I’ve got a few topics relating to my experience at agencies that I’ve been looking to share for some time. Now that I’m going my own way as a consultant with the goal of maybe expanding on that as well as somehow helping out at an agency again; I’m going to start to work through different agency related subjects as time allows. Hopefully you’ll enjoy this stuff.
I’ve related the following (albeit in much less detail) to people who work at agencies and a lot of them really hadn’t thought about the way that their employer makes money off of their services.
It can be an interesting revelation.
When you work for an agency your talents are for sale to clients. While the relationship is marketed in another way (agencies bid for projects and/or try to gain permanent relationships with clients) this is the basic financial currency of agency life- providing bodies to clients either directly or hidden within the completion of a project. There are basically three ways that your clients pay for your services. One of them ties directly to the number of hours you work. Another feeds into the internal agency accounting in ways that can be detrimental to your health. The third can just be boring. I’ll define them and then I’ll let you in on a little secret about the way that the agency views your relationship with each of those models.
- Time and Materials
In this model, the agency bills the client for your time and expenses when working on a project. For example, if you’re, say, an Art Director at an agency, the company might charge something like $200/hour for your services. If you then worked 40 hours in a given week, the company would charge $8,000 for your time.
This model is useful because, generally, the agency gets paid for the work they’ve done. There will be an estimate done at the outset of the project, but if the project goes, say, 10-20% over budget the client can still be charged for those hours.
- Fixed Cost or Fixed Price
In this model, the agency provides a fixed estimate of the cost of the project. Working through a gigantic spreadsheet (or something web-based that does the same thing as Excel) with limited information, the agency team will put together a proposal that’s supposed to predict, with pinpoint accuracy, how much the project will cost- including enough margin left over to keep the lights on.
This model is great for the client, since they know how much the final bill will be. This model can be great for the agency, especially if the project comes in under estimate. The thing is, that almost never happens and when the reverse is true and the project spirals out of control it can quickly turn into an emergency situation. Just like a startup working through their pot of money, projects have a burn rate, which indicates the daily/weekly/monthly resource usage on a project. When the burn rate indicates that a project is going to bust the budget, step back, grab some popcorn and watch as executives go into disaster recovery mode.
- Staff Augmentation/Dedicated Teams
In this model the client buys your exclusive services for a period of time. This is not project based and can last for many years. This can be on or off-site. If it’s on-site it’s basically like you’re an employee of the client company (except you have to kiss everyone’s ass and get none of the perks of the client company.) If it’s off-site it’s basically an arrangement that means that important staff can’t be pulled away from one client to serve another need within the agency.
This model can work for both sides as it represents a steady stream of income for the agency (albeit potentially a discounted one) and the client can flexibly fill positions with skilled staff.
Now it’s time for the secret. While your boss, their boss or even their boss’s boss (all the way up to the guy or gal that runs the place) might care about your well-being, the Agency, as a capitalist organism, does not. The Agency as a capitalist organism doesn’t believe that you’re a special little snowflake. The Agency thinks you’re a replaceable cog and doesn’t care about how many awards you’ve won or how clever your code is. With that in mind, with any of the models the agency is almost always healthier in the short term if you work 50-80 (or more) hours a week, every week until you quit, die or retire.
In reading this, if you’re unfamiliar with the way that agencies work, you should keep in mind that agency deadlines are pretty psychotic.
The folks that interface with clients would rather chew broken glass than tell a client that a deadline is going to be missed. Missing deadlines hits the wallet and (worse) the reputation and relationship with the client. It’s not something you want to do ever. So whenever a deadline is approaching the project team goes into “whatever it takes” mode to get the work out the door.
So, with each of the models, you being willing to put in 80 hours a week, sometimes for months at a time, is vital to the success of the organization. This is both down to the danger of missed deadlines and also down to the pure math of being an agency employee.
Lets look at how that math works with each of the models.
- Time and Materials
Cutting through any potential confusion, if you’re working 80 hours a week on a time and materials project you are getting royally screwed. Let’s take the example of the $200 an hour Art Director. To keep the math round, assume the Art Director makes $125,000 a year plus $25,000 in various other compensation (health insurance, 401k match, etc.) That works out to about $72 an hour for a 40 hour workweek. That adds up to $2880 a week. So, how much do you get paid if you work 80 hours that week? $2880.
What’s your effective hourly rate? $36 an hour. But yet, the agency is going to bill $16,000 for the full 80 hours. You’ve increased the company’s margins by a wide margin with your dedication.
You win free pizza at your desk for dinner, stress related hives, and an angry spouse.
There’s also a morale cost with this model. If you’ve got pure freelancers working alongside agency employees and both sides are working late nights, the freelancers are invariably going to be happier about the situation since they’re actually getting paid extra for their effort. Trust me, it sucks when you’re stuck in the office at 9:30 and the freelancer next to you is whistling while he works thinking about the new addition he’s going to put on his house.
- Fixed Cost/Fixed Price
Fixed cost projects only go awry, from an accounting perspective, when the agency needs to add more bodies to a project. Otherwise, with the planned number and makeup of the team, the only thing that matters to the Agency is whether or not the deadline is hit. To that end, if you need to sleep at your desk for two weeks straight and work weekends for six months, then it’s all good.
- Staff Augmentation/Dedicated Teams
Your number one job in this kind of role is making sure the client is happy. Depending on the engagement this can, of course, include long hours. That said, I’ve seen examples where these can be the healthiest situations in terms of the number of hours you have to put in every week and the pace of your day.
There are other downsides to being in one of these roles, but generally it‘s not the hours or the pace. The biggest is the common refrain of, “If I wanted to work at Client Company for the next five years I would have applied for a job at Client Company.”
That said, in terms of hours you can get lucky in these kind of engagements.
The weight of titles can vary, as can bill rates across agencies so don’t linger too long on the price quoted here. I’m sure there are folks with the title Art Director that bill out over four figures and others that bill out much less than $200. It’s just a nice round number.
Projects can be 50-100% (or more) underestimated, and in those situations it’s tough to keep asking for more.
Imagine a project budgeted for three years of development at, say, $1,000,000 a year. Then imagine that $2,000,000 worth of work is done in the first 6 months… That’s capital T trouble and there will be some awkward C-suite type conversations.
I’ve seen people who were embedded for more than five years at client organizations. Something like this: “I got into the office for my first day. they told me to go to client x later that afternoon and I’ve been here ever since. That was in 2007. I got back to the agency office 2 or 3 times a year.”
Some agencies have slightly different DNA that values talent as talent and wants to cultivate it and keep it from burning out. If you’re at one of those places you’re winning.
Keep in mind that the gap between $200 an hour charged out to the client and the $72 in total compensation per hour isn’t the entire story on margins in the industry. There are a lot of non-billable people in an agency and there are always billable people who aren’t billable at any given moment. There are a lot of slices to be taken out of that $128 difference. So many, in fact, that margins can be down in the single digits at some shops. I don’t have encyclopedic knowledge of margins across the breadth of traditional and digital agencies, but I don’t think they get much higher than maybe 15-20% anywhere
No, this doesn’t always happen. Sometimes an agency will eat the extra hours to maintain the client relationship or because it was your, or the agencies’ fault that you had to work 80 hours in the first place. That said, many times, if the numbers are okay, then $16,000 it is.