CMOs require an efficient and effective organization to serve today’s ever-changing business demands. In-house agencies can offer a scalable and practical internal resource. Part 2 of this series focuses on formulating a cost optimization strategy when building your in-house agency.
A majority of marketing leaders faced budget cuts as a consequence of the COVID-19 economic impact. Although external agency spend still makes up 23.7% of overall marketing budgets, many marketers have sought to reduce external agency scopes of work and costs and to rebalance the work in a more optimized hybrid model.
Marketing’s resource mix between insourcing and outsourcing continues to change. Data from Gartner’s 2020 CMO Spend Survey reported that 32% of marketing work previously carried out by external agencies shifted in-house in the previous 12 months.
Marketing leaders are often asked by C-suite executives to build a strategic plan and outline a case to support the funding of a more formal in-house agency, justifying costs and estimated cost savings.
To assess how your marketing organization and talent can best formulate a cost optimization strategy when building your in-house agency:
Factor in ways to justify and recover costs and include comparisons to external agency fees for similar projects when making a recommendation or pitch for your in-house agency.
Create a list of possible expense categories for your in-house agency to ensure costs such as technology and training are included in your plan.
Determine the best in-house agency strategy for now and the future, ranging from cost center to profit center.
Work with your CFO or financial manager to draft a cost proforma to start new or to extend your current in-house agency. However, cost optimization is not the only benefit as many people start in-house agencies for other reasons beyond cost savings (see Part 1 of this research).
Building an efficient and effective in-house agency and mastering the right outcomes can be an important and critical value driver. To maximize its potential and to sustain effective operations, marketing leaders must carefully flesh out the in-house agency’s cost benefits.
The purpose of this research is to help marketing leaders formulate a cost strategy for their in-house agency as part of an overall strategic recommendation and business case.
Inquiry calls from Gartner clients about cost optimization strategies increased dramatically in 2020. Although optimizing costs is not a sole reason to bring more work in-house from external agencies, utilizing an in-house agency can reduce costs when compared to external agencies. This is especially true for certain volume-based work types (see the social advertising example with Hershey’s C-Sweet in Part 1 of this research
Shortly after she joined the company from Mondelez, Hershey’s CMO Jill Baskin launched her in-house agency with 34 people and began recognizing savings in just one year.
Whether you’ll see cost savings depends on your ability to match the economies of scale offered by third-party agencies, factoring in the payback period. This may be especially true for capabilities dependent on technology, data and expensive talent acquisitions like an executive creative director or a data scientist.
The challenge is to monitor resource allocation and to effectively use in-house talent to avoid downtime and low utilization of resources. Adding contractors and freelancers will help you avoid hiring too many full-time equivalents (FTEs) unless and until a full workload is warranted and sustained by business needs.
There are three ways to position or pitch the idea of building an in-house agency in terms of costs:
At the start of the pandemic and for some industries such as travel or energy, Gartner analysts heard multiple stories from clients who were mandated to consolidate or eliminate agencies, or to pause or significantly cut agency spend. Some changes were not going to be a temporary situation but a new way of working and resourcing. Yet even if marketers took tough, emergency-like cost-cutting actions in the first half of 2020, they then instituted more refined cost optimization strategies later in the year, including continued organizational changes. See .
Based on those inquiry calls with Gartner clients and periodic survey research throughout the year, marketers did not feel like they would ever go back to pre-pandemic business as usual. Many admitted that while extremely difficult, the pandemic helped their companies make transformative changes they had long needed. This is not a silver lining, but an honest realization that their companies were not as agile, fast and responsive to customers as they needed to be.
Even prior to the pandemic, some marketers were working on a long-term plan for in-housing. In December 2020, P&G announced it would be taking programmatic ad buying for its baby products like Pampers and Luvs in-house, in a loss to Omnicom Media Group’s agency Hearts & Science. The move is the latest step in P&G’s ongoing effort over the past several years to handle more of its massive ad budget itself and shift it away from its agencies. Back in 2019, chief brand officer Marc Pritchard told Business Insider this approach had saved more than $1 billion on agency fees and production expenses.
