By Steve Fajen
“Hourly rates are not a true expression of the real value of an FTE. They are generally an OVERSTATEMENT.”
In the 1987 film The Untouchables Sean Connery’s character sarcastically accuses one of Al Capone’s men of taking a knife to a gunfight. That is what Procurement does when using hourly rates to evaluate an agency’s staffing plan and, ultimately, their fee request.
The client and agency very carefully construct a scope of work. The agency then develops a staffing plan, sometimes down to the individual deliverables level, and assigns each person on the plan a number of hours and an hourly rate. The roll-up of all the hourly rates and number of hours can become the initial fee request from the agency.
This document often becomes the tool upon which the fee negotiation will be conducted.
The client may very well look at the staffing plan by individual deliverable—and should, if they can. They may ask why the Chief Creative Officer spent her entire summer on a pamphlet (I took a liberty here). It’s a fair question. Some very sophisticated advertisers may even have benchmarks for how much time it should take to complete a specific deliverable and what kind of talent is needed. We do. So the negotiation continues this way and the client is not yet in harm’s way.
After all that effort on the client’s part, after all that very careful inspection and benchmarking, the client is about to get in harm’s way. The negotiation is a gunfight and the client is about to pick up a knife.
The client is about to continue the negotiation using the hourly rates that the agency provided and, even if benchmarked, they can hurt.
Hourly rates are not a true expression of the real value of an FTE. They are generally an OVERSTATEMENT. The client that continues to discuss terms and finalizes a contract on this basis will generally be overpaying. Here’s the proof.
(A little methodology here, so hang in for two short paragraphs)
We looked at ten job descriptions that very often appear on agency staffing plans (see the table below). They include representatives from account management, creative, media and account planning. We used the 4As Hourly Rate Survey for those job titles and aligned them with the 4As Salary Report for the same jobs. We adjusted for inflation because the reports were one year apart, and we made sure that the data came from the same agency size and geography. Then we made two final calculations so the data would match.
We took the salary information and increased it by an industry-accepted overhead rate and profit margin. That gave a fully loaded FTE on an annual basis. Then we divided that by the accepted number of hours in a year.
Here’s what we found:
Across the ten job titles, benchmarking staffing plans using reported hourly rates overstated the reasonably calculated reality by 25%.
For every job we inspected, the Hourly Rate Report yielded results that exceeded the calculated hourly benchmark. The most flagrant variation was with the Chief Creative Officer (an expensive position). Oddly enough, the least variation occurred with the Creative Director. On average, an overstatement of 25% is equivalent to having a 150% overhead rate with a 20% profit.
We suggest that clients should avoid using hourly rates because they are not transparent. They can easily mask the salary level, overhead and profit margin the agency is requesting. Only by using benchmarks that break down the component parts of salary, overhead and profit for each FTE can Procurement get a clear picture of what the agency is really requesting in their fee proposal. Even then the analysis is not complete until the number and type of staffers assigned to the scope of work is benchmarked as well. If this is not benchmarked, the compensation request can easily exceed an overstatement of 25%.