Opinion

What will happen to the client-agency relationship in a post-retainer world?

The traditional agency model has been built around long-term client relationships, supported by the stability of agency income from retainers – so what happens to headcounts, agency models and conflicted clients when project work takes over? Dan Beaumont explores the new world order.

In a world where we are all increasingly reluctant to commit (no lock-in contracts), it shouldn’t come as a surprise that project work has become the new normal in client-agency relationships.

Brands are no longer locking in agencies for work 

Our experience is that a growing portion of clients are shifting their agency remuneration model to project-by-project work and away from contracted retainers. Of course, this isn’t anything new. Agencies have worked project by project for decades, but now it’s becoming the norm rather than an anomaly. From conversations I’m having with other agency principals around the world, this is a universal trend and it’s impacting agency business significantly.

The traditional agency model has been built around long-term client relationships, supported by the stability of agency income from retainers – it’s this guaranteed income that allows agencies to maintain a steady headcount and grow as more clients join the portfolio.

But there are legitimate reasons for clients’ growing attraction to a user-pays project model, the most pressing of which are shrinking marketing budgets and the pressure to deliver on short-term objectives. I won’t get started on my frustrations with ‘short-termism’ again here. This is where to go to read my rant about this negative paradigm. However, there’s no doubt that marketers (and procurement departments) are preferring to work ad hoc with agencies, effectively keeping them at arm’s length.

Like most business decisions, there are pros and cons for both a project approach and the retainer model, although these vary depending on which side of the fence you sit.

The case for clients

I understand the appeal of project work for clients. Not being locked into a retainer means they only pay for what they get. No wastage – a critical consideration when they have less money to spare and every dollar counts.

Project work also stops agencies from sitting on a big retainer and going through the motions. It makes them hungry to deliver the best possible work and prove themselves so they can increase their chances of being briefed on the next opportunity.

On the flip-side, when a client abandons retainers for project work, they risk shedding the all-important knowledge base and IP that comes from a dedicated agency team with years of experience on their business. They sacrifice the full attention they expect when an agency team is dedicated to their business, and this can hamper the creation of the best possible response to a brief.

I’m not suggesting that an agency working on a project for a non-retainer client won’t work incredibly hard – because they will (and should) – but project clients could miss an opportunity that develops from a full-time relationship. Important market and business understanding and knowledge built over a long period of time is lost, or never understood in the first place.

A retainer, locking in a percentage of agency people’s capacity, can potentially lead to average work and diminished SLAs as agencies manage the account efficiently with junior talent in a bid to maximise the margin, a natural by-product of smaller budgets and the increasing pressure in agencies to maintain profitability, particularly by multinational holding groups.

Similarly, the type of loyalty that naturally develops when a client and agency have worked together for a while will be compromised, too. Project work doesn’t automatically breed loyalty.

The case for agencies

At face value, the cons for agencies are greater than those for clients – at least, the impact on our revenue and cash flow is more immediate.

As the stability of retainers disappears, it becomes harder for agencies to predict workloads (and income), so managing resources and cash flow becomes a risky balancing act. The end of the financial year is a scary time as clients put projects on hold or cancel them all together – which is something we’ll have to build into our projections if project work becomes the new norm.

Uncertain workloads can lead to increased conservatism among agencies when it comes to cost investments, such as beefing up capabilities, and it will certainly lead to leaner agencies, which will have to be way more efficient to maintain margins.

In a retainer model, agencies can tolerate staff costs at 60% to 65% of revenue, but that wouldn’t be tenable if projects made the bulk of our income. As a consequence, it would mean we’d have to wean ourselves off the reliance on headcount as a success measure for agencies. After all, in a project-by-project scenario, an agency of 100 people is much more difficult to manage on a month-by-month basis without consistent and reliable income levels.

On the plus side, project-based remuneration provides an opportunity for value-based costing, which is better than a resources x head hour rate. It gives agencies the chance to charge properly for IP and value add services. And who likes timesheets anyway?

Finally, the exclusivity of agencies comes into question under a project system. Agencies should be free to work with multiple brands within industries if a contract doesn’t exist. If a client can’t guarantee volume, it would be unfair for them to expect the agency to remain exclusive. In this case, we could see more agencies specialise in certain industries and categories.

A new world order

So can agencies survive without retainers, and what will happen to relationships if the project model becomes more prevalent?

I suspect we will see the agency landscape fragment further, in both the number of agencies (more) and their general size (smaller). While the barriers to entry will remain low for startups, their ability to grow large might be hindered – project work will make it tougher to get established, build capability and maintain growth.

Importantly, this new way of working will favour smaller agencies with lower overheads and more passion. Agencies will have to eat what they kill – which means the big multinationals can’t rely on global business as much.

Perhaps in a few years’ time, the most recognised agencies will have less than a dozen people, all working closely with the client to deliver creatively potent work, and out-sourcing the majority of production to the gig economy.

In a project-by-project world, the quality of the work and delivering on objectives is all that matters. So it should be a good thing for all of us.

As for the relationship – the intangible asset that so many of us in the agency world rely on and covet for future business – it will likely become more ad hoc also. Project work reduces the necessity for the client and agency to have a bond beyond the day to day, and so the relationship becomes more transactional. Of course, people need to work well together and collaboratively, but it’s all for the sake of project outcomes, not because there’s millions of dollars of contract work at stake.

As we all know, everything works in cycles. In the future we may start to trend back to long-term, contract-based arrangements as businesses recognise the long-term benefits of brand building, market knowledge and experience, and we rely less on tactical solutions to drive growth.

Dan Beaumont is managing partner of The Royals

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