In today’s competitive business climate, advertising agency clients are taking a closer look at how they purchase advertising products and services. The trends:
Smaller proportion of client revenues spent on advertising
Advertising treated like any other line in the budget
Greater cost-consciousness in choosing vendors and negotiating contracts
Third-party cost consultants often encourage clients to insist on replacing the flat fees traditional in the advertising business with project-oriented fee structures and deliverables chosen from a “menu.”
These trends make it imperative for ad agencies to exercise close control over their production costs by carefully tracking the cost of every client job.
Job cost tracking: Needs and challenges
Job cost tracking refers to the processes an organization undertakes to track the financial and production status of a client deliverable. Effective job tracking depends on clearly defined responsibilities, effectively managed processes, and job-tracking software that monitors cost and time factors at every stage.
The task poses some challenges. There can be a lot of people involved in tracking costs-account teams, production groups, broadcast groups, trafficking and others-and sorting out responsibilities can get complicated. Not everyone tracks costs in the same way; some may use a spreadsheet, others may do hand calculations on ledger sheets. In addition, finding the software system that covers all the cost-tracking needs of an advertising agency is not easy.
The “people” challenge: responsibility for managing costs
Typically, account management serves as the agency’s face with its clients. Account management presents the initial estimate to the client, keeps the client relationship running smoothly, and signs off on the actual billing. The production team or teams, however, develop the inputs to the initial estimate and have hands-on responsibility for developing the ad. So, who is responsible for cost management?
Some agencies believe account management needs to know what is spent at every step in the process. The account team, though, typically expects the production teams to monitor costs because they generate the expenses. Problems occur when, for example, account management does not know about cost overruns until after the fact. While it is true that as the client relationship manager, account management needs to keep a close watch on production expenditures, production groups also need to communicate potential overages and job cost challenges.
Account teams must be able to read the cost documentation. Some agencies have account managers who do not know how to read project cost spreadsheets or other documentation. They often pass the baton to the production groups, or rely on Finance to reconcile their client’s unbilled costs. Agencies should either train their account staff so they will have appropriate skills, or implement a project management group. Under this arrangement, project managers would be resposible for the day-to-day cost tracking and oversight for production group work. This setup allows account management to focus on client strategy versus operations.
Process challenges
The “people” challenges suggest some areas for improving the process of controlling costs. Several factors are important in the cost-management process; defined roles and responsibilities, as suggested above, is one. Others include turnaround time controls, documentation, and plain old fashioned solid communication.
Process cycle times. So often, clients will request a job to be completed quickly because an ad is needed for a TV slot, or for a particular newspaper or magazine edition. The production team hits the ground running when the client says “GO”, but the proper documentation (job number, billable code, signed estimate, etc.) may not be in place.
This creates problems down the line: How should the time be allocated? Did a particular staff person spend 20 hours, or was it actually 40 hours because the billing didn’t start until the team got a job number? Does Finance have to manually reconcile charges? Can we bill the client for the charges if we don’t have a signed estimate yet?
Account management should take the lead by establishing a clear agreement with the client that for work to begin, the client must sign off on an estimate-if not at the outset, at least within a specified number of days. Otherwise, it may be impossible for the agency to keep its internal processes smooth.
Who’s driving? The process can easily end up being driven by client demands. Remember, you are responsible for your agency’s financial well being, not the client. Client behavior should not drive the agency’s financial management and cost tracking needs. For example, if a production team plunges into a project and spends valuable resources on it and then discovers that the client’s instructions were unclear or have changed then the resulting product is of little value. So it’s back to the drawing board. “Redos” and creative development are one obvious reason for inaccurate job-cost estimates.
Whether reiterative work or creative development is billable or not should be specified in the job contract. This, and all other issues affecting production costs, must be clear at the time of the initial handshake. In any case, it’s important to track the actual job costs so that if the costs are billable, they are clearly understood by the client. If there is unplanned and unbillable extra work, the agency must know how much of the cost it has incured. Accurate cost tracking will help make future contracts smarter.
When a problem with client billing arises, the finance team has to reconcile it. Financial reconciliation adds to an agency’s costs, so it pays to iron out potential questions from the very beginning. Account management and production groups, as well as the client, must understand and agree on all billable costs.
Job tracking systems
Technology can help with a lot of cost-management issues: job number creation, job start notification, estimates, purchase orders, budget overrun notification, job closure, and other tasks. There are at least three types of job tracking system options:
Custom system. Example: a Web-enabled system built just for your agency.
Integrated financial system managing both front end (job cost tracking) and back end (the company’s overall financial accounting). These are often called enterprise planning systems (ERPs). Example: Oracle, Lawson, SAP, etc.
Hybrid (custom system plus integrated back end). Example: a customizable Web-enabled system for production job cost tracking coupled with an integrated financial system or ERP for overall agency financial management.
Custom System. A Web-enabled system offers several advantages. It can be up and running faster than a full-scale ERP system. If set up right, it is easy to use and less expensive to customize. As an option, it can also be designed to allow the client access to job-cost data.
ERP Packages. ERP vendors have provided solutions to most company data management processes; Human Resources, Financial, Manufacturing, etc. When it comes to advertising, however, there are few integrated ERPs that can actually fully satisfy an agency’s requirements. The larger players just don’t know the business well enough to develop thorough solutions, despite providing robust solutions in other parts of the business. Some agencies have “force fit” ERP packages into their processes, but they still come up short of industry specific activities such as estimating, information routing, differentiating between billable and non-billable work, payment timing, and specific reporting needs.
A handful of niche players provide job cost tracking solutions designed for ad agencies, but they tend to be weak on the back end as financial management tools, and pose difficulties for integrating front-end and back-end tasks.
In the longer term, it may make the most sense to have an integrated front-to-back system, but the available systems just haven’t caught up yet.
Hybrid. Today’s choices boil down to deploying one of the niche players’ products together with an ERP, or developing a custom Web portal combined with an ERP. Having a web portal on the front end of job tracking allows an agency to more easily embed its own processes and procedures into the tool, given it has solid resources to develop requirements, build, and implement the tool. Agencies have the flexibility to build in the functionality they want, instead of spending many hours and dollars tweaking an off the shelf package. Even software purchased from one of the niche companies will likely need to be customized, and it may be more cost-effective to build a Web-enabled solution from scratch. Some agencies may have already developed a custom tool for one office that can be inexpensively adapted for use at other locations in the agency.
Having an integrated ERP system on the back-end ensures robust reporting and functionality for AR, AP, GL reporting and other traditional financial management processes.
Conclusion
Standardizing job-tracking processes is important to ensure that an agency has control over its expenditures. Agencies need to assess the systems currently in use and decide how to build in job tracking controls and accountability. Then, by aligning processes and systems the entire job tracking capability can be made more efficient and scaleable.
Christopher Montgomery is an Associate Principal at Intellilink Solutions, Inc. a boutique consulting firm specializing in automating knowledge worker organizations. His areas of focus include advertising industry transformation, project financials, IT governance, and resource management. He can be reached at info@intellilinksi.com