‘Things have become so transactional’: Clients are scrutinizing agency billings more than ever

Billings have turned into a contentious issue at agencies. It’s a complicated subject, driven by the mechanics of the agency model, but also the pressures agencies are increasingly under, thanks to in some cases a lack of trust from clients. The result is that how agencies work, manage their businesses and get paid is creating problems of overwork and contributing to what is turning into a fractured relationship.

Digiday spoke to 12 executives for this article, ranging from agency CEOs to agency directors in charge of billing, as well as two more junior level account managers and two chief marketing officers. None of them agreed to speak on the record.

The issue falls into one of two: under-billing and over-billing: Some agencies allege that they’re working very hard and not getting paid for it, because they often over-service accounts and can’t scope projects accurately. Brands say that agencies are actually over-servicing, then handing over bills that weren’t agreed upon. And in some cases, that’s leading to practices of “padding” billings that may not be illegal, but can be considered murky.

For one director at a West Coast creative agency, the issue has come down to procurement. Procurement has become a much bigger part of a pitch process, whether for an agency of record or retainer relationship, or for project-based work. “It’s kind of like, you see these happy, shiny, smiley clients, but before you can get to them, you’re led down this dark hallway where you first face procurement, which forces you essentially to justify your entire existence.”

In most cases, here’s how the process runs. When a project is brought on, there is an equation that needs to be worked out. That should be simple mathematics: Who are the people who do the work, what is the rate for those people, and what hours will be necessary to do the work. (For the last one, some agencies rely on experience, as well as benchmarks set by the 4A’s.)

“It’s really only a place to start. What is the only thing we can be certain of is the outcome at the end will be different,” said the West Coast director.

That’s where the problems begin. Clients can push back, and do so, right at the beginning. But once the initial scope is agreed on the work begins, things change. Sometimes it’s that clients have underplayed what exactly it is they need to be done. Sometimes it’s that the agency itself realizes it’s underestimated the amount of work needed.

In these cases, an agency can go back to the client. Monthly burn reports generally show if an agency is running hot or cold. If it’s running hot, an agency can tell the client, and ask for a change order to essentially re-do the scope. “Clients don’t like to be change ordered,” said one account director. “So instead, we sometimes simply don’t, and eat the costs.”

In other cases, agencies will do the work, losing money in the process, but then present the client with a higher bill — in two cases reviewed by Digiday, that bill was twice the number of hours agreed on at the beginning — with the argument that they had to do this work.

“I’ve seen this my whole entire life,” said one exec who works brand-side now but worked at agencies before. This person said at one point they were in charge of double checking billings, hours, and people assigned. But now that she works at a brand, she has in the past been handed a bill that she simply hadn’t approved. “The problem is, I didn’t approve it, and yet they did the work, so it’s hard to simply say you won’t pay it,” this person said. “But the crux of the matter is, it wasn’t their money to spend. Why did they spend it?”

In one case, one agency offered to split the cost. In another, the agency ate the cost.

It’s that latter situation that leads many execs to posit that the big problem isn’t overbilling — it’s actually under-billing and over-servicing, that agencies are desperate enough to land businesses that they’re under-scoping on purpose, then eating the cost because it may mean repeat business. And sometimes under-billing is the only way to stay competitive for larger agencies who have bigger costs with overheards.

‘We suck it up’
“Things have become so transactional,” said one agency CEO. “Yes, there needs to be an agreement between agencies and clients about what clients are paying for.”

In a healthy client relationship, you can change it around and re-assess projects and hours and cost. But in an unhealthy relationship, said this CEO, the agency will more often eat the cost than present a high bill. “We kind of suck it up. We just want to work on something.”

“The story is really in the value of the agency,” said another agency CEO. “What we hear from clients is they’ll pay Deloitte five times more than they’ll pay an agency for the same work. That means we end up just conceding on cost.”

And this idea that marketing is essentially a cost, while “transformation” is an investment remains a problem. So when procurement comes into play and agencies compete on cost, with clients shopping around for agency capabilities, at essentially commoditized rates, problems arise.

The business has undergone a shift because of budgets moving to digital. And as clients cut fees and move capabilities in-house, scope of work has increased — making 10 YouTube videos isn’t the same as making one TV spot. It’s a fundamental Catch-22: Agencies have to do more work for less money.

Plus, brands often add more deliverables to an ongoing project, a phenomenon dubbed as “scope creep.” Ann Billock, who runs search consultancy Ark Advisors, said scope creep is definitely happening. And, “the problem is more that nobody knows what it’s going to take.”

‘Padding’
Avi Dan, agency search consultant, said that what has seen is what he calls “padding billings,” where agencies charge clients at a rate for “senior” people while putting “junior” people on the job. Here’s how that could work out. At one agency, the most expensive roles bill at $600 an hour. The next-most senior roles could be in the mid-$400/hour range. A creative director could be $325, while a more junior team is $145. If a client has $500,000 to spend, the agency will decide a mix of people and what percentage of those people will be billing and assigned to the project.

Dialing up and down on staff is common, but agencies can also show burn reports that match total hours, but have far more junior staff working those hours than the senior ones initially promised. “It’s not illegal, but it’s fuzzy,” said one agency executive familiar with the practice. “The services agreement doesn’t ever say exactly who will be working on the account, so it’s possible.”

But agencies say what actually happens is often the opposite: Often, agencies end up staffing projects with senior talent instead of junior because there is more turnover in junior talent, so backfills are often with someone more expensive, not less.

Dan said that in his experience, this can lead to a margin imbalance, and an inflation of up to 40%. Whether it’s hours worked or the wrong people working on the case, the issue, said Dan is the “agency moving the goalposts.” It’s not illegal, and it’s not even cheating. “It’s just messy.”