In-house agency cost avoidance or cost savings? Is there a difference?

For purposes of talking about in-house agency finances, yes!

Cost avoidance refers to costs that are not incurred because work is managed through a lower cost in-house model rather than sending it to an external agency. When we talk about in-house agency cost avoidance, the resulting “savings” are not additional dollars becoming available on top of what is already accounted for, rather costs that are not incurred through use of the in-house model compared to those that would be incurred if the work were done externally.

Cost savings refers to money that can be saved and/or repurposed by bringing work in-house that had typically been done by an external agency

Why is the internal team less expensive? First, it is important to note it is not because the talent isn’t up to external agency standards. In fact, the staff at either are interchangeable and often see their careers taking them back and forth between these options. 

Looking to avoid unnecessary costs? 

The cost advantage of using an in-house team is typically because there is no profit requirement, and some internal expenses are often subsidized by the enterprise. You are also working with a team of people with deep brand and institutional knowledge that simply can’t be attained by talent who are not entrenched in the company, products, services, communications, and experiences every day as an employee. The efficiencies of working with a well-functioning company team can be considerable.

Regardless of whether you call it cost savings or cost avoidance, what is most important is that it is a metric you should be calculating, as it is an easily quantifiable metric to share with your internal clients to help quantify some of your value.

How to Calculate Your Department's Estimated Annual Cost Savings

1. Calculate your department hourly blended rate

This is a calculation you can and should know, whether you are a chargeback department or not.

A. Calculate the total cost to run your department:

  • Personnel Costs (salaries, benefits, bonuses, overtime, taxes, temp labor, etc.)

  • Direct Operating Expenses (travel, meals, employee engagement, training, consulting, technology, supplies, etc.)

  • Overhead (rent, utilities, shared services costs, etc.)

If the creative team's budget is isolated (not intermingled with other teams' budgets), the easiest way is to get these numbers is from the budget owner, if that's not you.

B. Determine the number of working hours available for your staff:

  • Start with 2080 hours (52 weeks x 40 hrs/week)

  • Subtract out company holidays (most have 8 days at 8 hours: 64 hours of holidays)

  • Subtract out average PTO per staff member (e.g., 15 days at 8 hours equals 120 hours) Your individual team members' PTO or vacation days may differ. Simply estimate the average number of days folks are out of the office due to vacation, sick, personal, etc.

  • Based on the above example numbers, there are 1896 billable hours available in a year.

    To help with this and the next step, we have a calculator.

C. Determine the utilization goal (aka hourly productivity expectation for client work) of each of your team members and the total department. Typical goals include:

  • Individual contributors (design, copywriting, video, etc) contribution to client project work: ~80% - 85% target goal

  • Team Leads: ~65%+ depending on team size (the more direct reports, the lower the target goal)

  • Functional Managers: ~ 30% target goal

  • Executive Leadership / Head of Creative Dept: 0%

  • Operations (Ops Director, Tool Administrators, DAM Librarians): 0% 

Consider both the responsibilities of the role related to client work and the number of people a role may be managing and responsible for developing when you assign utilization expectations. Multiply the utilization percentage by the hours available (in this case 1896) to determine the utilization target for each role.

Add all the utilization numbers together to determine your annual department utilization capacity. 

D. Divide your total department costs by the capacity to result in your estimated department blended rate.

2. Determine the cost of your in-house agency competition

  • The easiest way to do this is to use the 4A's Labor Billing Rate Study (A new report is published every two years; note: there is a fee associated with the study).  

  • You can also partner with your procurement department to review rate cards provided by your agencies. This can be a more time intensive approach and the rate cards may not be  broken down into hourly rates.

3. Calculate the cost avoidance / savings

  • Take the comparable agency rate (e.g., $150/hour)

  • Subtract your estimated blended rate (e.g., $85/hour)

  • Calculate how much money the company saves for every hour utilized in the in-house agency/creative department ($150 - $85 = $65/hour)

  • Take your annual department utilization capacity total from Step 1C (e.g.:20,000 hours) and multiply it by the hourly cost savings ($65) to estimate the annual cost avoidance /savings your department provides your organization.

  • $1,300,000! 

Don't forget, cost savings is a significant reason that your internal clients should want to use your team, but if quality, timeliness, and adaptability aren't up to par cost savings are irrelevant. Cost savings opens the door, but quality, timeliness, and adaptability keep it open. As an in-house team you must deliver against all four value drivers: time, cost, quality, and adaptability.

For information about how Cella can support your Marketing and Creative department needs, please email [email protected]. To learn more about our services, visit www.cellainc.com/services/consulting.