Understanding the Agency Model

"Some people get upset that junior agency staff work on their account when in fact, juniors make projects cost efficient. The key to success is ensuring you have a senior person managing the project - and ultimately accountable for the work the agency delivers."

Greg MacDonald
Associate Director, Corporate Development, Bell Mobility
formerly PR Agency Consultant

To maximize the Return on Investment (ROI) from your agency, it is important to first understand your agency's business model.

Most PR agencies - defined for the purpose of this column as any external communications resources including freelancers, boutique shops and national/international firms - work like other professional service firms. They generate their revenue by billing for each hour of service they provide - much like a lawyer does. Typically, every account person in an agency is responsible for completing a timesheet at the end of each day to indicate how much time he spent providing services for each client. Most agencies require their account people to track their time in 15-minute increments - so every 15 minutes they spend working on a client's business, whether it's writing a brochure, co-ordinating event logistics, writing a plan or participating in a meeting, gets recorded and billed to their clients.

How does this process of tracking time equate into your PR agency costs? Your monthly invoice will reflect the total hours worked by each account person on the team, multiplied by each individual's hourly rate. Each account person's hourly rate is determined by his title in the organization and his experience level. For example, at a national or international agency an account coordinator/account executive in Toronto, who might have a year or two of PR experience, and often a PR diploma in addition to a bachelor of arts degree, might have an hourly rate of approximately $100/hour. At the same agency, a vice-president, who typically has 10 or more years experience and leads a practice team, might have an hourly rate of more than $200/hour. Rates vary across the country and from agency-to-agency.

How Agencies Create Budgets
It's important to understand the agency model in order to understand how agencies create their budgets. The first step in creating a budget is a detailed brief from the client about the specific objectives and requirements of the project. Next, the agency and client may brainstorm and nail down the exact parameters of the scope of work. Based on their past experiences and understanding of the task-at-hand, agencies will calculate budget estimates based on how many professional service hours they think the project will take to complete. A key component of creating the budget will be determining which team members to assign to the project to ensure maximum results and budget efficiencies.

For example, based on their previous experiences and the specific project requirements, the agency may calculate the project-at-hand will require 10 account coordinator hours at $100/hour and one vice-president hour at $250/hour - equaling a professional fees estimate of $1,250.

This reinforces the quote at the top of this column from senior communicator Greg MacDonald about having junior staff work on his business to keep the budget in line - as long as they're managed by a seasoned professional. You can see from the above example that if the vice-president did all of the work herself - the project would cost more than double than if the vice-president managed the work of junior and more affordable staff.

In considering the agency model it's important to note that for each level, there is typically an assigned productivity target. For example, in many firms consultants/account executives are required to spend between 75 - 90 per cent of their time working on client projects/billable activities. The rest of their time is spent doing agency administrative work/non-billable activities including team meetings, professional development activities, and new business development. These targets assist agency management in forecasting monthly and annual revenues, evaluating staffing needs and performance, and determining financial compensation for its employees.

Other Agency Revenue Models
As mentioned, not all agencies base their fees on an hourly rate for each title in the organization. Some agencies have hourly rates depending on the activity - so everyone (whether they're an account coordinator or a vice-president) will be billed at the same rate when they do media relation, and a different rate if they're doing account administrative work.

Some other agencies base their fees on set project costs, structured similarly to a la carte menu. For example, writing a news release costs X dollars and media follow-up to a news release costs Y dollars.

One of the reasons many agencies are modeled around hourly rates is that there is no hard-and-fast rule for how long certain activities will take to perform - and therefore they risk over or under-billing their clients by setting fixed rates. For example, it's possible for a news release to take two hours or 15 hours to write - depending on the nature of the content, quality of the initial brief and how much additional research is required, number of people or companies involved in the announcement, number of revisions required and number of parties involved with the approval process.

In addition to the above system for budgeting professional fees, most budgets will also indicate estimated out-of-pocket expenses required to complete the project. These are costs that the agency has to pay directly out of its pocket including long distance, couriers, wire services, printing, catering, etc. Most budgets will include estimates for both fees and out-of-pocket expenses to add up to the total budget estimate for your project. (Future columns will offer pointers for giving strong briefs and managing agency budgets.)

Now that you have a refresher on how agencies are modeled and their costs are structured, you are better armed to choose a PR firm that is right for your company. But at the end of the day, while the cost is an important consideration, it shouldn't be the sole basis for selecting and measuring the value of an agency. Ultimately maximizing your agency ROI is all about getting the best results and value for your dollar.

Published in PR Canada in 2005