement focus more on ensuring that client and agency are focussed on delivering effective marketing?

The author, Simon Collard, advises Marketing Services Agencies on all aspects of finance from KPI reporting to Procurement negotiation. If you need advice then please email simon@novemberfriday.wpengine.com

 

How to prepare for a successful Procurement meeting

Person pressing head against wall“It usually takes me more than three weeks to prepare a good impromptu speech”

Mark Twain

Procurement meetings are a routine part of the Agency FD’s diary these days. Whether it’s new business or annual reviews they are part of the furniture now. I’ve written before about how important it is to treat this as a positive development but this isn’t to ignore the fact that this is a negotiation.

Negotiation is a skill in itself and requires a broad range of inter-personal skills. Most of these can be improved on over time with training and experience but in the short term there is only one way to improve the chances of a successful outcome and that is to prepare. And then prepare some more.

So far, so obvious, but I’ve been in too many meetings to miss the opportunity to repeat this. Preparation is your best bet to level the playing field. Your procurement manager has the purchasing power as well as the specialist skills. You have the detailed knowledge of your agency, your pricing and your operations. If it’s important enough don’t have the meeting until you know your subject better than anyone in the room

Only by being all over the detail will you be able to negotiate effectively. To do this you need to understand the following;

Operations. Unless it is a very simple, linear project there will be variables. Is it possible to alter the scope of work? Only by talking to the people doing the work will you be able to work this out. It’s not a spreadsheet exercise. One simple example of this was when we were able to cut the scope down from 3 templates to 1 master template plus amends. By changing the scope of work we were able to fit into the client’s budget but still preserved our margin.

Margin. It’s vital you understand the likely effect on margin. This has to be done on a marginal basis. What revenue will this bring in versus any additional costs? Don’t look at the cost per hour. Once you know your likely margin you know what you can and what you can’t give away. I also much like to talk to talk about fee reductions in terms of the effect they have on margin. 10% fee reductions can sound reasonable until you realise that could be over 50% of your net margin.

Documentation. If you’re properly prepared you will have plenty of spreadsheets, word documents or presentations to choose from. Think carefully about what and how you show this information. You have to tell a clear, convincing story. Especially if is a mixed audience I would try to keep detail to a minimum.

Negotiation. There are many simple rules about negotiation skills. I have some of them written down and laminated on a card in my wallet. Some of them I agree with, some not so much. Find what works for you and use that – being natural will always be more comfortable and more effective. However (apart from preparation) there is another golden rule which is always ask for something in return. If your client wants something, usually a lower price, then ask for something in return. It may be a longer term relationship, payment up front or a longer termination period. If you don’t ask you don’t get.

Realism. Don’t expect to “win” the negotiation. You are going to have to give something away. You need to be in control of what you give away and what you ask for in return. Both parties walking away happy is victory. Think about what your procurement manager needs to achieve and work towards that aim.

It’s a messy business sometimes and the answer won’t pop out of any analysis. You will need to think on your feet about what to agree to and what you need to time to think about. You will need an appreciation of procurement’s target and knowledge of how your agency can deliver that and still deliver a good margin. Square that circle and you’ve done your job well.

The author has spent a large part of the last two decades working towards procurement targets. Never really got there. If you need some help with procurement please email him on simon@novemberfriday.wpengine.com.

 

Please tell us the budget!

I’ve written earlier about being transparent with your clients and their procurement department about your salaries and margins. It’s the right thing to do in order to foster an open, trusting business relationship.

It does cut both ways though. Too many times, especially during the pitch process, the budget is withheld from the agency. Without this vital bit of information the agency is expected to cost projects and put forward team structures usually based on, at best, a ballpark estimate.

The implication is that clients assume that if they tell Agencies the budget they will price their work up to the maximum. The flip side is that they must think that without knowing the budget the Agency is more likely to err on the side of caution when pricing in order to be competitive.

There are a number of problems with this. Firstly, it’s a competitive world and there will always be someone eager for the work. Padding quotes is one sure way to lose work. At the other extreme if the Agency is unrealistic in it’s pricing it is only going to lead to disappointment. Without the budget there won’t be the resource to deliver everything the client wanted for to the quality level they expect.

