In many companies, once the annual marketing budget has been submitted and approved, it is often set in stone, with little opportunity for incremental funding over the course of the fiscal year. Moreover, many organizations employ a line-item accountability approach to budget management, which limits flexibility for shifting dollars from one initiative or one market to another.
Thus, it is important to approach the annual Client/Agency planning process in a deliberate and careful manner. As Ben Franklin once intoned: “By failing to prepare, you are preparing to fail.”
Outside of the budget, one of the key outputs of the planning process is a Statement of Work (SOW) document that accurately and completely identifies all agency deliverables and detail on the timing or due dates of key deliverables. It is the SOW that then provides the basis for the agency to develop its proposed staffing plan and attendant fee recommendation. In an ideal world, the annual SOW is comprehensive in nature, covering both key deliverables and the prospect of potential contingency projects.
Some advertisers rely more heavily on a project-based remuneration program with their agency partners (versus retainer based fees), which lessens the risk for in-scope or out-of-scope confusion/ issues. However, since most advertisers employ an annual retainer fee based approach that is intended to cover most, if not all of its agency partner’s marketing and advertising deliverable costs, “out-of-scope” work requiring incremental remuneration potentially results in negative repercussions.
Properly executed, the annual SOW development and management process can minimize the potential for “surprises” that can be problematic for both advertiser and agency. The best approach is a combination of art and science, relying on a firm understanding of accurate historical project performance and an advertiser’s internal processes ranging from briefing the agency to securing the requisite approvals. Below are three key actions that both parties can take to minimize out-of-scope surprises:
- Begin the annual Client/Agency planning process with a studied, fact-based review of the prior year’s SOW. This should include a review of key projects, deliverables and the amount of time and resources that were actually expended relative to estimate levels. Understand and discuss the drivers of project costs ranging from rework levels to approval delays to inaccurate estimating, and identify how those issues can be addressed going forward.
- Review the agency’s proposed staffing plan to make sure that the time allocations and utilization rates are consistent with the nature of the deliverables (i.e. strategic vs. tactical, complex vs. adaptation, etc.). This can help to right-size the fee by aligning bill rates for the appropriate personnel with the initiatives and tasks that are best suited for their skill sets and experience.
- Ask the agency to provide monthly time-of-staff tracking and project status reports showing burn rates and percent complete detail. This will provide both parties opportunities to make real-time course corrections on specific projects and make the requisite adjustments to keep the SOW on budget. Optimally, these reports and the resulting implications should be discussed face-to-face each month.
Ultimately, the final SOW should be submitted in a form that contains the agency staffing plan with time, utilization and bill rates by position, fee work-up sheets (direct labor costs, overhead rates, profit margins) and comprehensive rate sheets for in-house agency services (e.g. studio) and non-retainer personnel.
Regardless of whether or not the fee is direct labor or outcome-based, fixed or reconcilable, it is still important to require agency reporting and analysis of time on task and agency staff mix utilization. The insights afforded both parties from investing in this practice will inform future SOW and project scoping and minimize surprises related to excessive expenditures for incremental time and out-of-pocket expenses.