Although your in-house agency may not realize the size of cost savings of brand giants like P&G and Sprint, there are still cost optimization benefits. It is possible for savings to accumulate rather quickly, even if on a smaller scale. For example, if you’re launching an in-house agency in an operating unit or smaller market with limited or no agency budget, you could calculate savings based on the cost if you had outsourced the work based on estimated project costs. You could bid out a couple of projects throughout the year to get an idea of what local agencies (or global ones found on Upwork or similar services) might cost. Then you could average that out for the number of projects that your in-house agency could complete in a year.
Table 1 illustrates how to get a ballpark cost savings for your in-house agency, with an understanding that agency projects, compensation and other costs may vary.
A word of caution: Be open to estimates that may not result in a net positive savings number or that may be relatively break-even. If cost savings is the primary consideration, then it may not make sense to bring work in-house. However, other considerations such as speed, may outweigh the lack of cost savings.
Doubts about whether an in-house agency can set strategies and produce equal quality of work as compared to its external counterparts are dissipating. Gartner’s 2021 Digital Marketing Survey finds that 41% conduct most or all of their digital marketing strategy and execution in-house, and only 23% outsource most of both strategy and execution to external agencies and third parties (see Figure 1). Thirty-six percent work with a more balanced hybrid model in which the digital marketing strategy is done in-house but the execution is outsourced to agencies or third party providers. Although the survey didn’t define in-house as the work being done by an in-house agency per se vs. the marketing organization or brand/digital marketing teams, it still means the work is not being outsourced.
Figure 1 leads us to two points of caution regarding cost estimation:
Be sure to denote any external agency or third-party fees costs for any portion of your typical projects like digital marketing campaigns that might be outsourced if that is actually how the project or campaign will be run. For example, if 75% of the campaign will be done by the in-house agency but external services will be required for key parts of the work, then ensure that point is clarified in your proforma. This would be true if the campaign creative is concepted and produced in-house but the media would still be planned and bought by an external media agency.
Budget for martech investments that must be made as you bring more work in-house. If you are currently dependent upon external agencies for martech and/or adtech — including work management platforms for project management, these costs will need to be factored in, even if covered under another budget such as IT or martech. See and .
Once you have completed a financial comparison of potential cost savings, consider the cost model you want to pursue (see Figure 2).
Generally, In-house agencies can be set up as:
A cost center, no different than — or even a part of — the marketing department. Talent, equipment, technology and other costs get folded into the CMOs budget. This is often how in-house agencies get their start.
Net-zero cost center, an attempt to bill out all costs to internal clients and the business without needing to make a profit. It is typical for mature in-house agencies to strive for this over time. They effectively manage time and project costs, provide internal clients with project estimates and arrange for monthly or quarterly billing or transfers to other cost centers.
A profit center, running very much like an external agency professional services business. It’s rare that in-house agencies can act like a profit center. However, there are in-house agencies that serve both internal and external clients and that run as a revenue-generating business. These may operate separately from the marketing organization (marketing is a client like any other).
We recommend you start with either a cost-center or net-zero cost center. Taking on external clients as a profit center is not recommended if your in-house agency is in early stages of maturity. That opportunity exists most for B2B2B or B2B2C channel marketers (or those in the media and entertainment sector). In that case, marketing services are offered to B2B partners to help them build their businesses with your product or service for a “win-win-win” scenario. The business partner doesn’t have the knowledge, expertise or customer data that you have to sell your product or service to their business or consumer customers. They are willing to pay your in-house agency for that expertise, strategy and execution for them and their company. It can be fee-based or revenue-share-based or both, and they may or may not be your current customer.
Although your in-house agency may not be at the scale of a Walmart, you could consider the acquisition of a small or local digital marketing agency. Evaluate a few on your agency roster that you work with already because the team is familiar with your company and the work. You can still apply Walmart’s strategy at a smaller scale when applicable.
