THE AGENCY BUSINESS: How bills are paid betrays much about client relationships

As the difficult economy seemed to shift power to the client side, Paul Cordasco finds agencies relying not as heavily on retainers and more on a broader range of cash-flow options.

As the difficult economy seemed to shift power to the client side, Paul Cordasco finds agencies relying not as heavily on retainers and more on a broader range of cash-flow options.

Perhaps one of the best ways to gauge what is going on "under the hood" of the agency world is to take a look at how agencies are billing their clients. Much like other markets, how folks get paid can be almost as telling as what they're paid. By breaking down the sources of a service business' revenue, one can tell a lot about the nature or even the health of a business. An informal e-mail survey of 100 independent PR firms conducted in November by Sedona, AZ-based agency consultant Al Croft, who works primarily with small and midsize independent firms, found that the average firm derived 57% of revenue from retainers, and so-called project business accounted for an average of 22%, while hourly billing revenue accounted for an average of 21%. While retainers accounted for the majority of revenue according to the survey, Croft says that percentage has surely fallen in recent years from its late 1990's dot-com heights. He says during those boom times, retainer revenue for independent shops was probably closer to 75% than 50%. There was also a remarkable range within those averages. For instance, some firms reported that only 7% of the revenues came from retainers, while others claimed that 100% of their revenues did. Nevertheless, it's tempting to read this shift away from retainers as not only a shift in the nature of the revenue, but also a shift in power. As the first chapter of any high-school economics textbook would demonstrate, as demand falls and supply remains relatively stagnant, prices will drop. There is little doubt that since about mid-2000 - when the economy fell into a three-year funk - this type of price decline has occurred throughout the marketing-services world. In the service industries, such as marketing, the way in which products are paid for can betray a lot about the way in which the balance of power - between client and agency - has been trending. A move away from retainers would seem to signal that power is moving away from the agency and to the client. Perhaps Croft has the simplest answer for why agencies would have derived more of their revenue from retainers during the late-1990s: "Because they could," he explains. Indeed, as firms found themselves competing much harder for business from 2000-2003, the need to offer clients a non-retainer based option would have become more necessary. Croft, a 40-year agency veteran, says that he has witnessed these swings with every business cycle since he's been in the industry. "First, everybody is on annual retainers. Then it swings to projects or hourly billing and back again," he explains. "Now it's project business that agencies are dealing with that make it difficult to predict staff needs and agency revenue. These swings seem to take place about every 10 years." Yet despite the perceived benefits of retainer-based revenue, Croft says agencies do not always stand to benefit from having retainer clients. "The advantage for the agency [of retainer-based clients] is obviously knowing your cash flow," says Croft. "The disadvantage of retainers is that agencies tend to historically overservice them." This conclusion counters much of the conventional wisdom about retainers. Yet Croft says that agencies should realize that not every account member in a firm will always be cognizant of how much his time is worth. "[Retainers] are not as profitable as an account where people are more accountable for their time," explains Croft. "The tendency has always been for agency staff people - especially junior people who aren't as attuned to the business side of things - to book lots of time against the retainer clients because the work is familiar and something they can always go back to. Meanwhile, they are spending loads of agency time on it." Croft suggests that a good way to keep account people more aware of the time they spend on retainer accounts is to offer clients a retainer plus billable hours option. This arrangement would see the client pay a retainer, but if work on that account ran over a certain number of hours during a month, the client would be charged the additional hours worked that month. But Croft admits that model can cause problems as well. "But you're not going to find many agencies wanting to do that in reverse," says Croft. "Meaning handing clients back part of a retainer if the hours worked on the account that month don't hit the target." ----- Trends in independent PR firm revenue A survey of 100 independent PR firms found that the average agency derived: 57% of its revenue from retainers 22% of its revenue from project business 21% of its revenue from hourly billing Source: A. C. Croft & Associates

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