Too many times I’ve been involved in pitch costings with a vague scope of work and an unknown budget. It’s the commercial equivalent of pinning the tail on the donkey. The tighter the brief and the clearer the budget is the more detailed and thorough the response you should expect from your agency.

Selecting the right Agency must be difficult. How to measure the chemistry, the creativity and the delivery is challenging enough. By keeping the budget secret you are immediately handicapping the agency from developing the right solution for you and making the election process that much harder.

Transparency should be a two way street. Agencies should be clear about their costs and margins to reassure clients they are getting value for money. In return clients should be upfront about their budgets so that Agencies can provide realistic and achievable proposals.

For a more thorough read on the subject try www.thegoodpitch.com/

The author has been an Agency FD for nearly 20 years during which he has costed many proposals. Some have been sensible, accurate whilst others, frankly, have been complete guesswork. If you need some help navigating the costing proposal please email me on simon@novemberfriday.wpengine.com

Does your client have the right to know your salary?

Person pressing head against wallOccasionally you come across an issue which causes you to ponder some business basics.

I recently saw an online discussion about the rights and wrongs of clients asking to know what your costs and margins are.

Now ignoring the obvious answer that they could just look your accounts up Companies House it raised some strong views. Some were dead against the idea, that the client had no right to know, it was none of their business how much profit they made.

Rhetoric aside, for me, it raised a very basic question about some Procurement departments approach to buying marketing services. Do they have a right to know your salary and margins and if they do how should they use that information?

Now, I’m lucky enough to have worked with some excellent Procurement professionals over the years and recognise their worth in strengthening the ties between client and agency. I have no problem at all about being open book with clients about costs and margins. I don’t think clients have an absolute right to know your margins but it’s in the Agency’s best interest to justify their rates by an open book approach and the quality of their work.

However the tools that procurement use and the information they ask for can be dangerous in less experienced hands. The first time I came across a “Cost plus” model was with a drinks company, whose most famous product used to be  advertised as being good for you. There was a detailed communications plan, they understood the time involved in both the production as well as the creative phases. They were willing to pay for the planning time involved, you know the time when the most expensive people in the agency sit around trying to come up with a good idea which most clients think should be free. That’s another blog though.

My point here is that the model worked because the procurement department knew and appreciated what they were buying. The mechanics of the model were simple and were the end result of the process of proper buying rather than a one size fits all method of buying.

Unfortunately I have also seen this same model used in a blanket fashion as if you were buying widgets. It’s almost uniformly now expected that you supply salary, overheads and margin to calculate a rate per hour per employee. It is also usual to be told how many hours everyone should work.

I know this methodology makes it easier to compare apples with apples but this is such a blunt approach that it positively encourages agencies to be creative with the numbers. If you are expected to recover an employee’s cost over 8 hours per day for 260 days per year then you will be tempted to bump up the overhead to cover for holidays, sickness, the inevitable down time.

This will lead to some Agencies claiming an overhead rate of 100% or more. Take a bow Advertising agencies. If this is really true then please send me an email and I can save you a lot of money very quickly.

What I suspect they mean is that they are either hamstrung by the model not reflecting the way they work or that they believe they are worth more than the rate they have been allowed to charge because of the quality of their work, their creative brilliance, their leading edge technology or, and this is the heart of the matter, because of the value they add.

My point here is twofold. First, procurement professionals should use their costing spreadsheets sensibly. You shouldn’t expect an Art Director or Copywriter to be productive 8 hours per working day so don’t demand Agencies charge them as if they can be. Maybe on some of the production tasks this may be possible but not the creative ones please. Why not put in an extra column for this utilisation factor into the spreadsheet – it will still be a level playing field but will reflect reality.

Second, Agencies should accept the open book approach. It is here to stay and you need to be confident about your commercials, don’t fudge the overheads but engage procurement in a discussion of the value your agency can add, how your approach will make them more money and why you are worth the margin you are making. If you have a premium product then you should charge a premium over the spreadsheet model. If you genuinely believe that then think about putting that premium up for performance review.  That, again, is another blog.

