As in-house creative teams and in-house agencies continue to grow, questions arise about how they are funded. Often the funding model can have an effect on the perceived value of the in-house team. Knowing that the C-suite often responds to metrics, the funding model – along with strategically aligned metrics – can be used to help express the value of your department.
We see how these in-house departments indirectly add to company profit through cost avoidance while increasing productivity through strong internal customer partner relationships that instill aligned goals, enterprise and product understanding, and brand knowledge. These departments are rarely tasked with generating a profit, rather they are generally responsible to their internal customers to provide services that are comparable or better than external agency services at reduced costs.
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Why is it important to understand your department funding model?
If you are running an in-house agency, you must familiarize yourself with how your agency is funded. Taking an active role in the financial aspects of running the department will allow you to take advantage of certain operational efficiencies and demonstrate your solid understanding of business principles.
It is key to understand how to:
- develop financial literacy and business acumen
- help properly manage your team and workload
- affect internal client behaviors
- show value in terms of cost saving and cost avoidance
- demonstrate operational maturity
Five Funding Models
Regardless of the type of in-house department structure you have or the services you offer, your funding model will likely fall into one of the following five categories:
- Cost Center. This is the simplest funding model and more common in small teams <10. In this model, the creative team costs are expensed to the corporate G&A budget. Internal customers are not charged for services.
- Shared Service. A very common funding source for creative teams is the across-the-board allocation or what is sometimes referred to as the corporate “tax”, also known as a shared service model. Clients are not charged a la carte for services or in line with usage patterns. Instead, each budget in the company is equally “taxed” per department size or per total revenue to fund a creative services department – regardless of whether or not they use the service. These costs are often bundled with other company-wide costs such as HR and IT operating costs.
- Usage-based Allocation. In this model, the creative team is funded through an allocation. Rather than allocating charges across the entire company, this allocation focuses on the business units that utilize the department’s services. The allocation for each business unit is negotiated based on past usage and forecasted future needs. This model requires planning and is often used by IHAs that have a more mature operating model. It also requires tracking and monthly reporting for your internal customers. If the internal customer exceeds their allocation allotment, the business unit may receive a chargeback and must pay for additional services from its operating budget. This model is similar to an agency retainer. The allocation model can be implemented in terms of hours or dollars. A note of caution: Avoid aligning the allocation to a number of FTEs which can create a false sense of resource ownership by the internal customer and negatively affect department operations.
- Chargeback. Another model is a full pay-for-use chargeback system. In a chargeback model, an internal customer is charged a project fee based on the hours used to deliver the work. This model requires a mature operating model. Chargeback fees are often collected monthly based on hours worked or projects completed. The department budget changes with the amount of work that is being done, and the department operates on a supply-and-demand model, which promotes baseline staffing and a flexible staffing model – the most cost-effective method to staff a creative services department.
- Project fees can be set up as:
- Fixed fee (project cost agreed to up front)
- Hourly, based on a blended rate (cost per hour of employee use all at the same rate regardless of role)
- Hourly, based on rates per role (cost per hour of employee use at individual rates based on role)
- Chargeback model goals vary by company and fall into three categories:
- Full-cost recovery: Departments are required to recover all operating costs resulting in an income of zero at year end.
- Profit requirement: In addition to requiring full recovery of operating costs, this model adds on an agreed upon profit, often used for funding innovation and new services.
- Subsidized chargeback. In this model the creative department is only required to recover specific operating costs. Most often this comprises personnel expenses.
5. Hybrid. A hybrid approach uses two or more of the funding models discussed above. For example, a usage-based allocation model may be used for internal customers who use the department regularly and have a marketing plan for the year. In addition, a chargeback may be put in place for overflow work and for those areas of the company that occasionally have projects that require creative services support.
Regardless of how you are funded, what really matters is how you use this information to manage your department or in-house agency.
When you’re choosing a funding model, take time to determine what your optimal internal customer relationship is. Are you strategic partners? A retainer approach in the form of a usage-based allocation model may be best suited to this relationship. Are you a supplier of services? Perhaps a chargeback model will work best in this situation.
Through understanding your financial model:
- You get additional insight and can better understand the attitude and behaviors of your internal customers.
- You can use the usage-based allocation and chargeback models to help evolve behaviors of both your staff as well as your internal customers.
- You can compare the cost of internal vs. external work.
- You have the opportunity to influence efficient operations with the right funding model.
- You will demonstrate operational maturity in running your department.
There are several steps to defining the model that best suits your organization and putting it in place and requires collaboration with your Finance team as well as your internal customer leadership group.
- Meet with Finance to agree on a financial model and methodology.
- Get buy-in from your internal customer leadership group.
- Develop hourly blended rates for core service and evaluate competitiveness of those rates.
- Work with business partners to socialize the model with an explanation of its benefits.
- Define the tracking and reporting processes along with role responsibilities.
- Implement funding methodology.
Understanding and fully utilizing your funding model to optimize your operations is a step toward in-house agency maturity.
Do you need help from an independent resource in determining your funding model and then identifying how best to realize operational efficiencies that model brings? Contact us for information on how we can help support you with identification, implementation, and training. To learn more, visist our serivices.
