Recent research has revealed that creative services agencies are spending a growing amount of time justifying their bills and then billing their clients for the time it takes to justify.
The research conducted in August and September last year for software provider Maconomy among 225 senior directors at creative services agencies in the UK and US, found that around 56% of agency invoices are queried, and that the time taken to resolve these disputes is adding significantly to the final amounts paid by clients.
To a large extent this boomerang billing, as it has been dubbed, can be explained by the recent tightening of financial controls by companies on both sides of the Atlantic. However, it raises the thorny question of how to pay for creativity.
Until fairly recently, many creative agencies tended to bill what seemed a reasonable amount and hope that their relationship with the client built over many long lunches would see the invoice approved. Increasingly, however, those agencies are having to justify their fees, and finance departments are facing the conundrum of how to put a value on an idea.Timesheets
Steve Hoddinott, UK managing director of Maconomy, does not believe that there should be any confusion over billing. He says: 'Agencies should keep their clients informed of every aspect of expenditure throughout a campaign. More traditional industries, such as manufacturing or the law, have time management systems in place to handle this complex process but the creative sector seems to rely on a few poorly configured spreadsheets to keep track.'
He believes that agencies need to overhaul their internal processes to give their clients this information. Technology can help but, as he puts it: 'Agencies need to address the culture of fear within the creative industry regarding client transparency. Agencies that are accountable and open can develop stronger relationships with their clients based on trust, and delivery of timesheets can also reduce over-servicing, another major problem in the creative industry.'
Matt Butterworth, director of creative marketing agency Folk, agrees: 'As an industry it is paramount to be transparent about costs. We bill most of our clients by time and any of our clients can see our timesheets at any time. We think this helps to build trust between us and our clients.'Ideas and time
Not everyone, however, believes that timesheets are the solution. Bob Little, managing director of agency Bob Little Press & PR, makes it a rule never to deal with clients who ask for timesheets. He says: 'We've had too many bad experiences in that line. If they don't believe that we've done the work, then we obviously haven't done it because it hasn't produced the results they wanted.'
Indeed, there is a growing tendency among agencies to request payment by results. This is primarily because the amount of time it takes to develop an idea is so variable.
Chris Hinze, joint chair of the Professional Services Marketing Group, says: 'An agency could develop a superb idea and execution in under an hour because the inspiration works at that point in time. Equally, it could take several days to develop something that turns out to be more workmanlike. On a time basis the latter is more valuable than the former even though the impact and results might favour the former.'Payment by results
There are, though, several problems with paying creative agencies by results. Sharon Morrison, managing director of PR and design agency Quay West Communications, says: 'Often PR agencies accept payment based on the quantity of coverage we generate. However, it would be easy for us to get coverage in publications that no one reads. The real issue is the quality of coverage.'
So, when she worked with Essex County Council on a campaign which aimed to increase recycling rates, she built in results measurement. Before the campaign began, a research company interviewed 200 residents, asking about their views on recycling. After the campaign they were interviewed again and the shift in their perceptions, together with the actual rise in the recycling rate, was the result of the campaign.
Yet Morrison was not happy to accept payment based on this measurement, because she believes that there were too many external factors that could have influenced residents' perceptions or the recycling rate.Finding the right balance
While many creative services agencies argue against payment based on business metrics, it may become an increasingly prevalent model. Ultimately, if the work an agency does has no impact on any business metric, then there is little point in them doing it. The challenge for them, their clients and those in the finance department is to find the right metrics and to measure them accurately.
In the long run this will be beneficial to all involved. Mandy Merron, a partner at accountancy firm Willott Kingston Smith, which has around 100 creative services agency clients, says: 'Agencies should make an operating profit of around 15%, but our latest survey shows that only four of the top 50 do so. This is largely down to the lack of transparency on payment which makes clients feel they're paying too much, and so makes them drive down fees as much as possible.'
She believes that agencies and clients should agree how agency creativity improves the client's business and from that agree a payment structure in which a significant proportion is a performance-related bonus. It would help clients understand the value of marketing; it would help agencies focus their creativity on producing results; and it would mean that everyone spent a lot less time querying and justifying invoices.TOP TIPS ON HOW TO PAY YOUR CREATIVE AGENCIES
Richard Fifield, director of business service at accountancy firm Tenon, offers these tips for how to pay your creative agencies to ensure you get the best value from the relationship:
• If you want to pay by results think very carefully beforehand about how you will do this.
• Agree the goalposts in advance. The right time to agree how you will pay, how it will invoice and so on is before the agency begins work.
• Monitoring and evaluating results can be very expensive, so before you hire an agency decide whether you want it to do this, or whether you would prefer it to be doing the job you have hired it to do.
• Decide whether your team will be employed on a project or retainer basis.
• Some creative firms will ask for payment a month or quarter before their start date. Avoid this.
• Creative firms are likely to add a 17.65% handling charge on handling purchases that they make for you, so always try to deal with suppliers directly.
• Don't pay more than 10% for operational costs such as stationery, telecoms, copying and printing.PROXIMITY LONDON
Proximity London offers direct marketing, digital marketing, event marketing and promotional marketing to clients such as Lever Faberge, Royal Mail and Sainsbury's.
According to commercial director Damien O'Donohue, the key to billing clients is to agree it all in advance. He says: 'Before we begin every campaign we prepare an estimate including a detailed breakdown of information such as the number of hours and the third party costs we expect it will take to get the job done.'
Although the time it takes to generate an idea varies enormously, Proximity is able to place a time estimate on this creative aspect of the process. Simply, it looks at timesheets from the past year and takes an average of how long it took to come up with each idea.
Managing director Amanda Phillips explains that it also expects to be paid by results: 'For most of our clients we get paid about half our fee as a set retainer, and half as a results-based bonus. Those bonuses tend to be based on specific business objectives such as increased responses and sales.'