Net billing by agencies is backfiring on brands

International Creative Services MD Anne Miles
By International Creative Services MD Anne Miles | 5 April 2018

The ad agency model can learn a lot from the production industry about becoming valuable and remaining profitable. Having been client side recently working with a big agency, the wastage was a very rude shock to witness. It could be that net billing, once seen to be the heart of transparency, is actually self-defeating and pushing reliance on time sheets for revenue. We need agencies to be profitable for the wider creative and production industry to survive, and we need brands to get the best value in the work they get in order for the business to be sustainable.

As a business coach to creative industries in the past it was evident that the agency’s own process and the reliance on billing for time as the revenue model is actually hurting the agencies the most with massive write-offs sometimes difficult to ever recover from, and in turn costing their clients, in a self-defeating spiral of co-dependence like two snakes eating each other’s tails.

In the past, agencies used to work on a fixed commission basis on production costs and on media, however without the incentive to drive savings and without relativity to value of work, this wasn’t viable and we can’t go back there either.

The production industry used to work on a Cost Plus model until around 15 years ago. This is really a similar fixed commission structure, with an agreed commission on top of all costs. It would be hard to imagine an ad agency accepting an arrangement like this from a production supplier these days for the fact that there is no incentive to maintain lowest costs or to provide efficiencies.

Many agencies quote up front to clients, but because of the need to bill to net, they provide copies of all invoices and all times sheets to justify every cent after the fact. Any savings made are to be refunded or adjusted at final billing. Any savings made on the job are pretty likely to be sucked up by excesses in time spent with no incentive to reduce head hours along the way. These costs are often justified by the existence of time sheets created to support the extra time but their existence doesn’t actually make them valid, they are a symptom of poor process as much as anything. Refunds that are offered to a client are sometimes only a token to disguise wider excesses. You’ll see an earlier discussion in AdNews in more detail on the impact of downscaling talent in our industry and my disdain for time sheet based operation overall.

The serious down-side to net billing is that agencies are now only able to make their money on time sheets, or some concept fees (usually calculated with some relativity to the time taken to create them), and with that comes no incentive to do anything other than rack up time on jobs. You can find up to 20 people in one meeting, with no incentive to reduce the head count.

If creative businesses worked to a fixed bid for each project there will be a shift in focus from ‘how can we increase the head hours?’ to ‘how can we improve our efficiencies?’. This best defines the difference between an agency model and a production house model today.

Production companies work to a fixed bid or bill to estimate basis with a clear expectation of creative standards and of specific deliverables with very good understanding of what is being delivered between all parties. The incentive is there for efficiencies, but the approved budget means there is the ability to deliver what is agreed, and sometimes the production house invests back into the project for a win/win result adding more value overall too.

If agencies shift to a fixed bid system it is more likely we’ll see more senior creative being recognised for their effectiveness, experience and their speed to produce good work, turning back the tables for the industry’s ageism problem.

Fixed bidding requires some solid understanding of what it is that a brand is buying and some clarity on the scope of work up front. With more savvy marketing departments and plenty of consultants to advise this should be easier than ever before. It is commonplace for an agency to provide very high-level summarised quotes without many details, and without explaining the full scope of work and sometimes not even who the suite of key suppliers will be. When on the client side I had to fight tooth and nail to see a full production breakdown and even to access the folio of a proposed film director. The budgets were substantial and provided without substantiation, and no time for proper due diligence with our backs to the wall to approve them, produced with an expectation that we would approve without questioning.

A project can be defined not just as an individual campaign or production, but can be a strategic piece, a research piece, a concept, a series of campaign ideas or the actual execution as a stand-alone. This means, that the best talent can be sourced for that individual project as well and not just pushing brands into using the one agency for everything as well. This means clients who want to do more in-house can then pick and choose the services they actually need without bias.

I think it would be fair to say that if a marketing department can’t evaluate a creative and production budget up front then they will have less chance of evaluating it after the costs have been spent and they’re looking at a bunch of invoices and timesheets that the agency is heavily invested in. This is where I think the backfire is at its hottest point for brands.

Working in the same way that production houses do (let’s call this the production house model) you will see a fixed bid estimate with a transparent production fee clearly disclosed based on a percentage of some, not all, costs. This fee is agreed up front with a very clear breakdown of every last detail and likely determined through a proper three quote and creative treatment process. This model works. The production house is incentivised for efficiencies, but also for producing quality work – the perfect combination.

I propose it is time for creative agencies to work like a production house. Then, let’s watch how many people turn up on the shoot or come to a meeting.

Let’s keep the good agencies alive by doing things differently in the way they work and the way they bill, and in turn support the entire production and creative industries that rely on them. Most of all make sure the best talent is working. That, or more and more production houses, media agencies or clients directly will be forced to do it without them; but let’s not diminish the value of a solid strategy and great creative in the process (that’s a topic for another day).

By International Creative Services MD Anne Miles

Read more from Anne:

How we can keep the creative industries alive

The ad agency model is broken - here's why

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