To answer the title question is easy. Of course clients have a right to ask. I also think it’s the best approach for an Agency to be open with their costs and margins. Any other approach is based on an incomplete understanding of the service you provide and will be a fault line in the relationship.

Put yourself in the client’s position and ask yourself who would you rather work with; someone with transparent working practices and finances who is confident enough of their work they are willing to risk some of their fee or someone who was more creative in their accounting than their work?

The author, Simon Collard, has spent the last 18 years dealing with procurement departments. Along the way he has picked up some experience in reaching agreements that are open book and performance related. If you have a procurement issue then contact me on simon@novemberfriday.wpengine.com.

A Finance Director’s view of Procurement

Person pressing head against wallThe growing influence of procurement both in the pitch process and the on going commercial management of agencies has been one of the biggest changes over the last two decades and has become one of the biggest challenges facing Finance Directors.

As the Agency’s number person you will be expected to be front and centre in the initial preparation of costs as well as in the final cost negotiation. This will on top of the usual demands of the job. It’s tough but you must find time to engage fully in the process.

It is very easy, but wrong, to be negative about procurement. This is not to say there aren’t instances or practices that couldn’t be improved but if Agencies accept that procurement are here to stay and take some time to understand their aims and methods there is a productive relationship to be built.

I have been (un)lucky enough for my career to coincide almost exactly with the rise of procurement. In summary this has happened in 3 waves;

The first wave saw the extinction of the mark up. Maybe extinction is overstating it but it’s certainly on the endangered list. From a procurement point of view this is simple, why should I pay a penny more than it cost the agency to buy the image/data/printing/media? If you are charging a fee to create then it’s a difficult argument to win sat opposite a procurement professional. If your whole model is based on a cost per unit it is possible to wrap everything into one price without a direct mark up. This still happens but it is a risk as procurement can ask for greater transparency. They will want to find out how much the agency revenue is and will have a view on whether this is fair. If this is your commercial model then you should start thinking either about how to defend it or how to migrate to a fee plus cost model.

With mark ups disappearing the next target was the rate card. During this phase the resource based fee became very popular. Marketing plans were agreed and the resource required to deliver them were charged at reduced rate because of the greater security of the income. Less risk, lower reward. This started the cost plus overhead plus margin spreadsheet beloved of procurement departments.

Now that bought in costs and the rate card were subject to a transparent cost model you could perhaps be forgiven for thinking that the job was done and Agency and procurement could move forward under an agreed model, each side knowing the rules of the game. This is where the word Japanese word kaizen should strike fear into every agency owner. Kaizen means improvement or change for the better and means in agency terms year on year cost reduction. It is not yet clear how this 3rd wave will play out. One route may be that agencies get paid for outputs rather than inputs thus throwing the onus on the agency to be more efficient. I fear the days of building an estimate up from the number of hours it will take will be superseded by a fixed (and decreasing) fee for the end result. The only way the agency will make money is by becoming more and more efficient in delivering the project. This could be through technology or it could be by outsourcing to lower cost countries. The jury is out for the time being.

The title of this article is a little misleading. I don’t believe it much matters what finance directors or CEOs for that matter think about procurement. They deliver cost savings for the client and are here to stay. It is Canute like to ignore them; the only response is to understand their motivation and apply their logic to your business. Where are the efficiencies to be made? Does it make sense to do everything yourself? Should you be concentrating on charging for the ideas, the creativity whilst outsourcing the production to specialists in this country or abroad?

These are challenging times for clients as well as agencies. Procurement is simply an expression of those times. The successful agency of the future will be the ones who concentrate on where they can add value most effectively and deliver the production costs at the lowest price possible. We need to incorporate procurement skills into agencies in order to make sure kaizen applies to our supply chain rather than focusing entirely on the agency.

The author, Simon Collard, has spent the last 18 years dealing with procurement. Along the way he has picked up some experience in reaching agreements that are kaizen compliant and agency friendly. If you have a procurement issue then contact me on simon@novemberfriday.wpengine.com.