Building a Chargeback Model
Internal creative organizations often struggle with whether they should be charging clients and if so, at what rate. This doesn’t seem like a complex challenge, until you try to solve it! In this post I’ll touch on good reasons for implementing a chargeback model, costs that should be considered for inclusion, key considerations, and implementation tips.
So, what are the benefits of charging back? Because detractors will tell you it’s just shuffling corporate money around. But charging back is not about creating a profit center or penalizing internal clients, it’s about running your creative services department in the most efficient manner to support maximizing your company’s profits. Benefits of implementing a chargeback system include:
- Increased awareness of how much it really costs to do those creative projects—especially the ones that get canceled halfway through
- Recognition of the value of an internal group compared to outside agencies—not just the cost, but things like brand knowledge and quick turnaround
- Increased efficiencies by reducing those endless rounds of revision—it’s so easy to have a dozen rounds of revision when no one is “paying for it”
- Increase resource flexibility—it’s much easier to add staff to meet demand if you are billing for their costs
There are many other good reasons, but that’s a start. If you are proposing moving to a chargeback system, you will also need to propose what costs should be covered by the chargeback and which will still be funded through a shared services model. Some of this might be dictated by corporate financial guidelines, but here’s a list of costs that may be included, starting with the most obvious:
- Materials and external costs—all the out of pocket costs associated with the project
- Creative and production, fully burdened labor
- Account management/project management/traffic, fully burdened labor
- Department management and administration
- Hardware and software costs
- Overhead (e.g., space and associated facility costs)
- Training and team events
Your chargeback model may be an internal service organization that is allocating variable costs, or, a self-supporting internal agency that is truly operating with little or no associated corporate funding. Either answer, or something in between, is okay, but you need work with finance and define your model before you start. You also need to track these charges very carefully, evaluate your chargeback strategy for accuracy, and then fine tune your model.
There are a few more questions to consider prior to implementing a chargeback model. Again, there are many correct answers, but you need to ask the questions.
- Rate sheet or hourly charge? Many internal groups provide standardized deliverables. It may be better to develop standard costs for standard work, e.g., a new 3 page brochure will cost X dollars.
- If charging back based on hours, what rate will you use? You can track hours by function with a rate for each function, or use a blended rate. As a rule of thumb, the more “agency-like” your model, the more appropriate to use actual rates for each function to calculate the total charge. This is especially important if some clients are using an inordinate amount of high-end creative, or require a lot of account manager time.
- Are you going to provide estimates? This is not necessary in the rate sheet model, but very important if charging based on project hours. This gives the client the ability to compare with outside agency prices and provides you with the opportunity to track estimate to actual metrics.
Finally, how do you implement your new chargeback model? We’ve seen some very good examples where costs were tracked and reported to the client for a full year before actually going to a chargeback plan. This gives you time to improve your costing strategy, provides the client with data for budgeting and gives your finance group the information they need to re-define their financial model.
It is also very important to develop a change management communication plan. That plan needs to inform your clients and other key stakeholders of the changes you will be implementing and how it will affect them. This is your opportunity to sell the advantages of your plan to each stakeholder group and get their buy-in. Theoretically a chargeback model should decrease allocated costs to each business unit to free up funds for their new creative services chargeback budget, but you’ll want to speak with your finance department to understand how clients will be affected by this new line item in their budgets.
Implementing a chargeback model can have positive results for many internal creative organizations. If your organization moves to a chargeback model, it’s important to plan the transition, develop accurate rates and communicate changes to your clients. The results can include better service to your clients, more efficient operations and better recognition of the value of your organization.
For information about how Cella can add value to your business through consulting, coaching, and training, please email email@example.com.
Les Johnson has nine years of experience providing technical solutions and process improvement in the Creative Services environment. Les is a certified Six Sigma Black Belt and provides process analysis and improvement services to clients. These services include process mapping, improvement activities and recommendations for process changes to improve efficiencies and reduce costs.