The point is that it is not necessary to begin from scratch, which may feel like a heavy lift in the beginning. If you want to ramp up quickly follow these steps:
Task staffing firms or Upwork to formulate a team of contractors for you.
Ask your agency to assist you in transitioning work to in-house teams (this will not be a new ask for them).
Hire a larger agency for a long-term assignment to help you in-house programmatic media or riskier initiatives that have revenue goals attached to them.
No matter which type of in-house agency you’re building, be sure to include any other cost or budget considerations. Building a creative in-house agency, for example, means more than simply adding a few designers to your marketing team. You are essentially starting up a business. It will require you or someone on your team to wear the entrepreneurial hat, and it won’t always be easy.
A recent in-house agency article in AdExchanger pointed out that “Training is paramount to building a premiere in-house model. Brands must identify knowledge gaps and fill them with simplified curriculum facilitated by transformation experts.”
Gartner clients have cautioned that in-house teams often risk what they call the “client-to-client relationship,” which is why it is critical to infuse outside-in thinking to your in-house agency plan (see ).
The other cost and budget considerations will vary for different project or work types, nonexistent social marketing, creative/content, media or data and analytics. Use this list to help you think through your own list of potential budget considerations:
Talent (FTEs and/or contractors from staffing firms)
Computer and A/V studio equipment and related creative/editing software for audio and video
Martech such as work management, digital asset management or analytics platforms including data visualization, dashboards, prototyping or social marketing management software (see )
Service, research, CX, analytics, media planning and production vendors
Agencies or managed services to be in place to handle overflow work (some in-house agencies use offshore teams for research or templatized work)
Research, data or stock photo/video subscriptions
Training for upskilling and continued learning
Miscellaneous expenses for office equipment, conferences, awards or industry memberships
Gartner’s 2020 CMO Spend Survey
The purpose of this survey is to understand the marketing priorities and budget allocations of marketers to help clients benchmark, allocate spend and prioritize. The research was conducted online from March 2020 through May 2020 among 432 respondents in the United States (44%), Canada (8%), France (12%), Germany (11%) and the United Kingdom (25%). Respondents were required to have involvement in decisions pertaining setting or influencing marketing strategy and planning, as well as have involvement in aligning marketing budget/resources. Eighty-four percent of the respondents came from organizations with $1 billion or more in annual revenue. The respondents came from a variety of industries: financial services (55), high tech (49), manufacturing (68), consumer products (44), media (50), retail (55), healthcare providers (38), IT and business services (27), and travel & hospitality (46). The survey was developed collaboratively by a team of Gartner analysts who follow marketing and was reviewed, tested and administered by Gartner’s Research and Data Analytics team.
Gartner’s 2021 Digital Marketing Survey
The purpose of this survey is to understand current and future digital marketing strategies, including where responsibilities lie, current and anticipated challenges and responsibilities and how these were affected by disruptive events. It also explores where marketers’ channel-specific investments and initiatives are directed today and what techniques marketers are using to support an effective cross-channel and multichannel digital marketing strategy. This study was conducted online during November 2020 through December 2020 among 350 respondents from the U.S. (31%), Canada (10%), the U.K. (30%), Germany (14%), and France (14%). Ninety percent of respondents came from organizations with $1 billion or more in annual revenue. The respondents came from a variety of industries: financial services (40), high tech (39), manufacturing (41), consumer products (41), media (42), retail (39), healthcare providers (42), IT and business services (26), and travel and hospitality (40). Respondents were required to hold a leadership position in decisions related to digital marketing strategy. The survey was developed collaboratively by a team of Gartner analysts who follow marketing and was reviewed, tested and administered by Gartner’s Research and Data Analytics team.
Disclaimer: Results of both studies do not represent global findings or the market as a whole but reflect sentiment of the respondents and companies surveyed.
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