Recently, Ad Age wrote about the 4A's 2012 Labor Billing Rate Survey Report, which sheds light on agency compensation practices. It is a first step towards greater transparency and associated benchmarking, which can lead to reality based hourly rate fees, but much more work remains.
It's imperative for marketers to still drill deeper to get to marketplace reality and how agencies structure and present hourly rate fee compensation. Marketers' investment in agency fees are growing in digital and social media in particular, and our firm estimates digital/social agency fee gross revenues alone will increase from $16 billion in 2011 to more than $28 billion by 2014.
As agency compensation evolved over the past three decades from media commission-based to labor-based annual fixed fees, hourly rates played a rather insignificant role with clients, except in the case of some specialty agencies, even though agencies internally use hourly rates to price services.
The 4A's report, although a contribution to industry understanding, has limited usefulness to marketers -- and those limitations are open to discussion. Transparent, labor-based, annual fixed fees were developed by marketers using methodologies driven by definitive scope of work, detailed staffing plan, transparent agency economics and important links to agency performance, value and business economics. That approach can be benchmarked across agencies of all sizes, locations and types, and this is a limitation of hourly rates in the 2012 4A's report.
Hourly rates can, however, be made transparent and benchmarked, but the 2012 4A's report draws a curtain across hourly rate transparency. This needs to be rectified by marketers wishing to revise the playing field. A good place to begin is to place four aspects of the 4A's report in context:
- Non-transparency. 2012 4A's billing rates are not (yet) grounded in a specific methodology, nor are they transparent and nor do they provide adequate benchmarking capacity. However, this can be readily changed.
Transparent labor-based annual fixed fees have been around for so long and implemented in so many ways that they have become the "best practice" standard, particularly when fair and reasonable performance and value elements are added to the mix. Likewise, with effort this can be accomplished for hourly rates, and a number of marketers have independently gone in this direction.
- Non-comparability: Identical rates from different agencies are not equal. The 4A's report requested that agencies provide hourly rates "charged to clients," and derive these from agency "rate card, budget, agency cost, value provided, opportunity cost and negotiated rates." This is a barn door a truck can drive through and raises serious questions of comparability of agency responses when "rate card" is an agency's requested rate ("ask") and "negotiated" is an agency's client-negotiated rate ("bid"). When marketers are in negotiating mode with agencies, they will want to: a) be very precise about how the agency develops its rates; b) request the agency's definition for each job position a rate applies to so comparability in rates can be obtained (position definitions are not uniform and vary from agency to agency); and c) evaluate the underlying components of hourly rates by their salary, overhead and profit components.
- Deconstructing hourly rates. One agency's $100 hourly rate is rarely developed the same way as -- and contains the same components of -- another agency's $100 rate. Notwithstanding the mathematics, all $100 rates are not equal. They can, however, be made equal and benchmarked. This is where transparency and a common methodology become essential and why 4A's hourly rate ranges, although a start, are not the final answer for marketers. In the following example, the same $100 rates from two different agencies are structured very differently, which has implications for performance and value delivered to marketers:
Rate Salary Component Overhead Component Profit Component Agency 1 $100 $35 $49 (140% ratio) $16 (16%) Agency 2 $100 $45 $47 (104% ratio) $8 (8%)
Clearly, Agency 2 invests more in people talent (salary) and runs its business more productively (104% ratio vs. 140% ratio). Agency 1 and 2 profit margins also vary materially (16% and 8%).
- Benchmarking. The 4A's effort is a good start, but it does not yet provide adequate benchmarking room for marketers for hourly rates. What is needed is a defined methodology/terms and transparency to enable marketplace benchmarking and agency competition. Reliable benchmarking data is available elsewhere from proprietary benchmarking data sets, but not yet from the 4A's report.
This is not an exhaustive examination of the pros and cons of the 4A's hourly rate surveys. On a positive note, the 2012 report is more useful than the 2009 report in that it provides a) more robust data for large and mega agencies and for California and far-West agencies and b) job position definitions.
If hourly billing rate surveys are provided with transparency and disclosed methodologies, they will give marketers and agencies better confidence, can better serve as reliable marketplace indicators, and could be as useful as transparent labor-based annual fees. They would contribute to better client/agency understanding, and the outcome should be as simple as annual "multiplier" fee arrangements based on transparency and full disclosure. The 4A's effort is a welcome next step, but much remains to be done and we hope this will happen soon.