An advertiser recently called with an issue that had lead to a dispute with their agency. The advertiser had a 30% cut in their marketing budget due to falls in sales and they had tried to negotiate a significant cut in the agency retainer to reflect the cut in the budget and hopefully a corresponding cut in the scope of work (but more on that later).
The agency had refused any cut in their retainer on the basis that they had recruited a number of resources specifically for the account and they maintained it would be unfair to cut the retainer as this would require the agency to terminate some of these resources as they could not be redeployed within the agency.
The advertiser maintained that as they were cutting the marketing budget the agency would need to do less work and therefore would require less staff and therefore the retainer should be cut.
Who was right? And what are the considerations when needing to make changes in the scope of work?
Retainer agreements
The traditional retainer was designed to retain specific resources to work on the account.
This is simply a number of resources that may or may not be linked to a specific number of projects and project types. Those resources are dedicated to the account and are on hand when required. It is up to the marketer to ensure there is enough work to keep those resources gainfully occupied to ensure there is value delivered from the retainer.
If the retainer is not specifically linked to a number of projects and project types then there is no contractual reason for reducing the retainer just because the spend is reduced.
But what if there is a scope of work specified as part of the contract and the retained resources are linked to this scope of work
Does this mean that if the required scope of work either decreases or increases then the retainer should increase or decrease?
This would require some type of agreement within the contract and ideally it would include a mechanism for calculating any decrease and increase in the retainer based on changes in the scope of work requirements.
We have often seen contracts that have these provisions and usually have an allowance for the adjustment to be made if the change in scope is a set trigger amount such as 10% or more.
Impact of changes in retainers
If you are retaining agency resources against a specified scope of work and you increase the scope then the retainer would increase. The increased retainer funds would allow the agency to either employ freelance resources in the short term or employ additional agency staff in the longer term.
The worst case scenario would be for the agency to take the additional funds and simply make the existing agency staff work unpaid overtime and therefore effectively increase the agency margin.
But of course this would not be very sustainable or even ethical as the retainer is paid to retain a specific resource level and mix.
If the scope of work is to be reduced, as per the case above, then if the retainer is reduced there is a very different impact.
If the the retainer is cut significantly then the number of agency resources will either need to be redeployed within the agency or made redundant. While it is nice for advertisers to think the agency has the ability to simply redeploy their resources, agencies actually run incredibly lean these days to maximise margins.
It is for this reason that many agencies will not agree to having provisions that allow a reduction in the retainer if there is a cut in the scope of work. If the agency has recruited and appointed resources specifically to fulfil the requirements of the retainer, they will want to provide some security in that employment for the term of the contract.
Some advertisers have suggested that the agency should simply employ freelancers or contractors as a way of providing greater flexibility. The problem is this is counter to the purpose of the retainer, which is to provide a consistent, stable, committed resource on the account that is also cost effective.
After all, freelancers and short term contractors come at a premium and will also move from job to job quickly and often.
The problems with project fees
There is a trend in the industry where advertisers are moving their agency from retainers to project fees. The main reason for this trend is the desire to have a more flexible agency remuneration model.
But the issue is that without some type of guarantee of cash flow, many agencies find it difficult to provide consistent guaranteed resources for the account.
How can the agency have resources available for an advertiser, when they need them, when there is no fee guaranteed to pay for those resources?
This is particularly an issue for agency account management more than the other disciplines within the agency mix.
This is the main resource interface between the advertiser and the agency and therefore if the agency is simply allocating account management resources based on who is available in the agency when needed, then the account management team may change on a project by project basis.
The best alternative
If an advertiser wants the benefits of the retainer but the flexibility to adjust the agency resources then we recommend a hybrid model of the retainer and the project fee model.
This is becoming increasingly popular as it retains agency account management resources to provide continuity. Then the project fees are based on specific scope of work requirements and the agency is compensated for the other disciplines such as strategy, creative, production and technology.
Rather than retaining all of the agency resources, the advertiser has the account management team dedicated to their business. It provides consistency but also means that only a fraction of the total agency fee is committed and the balance is paid on a needs basis.
The hybrid model means that the agency is able to provide a committed account management resource. The advertiser is able to adjust the total agency fee by altering the number of projects and types in the scope of work.
The outcome for the advertiser
Lets get back to the advertiser with the problem above. There was no agreement on an adjustment in the retainer fee in the contract but there was a specified scope of work. In this situation it makes it difficult to justify reducing the fee as the agency resources were retained and committed to the advertiser for the term of the contract.
But it also came to light in the discussion, that while the advertisers budget was being reduced by 30%, their proposed scope of work was being reduced by less than 10%.
They were basically trying to get a little less for a lot less.
We calculated the difference in the fee based directly on the scope of work and the advertiser realised that the difference in cost for a 10% reduction in the fee was three times less than the 30% they were wanting to reduce the agency retainer. It also would not require any adjustment in the employment status of the agency resources.
But if there was a more significant adjustment it would be unlikely the advertiser would be able to force the agency to accept a lower retainer without the agency having to fire staff. And no one wants to be responsible for having someone fired.
TrinityP3’s Scope of Work Management service evaluates your current agency scope of work and recommends the best approach, calibrated to your needs and benchmarked against the industry.
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