About Steve Fajen

Steve is a Managing Partner at Drexler/Fajen & Partners, a firm serving the media related needs of advertisers, agencies and the media.  Previously he was President of Deutsch and Simmons Research and Media Director at DDB Needham, McCaffrey and Saatchi.  He was also the Media Research Director at J Walter Thompson.  Stev...
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Taking a knife to a gunfight

In the 1987 film The Untouchables, Sean Connery’s character sarcastically accuses one of Al Capone’s men of taking a knife to a gunfight. That is what Procurement does when using hourly rates to evaluate an agency’s staffing plan and ultimately their fee request.

The client and agency very carefully construct a scope of work. The agency then develops a staffing plan, sometimes down to the individual deliverables level and assigns each person on the plan a number of hours and an hourly rate.  The roll up of all the hourly rates and number of hours can become the initial fee request from the agency.

This document often becomes the tool upon which the fee negotiation will be conducted.

The client may very well look at the staffing plan by individual deliverable and should if they can. They may ask why the Chief Creative Officer spent her entire summer on a pamphlet (I took a liberty here).  It’s a fair question. Some very sophisticated advertisers may even have benchmarks for how much time it should take to complete a specific deliverable and what kind of talent is needed. We do. So the negotiation continues this way and the client is not yet in harm’s way.

But wait!

After all that effort on the client’s part, after all that very careful inspection and benchmarking, the client is about to get in harm’s way. The negotiation is a gunfight and the client is about to pick up a knife.

The client is about to continue the negotiation using the hourly rates that the agency provided and even if benchmarked they can hurt.

Hourly rates are not a true expression of the real value of an FTE. They are generally n OVERSTATEMENT. The client that continues to discuss terms and finalizes a contract on this basis will generally be overpaying.  Here’s the proof.

A little methodology here so hang in for two short paragraphs.

We looked at ten job descriptions that very often appear on agency staffing plans (see the table below).  They include representatives from account management, creative, media and account planning.  We used the 4As Hourly rate Survey for those job titles and aligned them with the 4As Salary Report for the same jobs.  We adjusted for inflation because the reports were one year apart and made sure that the data came from the same agency size and geography. Then we made two final calculations so the data would match.

We took the salary information and increased it by an industry accepted overhead rate and profit margin.  That gave a fully loaded FTE on an annual basis. Then we divided that by the accepted number of hours in a year.  Here’s what we found: 

HOURLY RATE COMPARISONS

Title

From Salary Report

From Hourly Rate Report

% Difference
HR/Sal*

Dir. Client Service

$316

$497

+26%

Account Dir

215

259

+20

AE

72

89

+24

Chief Creative Dir

527

939

+78

Creative Dir

360

363

+1

Creative Sup

165

209

+27

Group Media Dir

205

232

+13

Media Buying Dir

189

193

+2

Exec Dir Account Planning

440

571

+30

Account Planner

88

119

+35

Average

 

 

+25%

*Indicates the extent to which the Hourly Report overstates hourly rates when compared with salary and reasonable multiplier benchmarks.

Across the ten job titles benchmarking staffing plans using reported hourly rates overstated the reasonably calculated reality by 25%.

For every job we inspected the Hourly rate Report yielded results that exceeded the calculated hourly benchmark. The most flagrant variation was with the Chief Creative Officer (an expensive position). Oddly enough the least variation occurred with Creative Director.

We suggest that clients should avoid using hourly rates because they are not transparent.  They can easily mask the salary level, overhead and profit margin the agency is requesting. Only by using benchmarks that breakdown the component parts of salary, overhead and profit for each FTE can Procurement get a clear picture of what the agency is really requesting in their fee proposal.

 

 

 

 

 

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