Off With Its Head! Replacing The Billing Model Based On Execution

Posted by Ray Kieser, Agency Practice Director on December 3, 2015

Replacing The Billing Model Based On Execution

Traditionally brands have paid for a creative agencies time, billed by the numbers of hours the team spend executing an idea. However, this doesn’t account for the intellectual property invested by the agency and regardless of how successful the product, platform or solution is, ultimately, the real value of the idea is not recognised. This leaves agencies in a precarious position – being funded by a billing model that offers no long-term stability and threatens the financial viability of agencies to come.

Valuing an idea

The topic came up at a recent BIMA breakfast where attendees discussed how to deliver the highest level of creative work whilst maximising profitability. A number of concerns were highlighted, particularly around how agencies can be paid for the value of their work – both in the immediate short-term and on a long-term basis. These concerns reflected broader industry issues as identified in a report by ClickZ and Deltek where it was noted that when considering profitability, the second biggest issue creative agencies said they faced was the concern that clients are being undercharged. The report also noted that 50 percent of creative agencies are operating on a retainer or rate card model, with only 14 percent consistently value billing.

Additionally, while profit margins are healthy with 75 percent of respondents reporting more than 10 percent profit, research by KingstonSmithW1 has shown consistently that these margins are under pressure, falling as much as seven percent in some sectors since 2012. Therefore, in order to ensure long-term health and success within the industry, a change in mind-set is required.

One of the biggest issues is, however, that it is not so easy to assign value to an idea, which is why the hourly billing model has reigned supreme for so long. Often agencies cannot be certain of an idea’s success so billing clients for anything more than tangible numbers (i.e. hours spent on a job) can appear to be based on plucking figures from thin air. This is where creative agencies could learn from consulting firms. Immersed in data and strategy, consulting firms have no problem billing clients for intellectual property. In fact, many firms are now commoditising the execution and outsourcing it to third parties once the strategy and idea has been fully formed.

Creating change

It appears that some in the industry have recognised the need for a change in mind-set too with The Marketing Agencies Association recently releasing survey results highlighting that “traditional models of hourly rates, retainers and project-based work aren’t cutting it when it comes to fostering commercial creativity”. The results also noted that marketers were interested in paying creative agencies ‘based on business KPIs rather than time spent on work’.

Additionally, with the Mars global chief marketing officer recently berating brands for not paying creative agencies “enough to make a very good profit”, and the ex- Pernod Ricard chief marketing officer speaking about wanting to “explore remuneration based on access to specific talent within an agency group”, it would seem the industry is not miles away from exploring a new finance model.

Turning technology into profit

This means that it is up to the agencies to start backing themselves when it comes to billing clients for not just execution but the intellectual property invested. This is not an easy task and requires not just bravery when discussing billing with clients but also a fortified understanding of the agency in terms of data and figures. One way to ensure that support is there with visibility into real-time project progress and ensuring billings are accurate is to implement an agency management system.

A system like this will allow creative agencies to proactively manage client relationships, track new business opportunities and understand the profitability of all work – which in turn can be analysed to determine where further opportunity for value billing may lie. Additionally, it can provide a granular understanding of the day-to-day activity, providing continuous updates against job planning, budget and staff capacity. Being able to track work in progress, assign resources and keep up to date with real-time alerts means an agency can operate at a high level of efficiency – delivering projects impeccably, keeping clients happy and opening up to the door to value billing.

By replacing the existing billing model with one which represents the intellectual property investment and overall value for the client, it ensures the longevity of the industry and allows creative agencies an opportunity to mature – increasing profit and growth moving forward. It is not going to be an easy change for the industry on a whole to make but ensuring the right management tools are available is the first step and that is all it takes for movement – just one first step.

What do you think?

To continue the conversation you can leave a comment on this blog or head over to Twitter and have your say using #AgencyBillingModel