Billing via retainers, rather than billing actual time worked, is preferred by many clients and can provide your agency with some convenience related to cash flow.
It allows you to maintain stability, in terms of billing, and a reliable stream of revenue and cash.
However, the retainer method, if improperly managed, can lead to serious financial consequences and diminishing profit margins for several reasons.
Generally speaking, agencies will staff these accounts to the amount of the retainer each month. If the activity levels remain constant over the course of the year, this is not a problem. Frequently, however, there are several months in a year when events, or other significant activities, will cause a spike in the amount of work required. As a result, on an annual basis, overservicing becomes inevitable.
For example, let's assume you are working on a $20,000-per-month retainer account, have assigned staff hours at this level, and have serviced it appropriately for the first six months of the year. However, due to client program elements, you'll need to provide $50,000 in service in July and October.
Clearly, you'll have cost overruns unless you dramatically reduce your service levels for each of the other months of the year. It is usually hard at this point to convince the client that a dramatic reduction in staffing during the remaining months will be acceptable.
To avert this type of situation, it is best to set expectations on servicing with the client at the beginning of the year. Recognize that there will be several months that require much higher levels of service, and reduce the service levels in the other months appropriately. In the example above, if you need to spend $100,000 in two months and have a $240,000 annual retainer, you should alert the client that you will staff the account at $14,000 per month for 10 months and $50,000 for the two spike months.
The $20,000 monthly billing is primarily a cash flow convenience for both parties. It should not be the driving force behind the level of staffing on the account each month.
A second phenomenon that occurs with retainer accounts is that they tend to be staffed with higher levels and billing rates from year to year, with no upward adjustment in the retainer amount.
During the course of a long-term relationship, clients tend to become comfortable working with specific people, and it is difficult to justify interfering with a relationship that appears to be working.
However, over the course of several years, the people working on a piece of business will generally receive several raises and one or more promotions, together with commensurate billing-rate increases. If they continue to handle the same type of work for the client, the cost to the agency will increase, and the amount of time logged will rise because of the higher rates. This leads to significant overservicing and diminished profitability.
To combat this issue, you need to do one of two things: First, you can treat the client as you would a time-input account and attempt to renegotiate the retainer amount on an annual basis, taking the increased billing rates into account. This, however, is frequently very difficult to get the client to accept.
If that option is not possible, you should adjust the workload to make sure that all program elements are handled by individuals at the appropriate level. For example, if an activity was handled by an AE last year, it should be handled by an AE this year. If last year's AE has been promoted to account supervisor, you should move the responsibility to a new AE assigned to the client. The supervisor can still have oversight on the business and maintain client contact, but the account executive work should be done by an account executive.
This requires proper training of staff and a well-executed plan of action that gets more junior people to become introduced to - and trusted by - the client. But the effort will pay enormous financial dividends year over year by helping ensure that the time logged stays more constant year to year.
It is possible to get the benefits of retainer relationships without sacrificing the financial stability of your business, but it takes diligence and a strategic approach.
- Darryl Salerno is president of Second Quadrant Solutions, an organization dedicated to helping professional services companies maximize financial health.