How to Structure More Favorable Engagements with Your Clients
The Best Way to Protect Your Investment in Your Clients
Every one of your clients represents a significant investment by your agency. You’ve worked hard (and spent a considerable amount of money) to win the business. You’ve then staffed up the account and begun the inevitable onboarding and learning curve where the start-up costs can easily outpace the income for at least several months.
In addition to your internal costs, you may also be funding the outside purchases for client programs throughout the life of the client/agency relationship. Then, like many agencies, you may be faced with accepting client payment terms where you don’t get paid until months after the work has been performed. The result is that you’re meeting 2-3 months (or more) of payrolls before you’re paid back for work that has already been done.
Finally, it’s inevitable that every client will leave you at some point. It may be many years down the road but it will happen. In many cases, it will be for reasons beyond your control. When this occurs, every agency needs a “soft landing” opportunity to replace the revenue you’re losing and avoid staff layoffs.
Don’t kid yourself that your agency will escape these realities. Protect yourself instead.
Here’s how.
The Client Engagement Letter.
These are the three most important things you can do to protect your agency:
Consistently provide outstanding service, innovative thinking and work that drives concrete results for your clients year in and year out.
Develop strong, multi-level and lasting relationships throughout your client’s organization.
Begin every client relationship with a clear and comprehensive Client Engagement Letter which:
Specifies the philosophy, guidelines and expectations of the client/agency relationship. It should cover all the conditions that will result in the optimum performance on both sides.
Is easily updated to accommodate new rates, new scopes of work and other changes to the relationship.
Puts you in the strongest possible position for the day that client will leave.
Points #1 and 2 above are vitally important to a healthy client/agency relationship. However, for whatever the reason, the relationship will eventually end which makes the Client Engagement Letter all the more important to your firm’s well-being.
How to Structure a Strong Client Engagement Letter.
As your starting place, create the engagement letter in an evergreen format so that you’re negotiating the broad relationship parameters once. Each specific scope of work or future program can then be added as an addendum to the letter as needed (with the details of its scope, budget and timeline included).
The evergreen letter should include at least the following:
The Compensation Section – Hourly rates and/or the general type of billing the agency prefers, monthly retainer or project fee. The details for each specific project are included in SOW addenda.
Your right to raise billing rates annually in order to keep up with rising salaries and cost of living.
A clear statement that incremental work outside the prescribed SOW is eligible for compensation at the agency’s then current hourly rate.
Marking up out-of-pocket costs billed through the agency by 15% to 17.65%. This was once standard practice but not all clients will accept it today. However, your starting position should still be to have this provision in your template.
A surcharge on professional fees to cover the expense of research and other subscription services where the use is not easily traced back to specific clients. Most clients understand that the nature of the business has changed where data and other information services have become critical to client program success. Take care to explain the rationale for this charge and label it as information access or management and not just something like “administration fee”.
Don’t Be the Bank for Your Clients.
In the evergreen letter, your starting philosophy is to work from client money and not agency money to the degree possible. Begin by including your preferred payment terms. Also ask to receive the last two months of fee at the start of each client engagement or new scope of work. Hold that money until the end of the relationship.
For all projects that involve significant budgets for research, production, media placement or other needs (for example, $50,000 or more), always ask to be paid at least 50% of the money in advance of its actual outlay. (Another approach is to stipulate that the client will pay these costs directly if they’re not already doing so.)
Preventing Your People from Being Poached by Your Clients.
Use the evergreen agreement to protect your staff from being solicited by clients. Include a one-year-of-compensation penalty plus a 30% (of salary) recruitment cost to discourage this from ever happening. Robbing an agency of key talent is an integrity issue. The client should understand there are consequences for breaching the relationship.
Clients Will Eventually Move On. Here’s How to Be Better Prepared for That Day.
Minimum termination period: Payroll keeps arriving with relentless consistency. So having a major client relationship end with little or no notice often results in the agency being forced to lay off staff. To better protect yourself (and also provide a more equitable return on the investment which the agency has made in the client’s account), we recommend seeking a 90-day notice period.
If it is a retainer client, this will ensure three more monthly retainer fees. If the relationship is based on hourly fees, the termination period should provide for a monthly fee during the notice period equal to the average monthly fee over the last 12 months.
This allows the agency 90 days to replace the lost client revenue. If you can’t get 90 days, try for 60… 45… or just 30. Even a short termination period can make a big difference.
Getting paid in full before releasing materials: Unfortunately, sometimes there are clients who, after terminating the relationship, will either slow pay the agency for its remaining charges or try to reduce the amount of what’s legitimately due. Apart from litigation, the agency’s only leverage in such cases is to be contractually entitled to withhold the release of the client’s materials until all invoices have been paid in full. The evergreen letter should include this.
Don’t Forget the Nuts and Bolts. They Might Be Extremely Important Someday.
Always include a mutual indemnification clause that clearly and fairly states where the agency’s liability ends and the client’s liability begins. Generally, if unauthorized information is disseminated by the agency without the client’s express approval, the agency is at fault. Try to limit the agency’s liability to gross negligence or willful misconduct. (It’s also a good idea to get errors and omissions insurance to limit your agency’s financial exposure.)
Of course, there are other standard legal provisions which should also be part of the evergreen agreement such as:
Clear definition of ownership of the materials/work product involved
No compete (Negotiate to define this as narrowly as possible in your favor)
Governing law
Arbitration
Finally, more agencies are now setting up the mutual expectations in advance.
Beyond the legal agreement itself, we often see agencies developing an “Expectations” document that lays out the behavioral expectations of both parties.
For its clients, the agency might commit to:
A stable and experienced team
Meeting deadlines, quick response and thinking ahead
Dedication to delivering high quality work
Adhering to approved budgets
Meeting agreed-upon goals
Respecting the client’s staff
Being open-minded to client feedback
Easy access to the firm’s top management
On its part, the client might commit to:
Providing clear goals and the client-side resources needed to achieve them
Also providing needed information and approvals on a timely basis
Reasonable deadlines
Providing timely feedback to the agency
Adequate budgets
Respecting the agency’s staff
Access as needed throughout the client’s organization
Clearly communicating to its own people to adhere to the Client Engagement letter at all times (including getting the agency paid in full and on time for its work)
Conducting periodic conversations about the client/agency relationship (including candid feedback on the agency’s performance)
The Bottom Line.
Having a strong, clear and adaptable Client Engagement Letter will help your agency be more profitable and better protected. Never underestimate its importance.
Prosper Group can help you create this letter. We have the experience to help in virtually any area throughout the life of your firm.
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