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Mr. Michael Farmer

The Myth of Overhead Benchmarks

Overhead rates are used by many advertisers in the calculation of agency fees. In many cases, the overhead rates of a client’s agencies are compared to “benchmarked overhead rates” as provided by benchmarking consultants. Benchmarking consultants will tell you that there are standard proportions of these costs in the marketplace, and that these proportions (“rates”) should be used to evaluate an agency’s overhead costs. The benchmarkers have the industry data and proof, they say, but their database cannot be revealed for confidentiality reasons.
 
Farmer & Company work shows that the long-term trend is for agency overhead rates to rise with increases in agency productivity. Clients, though, believe that benchmarked rates are going down and so should agency fees, even though workloads are on the increase. If fees go down, overhead rates will rise. That’s the real mathematical logic of the industry, in stark contrast to industry practice or the claims of the benchmarking consultants.
 
Clients beware! Agencies beware! There are no scientific overhead rate benchmarks.
 
There are high overhead agencies and low overhead agencies, just as there are young men and old men, short women and tall women--there is a variety of experience in the real world, and the different levels of overhead costs are just another dimension by which agencies differ from one another. Benchmarked overhead costs are like average height or average age. If you happen to be taller or older...are you expected to change?
 

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Comments

Benchmarking Myths Indeed!

Michael, Thank you for re-emphasizing a critical best practice guideline that was long ago endorsed by a joint taskforce of the ANA and 4As concerning labor based agency-client fee agreements. Despite this mutual understanding, as you well know, there are client compensation consultants and procurement representatives who continue to press for some kind of misguided standardization of overhead rates. The core issue remains the misplaced emphasis on costs as the fundamental determinant of the proper pricing and value of agency services in the first place. Your comments are greatly appreciated by those of us who continue to fight the good fight of finding truly relevant approaches to agency compensation.
Posted by Steve Koskela (Wednesday, July 20, 2011 11:28 AM)

Amen

Great post and white paper, the logic of your argument is very well presented and is rock-solid conceptually. The question is whether the logic will persuade procurement departments to change their practices - especially when they have "successfully" reduced agency fees. Seems like an industry issue that requires an industry response.
Posted by Jeff Silverman - Morrison (Atlanta) (Wednesday, July 20, 2011 11:42 AM)
 

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