Friday, December 5, 2008

Retainer Vs. Project-Based Compensation

Agencies tend to be far more flexible with their fee structures, especially in laggard economic cycles. They have an overhead of staff that needs to remain billable at a decent percentage. Usually that percentage is around 65-95% depending on the overhead fixed costs component. This gives the upper hand to a client in attracting the attention of a larger shop. However, this is a short term solution. As the marketing economy starts to improve, agencies will “trade–up” and look for more established, long-term, budgets to help manage their visibility. And who can blame them?

Clients like project-to-project relationships because it gives them leverage of budget control, and the option to end a relationship if performance is poor. The process of firing a retained agency is obsolete and messy. Agencies and clients should be frank about engaging under this model, as it is important to agree on the key performance indicators (or KPIs) before engaging in the project. Having a shared understanding of the KPIs helps remove subjectivity regarding the performance of the agency, or the outcome of the marketing effort.

Marketers often struggle to establish a process and methodology for managing communications. Working on a project basis with an agency or PR firm is not likely to solve this problem.

According to Forrester Research Project-to-project relationships can have an upside from an agency perspective. Besides covering off some COGS (agency cost of goods sold), they can actually grow into accounts while reducing overhead.

These relationships can typically result in:

- Shorter sales cycle
- Higher profit margins
- Speed to ideas in market
- Ability to prove their value, every day
- Permission to grow into the business
- Ability to enter into otherwise crowded markets
- Establish name brand accounts on roster

The issue for marketing agencies is their ability to find these projects. Project outsourcing will increase in a recession, but if the agency isn’t poised to get its foot in the door, it may find itself chasing “bad” projects – unprofitable, not focused in areas of its expertise, and working with brands that are not healthy, etc.

Please let’s not forget that getting paid is just the fiscal transaction between the two parties and shouldn’t be confused with a “relationship” between an agency and a client. That is earned over time by delivering the goods and great work.

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