In the last 15 to 20 years, many agencies and clients have worked on a fixed fee retainer basis calculated on the use of key resources and hours spent.
Prior to that, advertising agencies were able to work on the basis of receiving media commission along with marked up production costs and concept fees as media and creative had not been split into separate agencies and therefore separate income streams.
With the separation of the two, creative agencies brought in a resource-based model, where time and resources are predicted. But does this work for procurement and other stakeholders?
The upside of a regular retainer is that service level agreements (SLAs) can be pre-determined and budget set aside for the retention of that agency’s time, resources and completion of projects.
The downside is when the client doesn’t get the expected output or the agency underestimates the workload. For this reason, the scope of work must be explicit, written and agreed on by all parties. Expectations must be managed by both client and agency and SLAs must be measurable.
Why output-based costing works
As more agencies and clients look to move towards output-based costing, according to trends emanating from SCOPEN’s AGENCY SCOPE studies in 12 countries, the secret sauce is the scope of work. A retainer can be determined based on annual output, including all the calendar events that both parties know will need extra resources – back to school for retailers; season-dependent events and products like clothing, aircon and heating systems; and client participation in yearly exhibitions.
Taking all of these into account means that creative agencies can present a reasonable retainer which avoids under-costing on their part and provides value for adspend for clients.
When creating an output-based agreement, it may be helpful to call in consultants who are familiar with client needs and agency resource allocations. This can just make for a smoother ride for all parties and ensure neither feels hard done by during the months where the retainer feels more like a no-return expense.
Knowing an agency is available to you when you need them is vital for clients – but this will always come at a cost. Understanding this as part of the bigger picture will facilitate best practise by both parties, and agencies will reciprocate by treating retainer clients as tier one partners.
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