When you hire a creative agency, what are you paying for? Creative thinking, right? Think again.

Creative expertise is what you should be paying for. Strategic creative solutions shouldn’t be free, or even devalued – and they so often are, when clients only want to pay for the expenses to produce the final set of deliverables and expect to get all the ideas at a low or no cost. Agencies are battling this all the time, when they’re expected to pitch ideas at their own expense, and then only get reimbursed for the hard costs of production and media. That’s certainly a fallacy of thought that our industry needs to continue to battle.

You can’t make a thing until you first envision it, and that can take just as much expertise, exploration, iteration, prototyping, and planning as the craftwork that goes into making that final deliverable once you land on that “big idea.” I’m not here to debate that, and I assume if you’re reading this, you’re paying someone a creative fee, so you understand the value in creative expertise.

But when you hire a creative agency, are you really paying for creative expertise? On average, most agencies set their fees at 3x the cost of the employee. Of that, here’s how the creative agency fee usually breaks down.

  • 20% goes to agency profit.
  • 55% goes to agency overhead.
  • 25% goes to the talent doing the work – the actual creative and strategic expertise.

What’s wrong with this picture?

The profit margin is your cost of doing business with an external firm. We all need profit, to continue to invest in growing our businesses and providing opportunities. If you’re not planning on making a profit, don’t bother starting a business – start a hobby or a charity.

Let’s dig into the biggest chunk of that fee that you’re paying: agency overhead. Here’s what goes into that bucket.

The office building, which was designed at a premium cost to try and impress you, the client, with an “open office” layout to ensure you see lots of people buzzing around looking productive, but lacks the actual features that employees want and need to be truly productive (privacy, think-space). And likely in a high-rent area of your city, also to impress you, the client. But as 2020 has taught us, productive collaboration can be done anywhere there’s an internet connection, and many employees prefer and thrive from the option to work from home.

Non-billable staff, including the C-suite. Outside of the C-suite, these roles exist to ensure the building is in working order (see above), the company benefits and perks are administered (see below), the accounts receivable and payable are functioning, and the sales pipeline is humming. That’s not to say these are unimportant functions, but there’s lots of bloat that can be trimmed; lots of functions that can be outsourced or automated more cost-effectively, or eliminated by way of simplifying your organizational model.

By far the biggest chunk of that non-billable staff sits squarely in the C-Suite – who are getting paid exponentially higher wages than the employees working on your business. At the largest holding companies, the CEO-to-employee pay ratio is anywhere from 100:1 – 160:1. Even in the small independent shops, these ratios can be hugely disproportionate, especially when the C-suite members aren’t actively working on your business, and make up a disproportionate number of the total staff of the agency.

You might argue that it’s the leadership of the C-suite that you’re willing to pay for – that would be great if their expertise was being applied to your business in a meaningful and efficient way, or if they were truly spending the bulk of their time mentoring and growing their direct reports (headline, they’re not – they’re most likely focused on new business, not current business). They probably could, on their own, solve your business problem in a fraction of the time it takes that entry-level team to stumble into a solution: so ask yourself, why aren’t you leveraging a solution that allows you to work directly with this level of highly skilled, highly experienced talent?

Company perks. These aren’t benefits – medical and disability insurance, paid leave, and vacation time is already calculated into the 25% cost of the billable employees. In comparison, perks are largely useless efforts intended to build “culture” within an agency: happy hours and mixers, catered lunches, ping-pong tables, kombucha and rosé on tap, fully stocked liquor cabinets, extravagant holiday parties.

Most of these are distractions that actually interrupt the flow of work, causing employees to spend even longer hours in the office to finish their tasks, away from tending their personal lives. Or worse, these “perks” can alienate and cause resentment within those under deadlines who simply can’t afford to step away from their desks for a cocktail or four, or compete in a ping-pong tournament. What exactly are we rewarding here?

And yet what employees really want, as uncovered in countless research studies, are stronger benefits – not perks. They want better insurance coverage, flexible hours, work-from-home options, more vacation time. These are the things that actually make employees happier, healthier, and more productive.

The rest. Insurance, marketing for the agency, software licenses, interest, legal fees, utilities. Most of this is necessary, and it’s not actually taking up the bulk of overhead costs.

So what’s leftover? The remaining 25% of the fee goes to the actual talent working on your business, by way of their salary and benefits. Do the math – if you spent $100K with your agency last month in creative fees, only $25K went to the people working on your account. Let’s assume that the team was made up of 6 core people: an account manager, a strategist, a project manager, a copywriter, a designer, and a producer. That’s a little over $4k allocated to each, on average, which has to cover both salary and benefits. Benefits will easily add about 25% of the rate of the salary to the employee’s cost to the employer, so what the employee gets in salary, before taxes, is about $3,125 for the month, a meager annual salary of $37,500. In any major metro area, where most of our industry lives and works, this is certainly nothing more than intern or entry-level pay.

You are not paying for expertise.

You’re not getting experienced talent. You’re getting a group of increasingly stressed out, burned out entry-level employees, likely drowning in college loan debt, with anxiety clouding their best creative thinking. No one wins.

The next time you’re in a meeting with your agency, count the heads. Now count the people actually contributing to your business (and if it’s not obvious from the meeting who did the work, find a new agency). How much did that meeting cost you? Did you get the same value back in creative solutions? Did the C-suite, if they were even in the room, actually contribute, or were they just filling air?

Do you feel your pocket burning yet?


Author: Dena Gonzalez, COO, Area of Expertise

Photo credit: JP Valery