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In-House Versus Agency Rates

[ 0 ] August 21, 2012 |

In today’s tough business climate executives are looking at every function within the corporation to determine if it is a core or non-core competency necessary to meet business goals and objectives. This includes in-house creative services organizations.

The economic downturn and trend toward outsourcing has put added pressure on creative leaders to justify their existence. Executives will be evaluating the value of their investment in your team. As a creative leader, you may be asked to provide a rate benchmarking study to determine whether it is more cost effective to keep or outsource your department’s functions. Informed decisions about your department should be based on complete and accurate information. If you proactively provide this information it may earn you a seat at the decision-making table.

An Important Note

A key point needs to be mentioned up front. Many companies choose to employ an agency or outside marketing communications firm as well as maintaining an in-house group. The outside firm generally handles its high-level strategic initiatives such as image advertising, competitive and strategic analysis and alignment of new products and services—Tier 1 (and above) work. The in-house team complements the agency by producing Tier 2 (execution against established creative) and Tier 3 (production design). It’s important to identify the work (by tier and medium) you want to own versus what is appropriate to outsource.

In some cases, if the leader of the in-house organization has the expertise, they manage the agency relationship. In an ideal world there should be a direct and logical relationship/synergy between the work of the outside firm and the in-house team.

Before you begin your benchmarking study, it’s important to understand how in-house and outside providers charge for their services.

Types of In-House Rate Structures

Depending on the particular company, here are a few examples of models in-house department’s use for charging back their services:

  • • One flat rate for the entire department and its services—Regardless of what type of work or who performs the work, all services are charged out at the same rate. This model includes a calculation of personnel expenses (salary, benefits, taxes, etc), direct operating expenses and overhead and a determination of chargeable staff hours. This model is the easiest to calculate and implement, but can create challenges.
  • • Individual rates—This model establishes billing rates specific to the team members performing the tasks associated with the project. Rates are determined by calculating individual salaries, fringe (healthcare benefits, vacation, holiday and sick leave pay), work schedules (shift differential) and number of productive hours (utilization), plus a standard overhead factor for department management, administration and operating expenses.
  • • Functional rates—Generally, there will be several staff members in each functional area (e.g, editorial, multimedia, account management, design, etc.). The billing rate is determined by the average salary, fringe and utilization of all individuals in this category plus a standard overhead factor.

Because labor and overhead expenses can change over the course of a budget year, it may be necessary to recalculate your rates once or twice a year—though most organizations do not do this unless required (such as government contracting) or a significant business change has occurred (e.g., layoffs).

If your group is overhead (a cost center) and you do not charge back for your services, your department still costs the corporation money to keep and maintain in terms of salaries, fringe, equipment and facility costs. In order to benchmark against external agencies, you will need to calculate your true hourly rate(s). If you’re in this bucket, I would suggest calculating your rates functionally as this will make it easiest to compare to external providers.

Agency Rate Structures

Agencies commonly structure their fees in four ways:

  • • Time and materials—In this example, the outside firm will track the actual number of hours and bill them to the client at agreed-upon hourly rates. Out-of-pocket expenses are also billed for reimbursement. Generally, travel costs are billed at cost while other expenses are billed at a standard 20–25% markup to cover the administrative costs associated with procuring and paying for required additional services.
  • • Fee basis—In this model, services are billed at one or more rates. The rates vary according to the level of talent and service performed. Media selection and placement costs are billed directly to the company. Agency media commissions are credited to service fees. Other outside purchases are billed at cost plus standard markup fee of 20–25%.
  • • Fixed-fee—Before starting work, the outside firm will agree on a flat amount that will be charges for all services against a well-defined scope of work. Generally, changes to the original scope of work are documented in a “change order” and billed separately.
  • • Retainer basis—A fixed amount of money the client agrees to pay in advance to secure the outside firm’s services to provide immediate services when clients need it. Generally, a retainer is paid in a lump sum or on a monthly or quarterly basis.

Compare Apples to Apples

When conducting your study:

  1. Select a minimum of 2 or 3 outside firms with proven track records, expertise in your company’s industry and have the ability to offer services required to handle the majority of the types of projects you generally support.
  2. Ask external firms to provide you with a description of their fee structure and a rate card of their hourly rates used to estimate jobs.
  3. Have them bid on 2 or 3 of projects (a simple ad (print and/or web-based), a product or service line campaign and a brochure or website) based a tightly defined scope of work.
  4. Then do a direct comparison using their standard hourly billing rates and standard markups. The comparison is their rates versus the in-house rates.

In most cases, in-house department’s rates will be 20–40% less than outside firms. But, the comparison doesn’t end there—there are additional considerations you must evaluate.

Other Factors You Need to Consider in Your Study

Often executives make decisions to retain or outsource in-house creative services based on value, not solely on cost. You will need to consider other factors beyond cost in your benchmark study. Ask yourself the following questions.

  • • Quality of services—How does your in-house team stack up against the talent of an external agency or design firm? To be competitive with outside agencies you will need to recruit and retain comparable talent. What are you best equipped to handle now? And, what is your plan for filling the gaps in the future?
  • • Value and impact of services—Can your in-house group offer the same depth and breadth of experience as an outside firm? Is your group capable of more strategic and cutting edge concepts and solutions? In addition, reduced time to market and increased market share, competitive advantages and strategic alignment of products and services all add value.
  • • Customer service—Can your team provide the same or better commitment and focus to client satisfaction to your internal clients as an outside provider? You may want to implement Service Level Agreements (SLAs) to gauge client satisfaction.
  • • Managing the company’s brand—Who will be responsible to ensure brand compliance of all design and communication’s initiatives? Your company’s brand is a substantial investment and its integrity must be maintained.
  • • Managing the projects and outside vendor—How many project managers would it take to effectively outsource and manage the volume of work? You will need to develop and implement a process with the outside firm to ensure smooth workflow.
  • • Turnaround time for projects—Would an outside service provider be able to effectively handle the quick turnarounds that most in-house departments encounter on a daily basis?

Finally, as a creative leader you must remain diligent and proactive in evaluating your in-house services against those of outside providers. While a tough task, it will bring to light the value and ROI you contribute to your company and may save your organization from extinction.

For information about how Cella can add value to your business through consulting, coaching, and training, please email cella@cellaconsulting.com. This article was written by Cella Consultant Ceil Wloczewski.


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