In an era of tight budgets, every decision is price sensitive. But as high-profile initiatives or projects get discussed, the cost of working with outside partners can be too easily dismissed as “too expensive.”
If all your president and your staff — or even you for that matter — are doing is looking at a project proposal bottom line and comparing it with staff salaries or looking at agency hourly rates as compared with staff hourly wages based on salary, outside agencies can look really expensive. But we’re not. And here’s why:
- In-house staff members cost much more than individual salaries.
- If your organization operates on charge-backs or transfers, these rates are likely much lower than true costs.
So educate yourselves — and your team — on how hourly rates are developed by agencies. Consider adopting similar pricing models for your own team’s work so they feel more valued, and you can make smarter decisions about return on investment.
What does my staff cost?
A better and more accurate way to calculate the true cost of in-house talent is to add up the total costs for each employee, then divide by the total by his or her productive hours. I’ll illustrate using an example of a mid-career creative professional.
- Salary: $56,000 per year (or $27/hour)
- Payroll taxes: $5,600 (averages 10% of salary)
- Benefits: $11,200 (average 20% of salary)
- Expenses: $4,000 (training, travel, etc.)
- Equipment overhead: $13,250 (office space, computer, software, furniture, etc.)
- Administrative overhead: $15,000 (based on one support person for every three employees)
I recognize that many education institutions don’t seek to operate in-house groups as profit centers, but for comparison’s sake I’ll also add a standard profit percentage that an outside agency will need to stay in business.
- Profit: $22,050 (all of the above total — $105,050 — marked up 20%)
So, the total cost of a $27/hour employee is now up to $127,050!
More reasons why that $27/hour
is way too low
When comparing hourly costs of in-house employees vs. agencies, don’t forget that neither your employees nor an agency’s employees can be active for every single hour of the year. So if you’re only charging/accounting for that $27/hour, you’re not seeing the entire picture. More food for thought:
- Productivity: The average productivity — after vacations, staff meetings, sick time and the occasional bout of ennui — ranges from 50%-75% of total time. Your benchmark across your group should be 60% productivity, or 1,248 hours per individual, per year.
- “Billable” hourly rate: When you take the total employee cost of $127,050 and divide by the 1,248 possible productive hours, the billable rate necessary to support that employee — with a 20% profit margin — is $102/hour. With no profit, just breaking even on your employee’s cost to the organization, your employee requires $105,000, or a billable rate of $85/hour.
All of the sudden, in-house billable rates vs. agency rates start to seem comparable.
Compare value, compare costs
There is no denying that bringing in outside help can be costly. It’s just less costly than it appears — and much less than the alternative of having important projects fall behind, not get done (or never get started), or suffer from a lack of expertise or a fresh perspective.
So the next time someone says, “We can get it done for a lot less than hiring an outside firm,” remember to factor in the real costs to your organization. The difference probably isn’t as much as you think.
In-house vs. outsource: a cheat sheet
But cost shouldn’t be the only driver of your decision on whether to keep a project in-house or work with an outside firm.
Some situations where it makes the most sense to keep work in-house:
- When there is the need for direct control over the output of the project.
- When there is the need for speed, an in-house staff can respond more quickly than when working with an outside firm.
- When there is the need to have access and in-person daily communication with internal clients. You and your staff are there to hear things as they happen.
- When there is the need for confidentiality — providing outsiders with proprietary information could cause leaks even when a non-disclosure agreement is in place.
And when does it make sense to outsource?
- When you need a fresh perspective or objectivity. You may want a team free of the history and hang-ups — and one that is unafraid to take a chance in doing something completely different.
- When there is the need for a diversity of experience outside your institution — either within the education industry or in a particular aspect of execution.
- When your staff is already working at capacity, and the new project must get done, going outside can relieve the pressure.
- When there is the need for a different level of talent, skill or experience needed for the quality and effectiveness of work.
- When you need a “temporary” expansion of your in-house team, instead of adding internal positions that will be on the budget books forever.
But even when you go outside, you’ll want your in-house team comfortably along for the ride. It’s important to make sure that your staff understands the reasons you may consider an outside partner. Some ways that we at Zehno try to get things off on the right foot with in-house teams:
- Make way for productive relationships by empathizing with them about the challenges of being in their shoes.
- Involve them sooner — they’re our first strategic assets, and we look for their insights and ideas.
- Recognize and promote their accomplishments within your institution.
- Help them build the relationships and deploy the tools that are critical to the long-term success of the work they do.
- Train internal teams on how to work smarter and with greater brand focus.
The best strategic marketing comes from a the right mix of deploying your internal staff’s knowledge and expertise combined with the objectivity and expertise of trusted marketing communications partners. At Zehno, working as true partners with a dedicated internal team is the key to lasting success on every project.
For a more in-depth discussion on this topic, as well as many other valuable resources, I recommend Cam Foote’s Creative Business. His newsletter and website contain a wealth of data, templates and discussion of issues facing agencies and in-house marketing communications or creative services groups.