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.