By Candida Henning, Operations Director at VML South Africa
Agencies have a long tradition of operating on billable hours. It’s what lies behind the timesheet admin that staff love to hate (there is more hate than love when it comes to this task!) and it’s the way things have always been done. But with generative AI reaching the point where a useable piece of work can be generated in seconds, clients will soon come to expect turnaround times to be adjusted accordingly – which renders the timesheet billing model about as useful as the office fax machine. So, what’s the alternative?
Current State of Play
For those unfamiliar with the current model, here’s a quick catch-up: traditional billing practices in advertising agencies are primarily based on timesheets. This model charges clients for the time that specialists spend on various tasks. The client's fee is calculated based on the hourly rates of the professionals involved and rates vary depending on the skill set and experience of the team members. If a client retains a specialist, they might pay for 100% of that person's time or a percentage thereof, depending on the project’s scope. If a specialist is not retained, the client pays based on the number of hours the specialist logged to complete the task. It's a model has been the industry standard for many years – and it may finally have reached its sell-by date.
Anything You Can Do, AI Can Do Faster
There are many applications for AI technology in an agency environment. At our agency, we are currently using it in multiple areas. In the strategy area, AI is helping us reduce research time and infuse data into our strategies. On the creative side, we have created our own stock image generating tool.
These AI integrations are already streamlining our workflows and reducing the amount of time – i.e. number of hours – we spend bringing work to life. And where we are now is only the beginning of what is possible with AI. In future we believe the technology will improve the consistency of our output, and our ability to infuse data into everything that we do.
With AI we can instantly reference past campaign data and learn from the strengths and weaknesses to ensure future campaigns are optimised for success. AI can predict trends and consumer behaviours, enabling proactive planning that aligns with future market demands. By reducing the time spent on data collection and analysis, AI frees up our teams to focus on creative solutions and innovative concepts that will drive results for our clients.
Over time, the integration of AI will likely become more seamless, with tools becoming more user-friendly and accessible to creative teams. This evolution will allow agencies to fully harness AI's capabilities, enhancing outputs and saving time. So, where does this leave the old faithful hours-based billing model?
Beyond the Timesheet
Recently, some agencies have begun adopting output-based pricing. This approach sets a fixed price for a project based on scoped parameters and deliverables agreed upon upfront, regardless of the time spent.
Another emerging model is performance-based billing. In this scenario, billing is tied to the achievement of specific client KPIs, such as increased sales or improved brand awareness. Over and above a base fee, agencies earn bonuses or percentages when the targets are met.
Bigger Than Any One Agency
The shift towards new revenue models in advertising is not a challenge that can be tackled by individual agencies alone. This is a pivotal point for the industry as a whole and all agencies need to work together and embrace the changes that these improved fee models can bring.
As an industry, we have some introspection to do. Without hours as a metric, we need to consider the real value of our work, rather than the value of the time it takes to produce it. And we need to be prepared to defend that value.
The new output-based pricing model must take into account what the client needs to achieve based on clear KPIs and marketing goals. It must be clear that, while using AI tools improves efficiency, it does not mean a huge reduction in costs, as the value lies in the output and having the expertise to use the tools to achieve that output.
Clients and procurement teams need to understand the benefits of a shift to output-based pricing. If they don’t, agencies will be forced back into a legacy way of working that is no longer serving anyone. In fact, this way of working has benefits for clients. It incentivises agencies to meet KPIs, as their earnings are tied to the success of their work. The model also offers greater predictability for clients, who can budget based on expected outcomes rather than fluctuating hours.
The biggest lesson we can learn though, is that we must never become complacent. The reality is that this conversation has been looming for some time, but as an industry, we have collectively been avoiding eye contact with the skill of a pharmacist faced with Friday afternoon rush hour. Now, AI has made it urgent. It’s tough to reinvent something that has always been done a certain way, but stagnation has never been a good look on anyone.
