THE AGENCY BUSINESS: Firms find acceptance of markup fees might be declining

As a cost-cutting wave sweeps corporate America, companies are seeing that more Clients are scrutinizing, and sometimes rejecting, fees charged for out-of-pocket expenses.

As a cost-cutting wave sweeps corporate America, companies are seeing that more Clients are scrutinizing, and sometimes rejecting, fees charged for out-of-pocket expenses.

"I used to call them the printing presses," says one veteran of a top-20 agency. "It's because it was like they were printing money." Surely this agency veteran is talking about the team of hungry and ambitious account leaders he had assembled sometime earlier in his career. Right? Well, not exactly. He is actually referring to the two photocopy machines that his firm used to make copies for clients. The machines were big money-makers because the firm would charge a mark-up for almost all the copies those machines produced. A markup is a charge for an out-of-pocket expense that is over and above the original cost of that expense. In the case of the copies, the firm would charge a fee that would be well beyond the cost the agency incurred when it produced the copies, which would seem to only include the price of paper and toner. Charging such markups is standard operating procedure at many firms. Indeed, what some say began as a middleman fee for securing services from clients eventually grew into a profit center for firms that regularly tack on a fee (often more than 15%) onto all out-of-pocket expenses. However, by all accounts, PR firms aren't alone in charging markups as other professional services firms - including advertising firms - have historically embraced markups with at least as much enthusiasm. But times are changing. As a cost-cutting wave swept across corporate America during the most recent recession, clients began scrutinizing their invoices and are now less likely than ever to let markups slide by uncontested. The industry veteran quoted above now spends more of his time fashioning proposals for Fortune 500 procurement officers than he does quipping about the photocopier. While there is no hard data on the decline of markups, the anecdotal evidence is significant. "I now have clients that even reject double-digit markups from their advertising agencies," says Robin Russo, president of Robin Leedy & Associates, a 17-year-old firm based in New York City's northern suburbs that specializes in health and beauty aids, as well as OTC medications. "I think clients felt the need to find more efficiencies and cost savings from somewhere, and this was as good a place as any to start." Russo's firm doesn't markup expenses. Instead, she charges her clients a one-time administrative fee that she says covers the cost of the invoice process. Her firm and a few others that PRWeek spoke with, use the fact that they don't charge markups as selling points to potential clients. Russo says some clients are often genuinely surprised that her firm doesn't mark up. Some executives at agencies that don't mark up say that marking up creates a disincentive at firms to shop around for the best deal for their clients. That's because the markup is often based on a percentage of the original expense. "Our success is predicated on making certain that our clients get the maximum value for every dollar they invest with us. So marking up their expenses in not consistent with that objective," says Eric Starkman president of New York-based boutique Starkman & Associates. "A firm that marks up expenses has an incentive to use the highest cost provider of those services." Those who have been drafted by clients to help police accounts in recent years, namely procurement officers, say that markups have certainly landed on their radar. "Somebody who understands how to properly buy agency services would want to get the revenue streams [on the agency side] down to as small a number as possible - and really down to one," says Francisco Escobar, a former procurement officer with Texas Instruments who now consults with major marketers on the structure of their contracts and compensation agreements with their marketing services agencies. "What you're trying to do is get the revenue stream to the agency down to one item, and that stream should really cover what you are actually trying to buy, and that's the agency's time. So [from a client's perspective], all of these other ancillary things like markups from out-of-pockets and other various fees can be eliminated if you get into a good dialogue with an agency and show them how you're going to compensate them fairly." ----- Out-of-pocket expenses
  • Some firms mark up more than 15% for all out-of-pocket expenses incurred on behalf of the client
  • Charging out-of-pockets often provides a disincentive for a firm to shop around for the deal on behalf of the client
  • Procurement officers charged with purchasing marketing services are conditioned to eliminate markups in an effort to streamline contracts

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