Whether you hire an ad agency to drive your ad campaigns, a development firm to build an app, a creative firm to rebrand your business, or a consulting firm to develop a customer experience strategy, you expect to gain the benefits of expertise and efficiency. You also anticipate receiving high-quality work you could not achieve on your own. However, many businesses do not realize that agency agreements often allow for hidden costs. These costs may not be apparent up front but can significantly impact both your bottom line and the final work product.
Weighing the Make v. Buy Decision
Modern businesses must carefully weigh the make vs. buy decision: whether to build internal teams (“make”) or outsource key initiatives and competencies (“buy”). Outsourcing can provide access to specialized talent without the overhead of full-time employees. If not properly managed, though, outsourcing also introduces risks that can reduce the quality of the work and still increase overall costs. These risks are not evident on the face of standard agency agreements, so it is essential to enter the contracting process with the entire lifecycle of the project in mind. If you know what problems could happen, then you have the power to control the risks.
Hiring employees is difficult. Recruiting, training, retention, and replacement each require significant investments of time and money. Attrition is costly for any business, and it frequently drives the decision to outsource key business functions to agencies. But here’s the twist: outsourcing does not eliminate turnover; it just relocates it. Agencies experience employee turnover too, and rather than absorbing the associated costs, they quietly pass them along to their clients. The price is not merely financial. Clients often end up paying with lost efficiency, missed deadlines, and reduced quality of work.
For example, consider hiring an agency to design a multi-million dollar digital initiative. The agency has a reputation for doing award-winning work, and your team is excited to see what kind of needle-moving designs the agency will produce. You negotiate detailed terms, including staffing needs and billing rates for each role. You sign the agreement and then have a kickoff meeting with the agency team assigned to the project. During that meeting, it quickly becomes evident that all but one of the agency’s team members are new employees at that organization. Instead of providing tenured talent representative of the agency’s reputation for quality, the agency hired a team at the last minute, and you are about to pay the price of their learning curve on the job. Believe it or not, this project-based staffing is an industry norm. Agency culture is notoriously prone to staffing churn, and the gig economy is making that even more common. But there is not much of a reason for agencies to try to fix the issue when clients routinely cover the resulting costs.
Three Key Negotiation Levers to Protect Your Investment When Hiring an External Agency
It is difficult to anticipate what might go wrong in an agency project, especially if you have never worked through one. Most procurement teams and contract attorneys do not realize what the lifecycle looks like, so they do not realize that they can contract away attrition risks from the outset. Here are three key strategies for significantly mitigating the most common risks in agency relationships:
1. Require Detailed Job Descriptions for Hourly Positions
An agency’s reputation does not guarantee the experience level of the individuals working on your project. If a role is open on a client’s project, the work is not being done, and the hours are not being billed. An agency might also promote a junior staff member prematurely or hire someone with insufficient qualifications to fill a spot and justify a higher billable rate. Insist that the agreement include specific job descriptions with measurable qualifications, such as required education and years of experience.
2. Establish Role-Specific Billing Rates That are Tiered by Seniority
Negotiate pricing based on the value of the work being performed and negotiate tiered pricing based on predefined qualifications. A junior account manager should not be billed at the same rate as a senior account director. A project manager should not be billed at the same rate as a full-stack developer. Role-specific billing will ensure that you are paying for the level of expertise you receive.
3. Request a Rate Reduction Clause for Staff Turnover
Even well-structured job descriptions and billing rates will not solve the problem of attrition. To avoid paying for the agency’s staffing challenges, require a clause that reduces billing rates for 90 days following any team member replacement. A rate reduction clause ensures that you are not paying full price for someone’s learning curve. And agencies will be motivated to assign the right talent to your project from the start and manage them proactively to minimize employee turnover.
Final Considerations
Agencies often operate on a billable hour business model. Without explicit contractual safeguards, clients are left to absorb the inefficiencies caused by high employee turnover, last-minute hiring, and internal promotions aimed at justifying higher rates. This blowback is avoidable if you know what to ask for in the contract.
FMJ strategically negotiates service and agency agreements and contracts to ensure that agency partners are equally invested in delivering top-tier service without transferring hidden costs to their clients. We review and audit current contracts to see if these protections are in place, or we can help draft new contracts. We utilize our experience to helping businesses secure stronger, smarter agreements that deliver long-term value. To discuss this or other business law topics, please reach out to Morgan Zuehlke or Pat Shriver.
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