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Charging by the hour has had a great run — but it's over.
The way agencies bill clients is slowly changing to a system which smooths out the boom and bust of pitches and makes forecasting revenue more robust.
Paying agencies a monthly subscription, rather than by the number of hours worked, might be the dominant way the industry makes a living soon.
Blame AI, which can turn around, in a flash, one ad into multiple iterations for different markets and media.
Charging for hours spent on such a project, which has been the industry norm, then doesn’t work.
There are signs everywhere that change is here already.
Look at Howatson+Company’s Plus Also Studios, which is offering unlimited campaign assets for a flat fee of $5,000, all made possible by proprietary AI tools, the subject of years of serious investment.
And independent Frontier has abandoned its agency model and repositioned as a subscription-based platform built on its AI system, Frontier OS.
This system combines more than 41 AI models with 15 specialist agents across strategy, media, PR, copywriting and creative direction.
The subscription mode starts from $1,500 a month and scaling depending on how much capability and support a client needs.
Martin Sorrell’s S4 Capital is pushing hard to move away from time-and-materials billing to fixed-fee subscriptions and asset-based pricing, a "talent and machine" model.
Under the model, clients pay a fixed monthly fee for a defined output volume — perhaps 50 assets a month.
As AI improves efficiency and that rises to 70, the client's cost doesn't increase. S4 argues this creates aligned incentives and increasingly looks like ARR (annual recurring revenue) rather than project work.
In practice the transition is slow. One major client won last year is fully on the subscription model, three more are in discussion.
Existing clients are harder to shift because of current contracts and procurement teams who want apples-to-apples comparisons.
The new model is now S4's default offer in all new business pitches.
"If a task that used to take 8 hours, because of AI gets reduced to 45 minutes. If you're charging hours, it punishes that innovation,” Wesley ter Haar, S4’s chief AI & revenue officer, told a briefing of industry analysts.
"We're committing to output and outcomes within a fixed fee, and we're also committing to our clients getting faster and better as AI models improve.
"The billable hour has had a great run, of course, but it's not a long-term viable model as you see software and service collapse into one."
"Fixed monthly fees, annual contracts. We combine great talent with our AI workflows, our machines. We don't focus on headcount pricing."
WPP is also moving to tie fees to metrics such as product sales, brand equity growth, or measurable increases in consumer desire for the brand, rather than hourly rates.
The switch will be from a model seen as “unpredictable and episodic” to higher quality recurring revenue that can be linked directly to client success.
“A commercial model that is more closely linked to client outcomes will enable us, over time, to move away from time and materials and decouple revenue from headcount,” CFO Joanne Wilson told analysts in a marathon briefing on the company’s new strategy.
“Over time, this will support higher revenue per head and margin expansion.”
WPP has acknowledged some downward price pressure from AI-driven productivity gains but argued the shift to integrated, outcome-based relationships would more than compensate.
Consultancy Forrester advocates for an evolved remuneration model, the human/technology equivalent, to replace the current full-time-equivalent - services model.
“In this solution, the cost of technologies such as predictive, generative, and agentic AI are permanently coupled with the hourly costs of the experts who wield them.
“This fundamentally modernises marketing partnerships by focusing them on value, outcomes, and growth, rather than scopes, FTEs, and billable hours."
Forrester’s global agency analyst Jay Pattisall said there’s little secret that today’s marketing mantra is “do more with less”.
Major retail, manufacturing, and services brands are looking to remove marketing costs using AI technology.
And AI is reshaping the way agencies deliver value, increasing productivity, accelerating the speed of insights, assisting creative ideation, amplifying production velocity, and sharpening media and search activation.
“But they are not being compensated for the value creation,” Pattisall said. “It’s an AI cost centre crisis.
Agencies such as Omnicom, Publicis Groupe and WPP build AI into their offerings and leverage partnerships from Adobe, Amazon, Google and NVIDIA.
Yet AI marketing capabilities are absent from the brand-agency remuneration. Most agencies fund the costs to develop and maintain AI marketing capabilities.
Forrester’s Pattisall recommends a two-pronged approach: transparency and transformation.
Increase transparency by monetising AI-enhanced marketing, thereby removing opaque cost-of-business contracts and deliverables.
And share the value of AI with clients. Brands should compensate for that value.
“This will require a transformation of the agency/partner commercial model.
An industry report published in March, Redesigning The Agency Value Model by VoxComm, a network of regional bodies representing agencies, puts hard numbers on the pressure to change.
Agency profit margins have fallen to an average of 10% from a golden age high of around 30%, while the average creative is churning out nearly five times the output for the same or less compensation than a decade ago.
The agency industry has built an unscalable model, the report argues. To increase revenue, agencies must increase headcount, a linear relationship that caps both growth and profitability.
True scalability, by contrast, allows revenue to grow faster than staffing.
Try judging profitability by the metric revenue per FTE (full-time equivalent), the amount of cash brought in by each staff member.
At most agencies, this figure is roughly USD 150,000. At most client companies, this figure is often above $1 million.
At Google, the revenue per FTE is $1.3 million. For Apple, $2 million plus.
“Why the difference? Brands treat employees as sources of intellectual capital, an asset that can be scaled through technology, IP, and innovation,” the study says.
“Agencies, however, treat people as billing units, each limited to roughly 2,000 billable hours per year -- an artificial ceiling on both revenue and profit.”
Charley Stone, president of VoxComm and CEO, EACA (European Association of Communication Agencies, said a simple economic truth lies at the heart of the industry’s challenges -- incentives matter.
“When agencies embraced the hourly rate model, they unknowingly created a structural misalignment,” she said.
“What agencies are rewarded for—more hours— clients are incentivised to minimise. The result is a zero-sum relationship where every negotiation feels like a tug-of-war over cost rather than a partnership focused on growth.”
She said an income model based on time and staffing is increasingly less relevant in a world of integrated AI workflows, agentic media buying and faster and faster response times.
“Changing a business model is no light task, however, and many agency leaders will naturally have questions about how clients will respond,” said Stone.
‘As this report explains, pushback is likely to be less intense when agencies have prepared for those conversations, properly framing value around key products that give clients certainty.
“This conversation matters because while some VoxComm members have started this journey, others are stuck in the old ways. AI will only move faster and no one should be waiting for it to engulf their bottom line.
“If you are a CEO, CFO or a member of an agency leadership team you should be looking to decouple revenue and profit from staffing numbers. If we don’t have this conversation, agencies won’t be able to continue to deliver amazing value and clients will miss out.
“Agencies want to make a difference, and we now have the data and tools that help us prove how and where we are delivering.
“Making the change will require some delicate conversations but most clients will welcome the idea that compensation aligned with the outcomes agencies help create should become a much more central part of the relationship.
“This report is a call to arms and a roadmap to a brighter future, one that allows agencies to be recognised for their contributions to brand growth and rebuilds margins across our industry.
“It is not an instruction manual; it is a guide to the change needed across the agency community. The right way forward will be different for every agency, but the fact is that things can’t stay the way they have been.
“The place we need to get to is where clients buy solutions of clearly defined scope based on their ability to deliver defined outcomes. It’s not simple but it can be done.”
The change has been coming for a long time.
Trinity P3’s Darren Woolley, speaking at an AdNews L!VE event in 2024, urged agencies to move quickly to a more output-based fee structure.
Woolley said that selling creative and strategic problem solving based on time has always been flawed.
“After all, how long does it take to come up with a billion-dollar idea? But in the absence of a popular alternative, agencies continue to cling to the hour rates as a security blanket,” he told the audience.
“There is no future in selling time. The alternative is to start selling deliverables and output.”
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