Saturday, November 24, 2007

Agency Selection Process

Marketing, Money and More Issue 2 (11/24/07)

Agency Arithmetic
Let's do some math. Say an agency has 30 staff members that work 40 hours per week each. That's 1,200 hours per week and there are 52 weeks per year for a total of 62,400 total hours each year. Agencies don't sell products, just hours. That is their inventory. Those hours are spread out amongst different departments and disciplines. There are also lights, a building, power, computers, research tools and subscriptions, seminars, classrooms, chairs, toilets, water, books and other related expenses that lead to a bottom line number that has to be spread and charged to the 62,400 hours available to sell to clients. It is a basic matter of running a business, it must be profitable but there are industry practices that drive up the expense for everyone.

Rolling the Dice

The average agency will do many "pitches" for work. Hours will be spent putting together these pitches. If the average agency wins 1 in 7 pitches, that is 6 pitches where the hours are written off. An agency could easily spend 100-200 hours on a major pitch. That reduces the available inventory of hours. Some agencies can be very selective about how much work that they will put toward winning a client's business and some have to just to compete. This is an industry standard that stems from the ambiguous nature of marketing. Since we aren't selling widgets, clients want to see what they are buying. There is no other way to show them the product than to do the work. Every pitch is a gamble and there may not be any return on that investment other than a letter thanking you for your effort. At the end of the day you gave away your best ideas, learned about a company that you will not be partnering with and have lower morale than when you started...But when you win, it's that much more rewarding.

Agency Selection Process
I have been through pitches for clients that have $5,000 per month to spend and pitches for clients that have millions. It then makes sense to give it your all for the ones that have millions and do a minimum amount of work to win the small clients, right? If it were that easy, I wouldn't take the time to write this. People watch too many movies. Not every client needs to go through the same process. Here are a few tips:

  1. Assess what your account is worth to an agency in a dollar amount per year or month.
  2. Have an expectation of what marketing can do for your business, even if it is wrong.
  3. Do your homework. Read a few case studies within your industry.
  4. Ask yourself what sort of agency culture will work best with your company.
  5. Start out online and ask a few people in your industry for recommendations.

Now, what was your answer to #1? That will help you know what size firm to be talking to. Chiat Day will not speak to you if you have $5,000 per month, but a small consulting firm or PR firm will.

Size Does Matter
Now that you know you are talking to the right size agencies, do some homework. Ask for some references and their materials with a few case studies that match your business' situation. Once you have narrowed your seach to just a few candidates, call for a casual meeting with a represenative from each candidate firm at their office. Be upfront about your budget and your situation and let them come back to you with a proposal. Tell them your expectations in terms of what you want to see such as costs, spec creative, recommendations, etc. It is also important to let each firm know that you are talking to more than one firm, they will need to decide if they can accommodate your expectations. Firms do get short staffed, although most would pitch for the new business regardless.

How do you know if you should be seeing creative done "on spec?" Here are some ranges based on my experience:

  • $25,000 Annual Budget = Proposal with broad recommendations, case studies, etc
  • $100,000 - $300,000 Annual Budget = Proposal with specific recommendations, case studies, etc.
  • $500,000 + Annual Budget = Full agency pitch with recommendations and spec creative

These ranges are based on total annual budgets. It is difficult to quote because of the amount of money that may be spent on media or production. A $5,000,000 budget can translate into less than $1 million in agency revenue if there is a heavy media spend. The best course is to ask each agency how they will be demonstrating what they will do for you. If 2 out of the 3 agree to go to the next level by writing up some recommendations and showing creative, then you are most likely a valid client that deserves that respect. If all agencies pass, it is because the potential return on your business does not qualify for a pitch process. In this case, you may go back and rethink your position on what you would like to see.

Agencies Investment
An agency will invest time into learning the client's business. Marketing directors tend to want to reduce their rate over time. Agencies tend to want to reap the benefits of having learned the clients business and therefore reducing the amount of time spent on the account.

If you have found a firm that produces results, you must look at every dollar spent as an investment. Look at your P & L and share pertinent information with your agency. If the agency is performing, then a reward is in order, not a lower rate. Agencies are in business also. If they are receiving a fair rate with bonuses for performance, you probably have a very involved and motivated agency.

Outlining the Relationship
Retainers are great...for one of you. If your agency receives a monthly retainer for services and your workload is up and down, then you are paying for a block of time that does not get used. If the retainer dates back to 1997 and has not increased over the last 10 years but the workload has, then the agency loses. Here are a few fair potential scenarios


  1. Min/Max Retainer - This scenario is based on a range. There would be a minimum and a maximum. The minimum might be $10,000 and the maximum might be $30,000. The agency could charge anywhere within this range based on usage but it gives an expecation on both ends for cashflow.
  2. Performance - This scenario would allow the agency to truly be a partner in success. Goals are set for each campaign and performance bonuses are dispersed to the agency when they help achieve specific goals. A basic retainer would be attached to this for maintaining the account.
  3. Account Planning Retainer - This scenario pays for account planning and account service on a monthly retainer. Strategies are developed ongoing and execution is done a "per project" basis.

These are just a few scenarios that give a bit more controll over spending than a traditional retainer. Some clients don't want account planning, but I feel that it is the strategic thinking of an agency that differentiates it. Otherwise you are looking for a specialty firm like a creative shop or an interactive boutique.

The point is that it is very costly in terms of time and expense to choose a firm that doesn't fit your business. Choose carefully and make sure you conduct an appropriate process in your selection. If you feel like you need someone to guide you, there are plenty of consultants out there and when you are talking about managing millions of marketing dollars per year, it's worth it to choose wisely.

If you want to add a few scenarios or throw out a situation, please do.

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