While in-house creative teams do not have the same financial pressures as outside agencies, each group's funding model is still important to understand, considering your group's funding model is critical to making the case for additional staff or other needs such as temporary staff, new computers, and upgraded software.
When creative departments are understaffed, many creative leaders contemplate switching to a chargeback model as a way to minimize pushback when it comes to increasing staff size. And while a chargeback model is extremely helpful in allowing creative leaders to own their financial outcomes, there are also possible challenges with chargeback models. First, let's take a step back and identify the three major funding models of in-house groups:
- Chargeback Model: The creative department must recover all expenses through an hourly (more common) or project-based chargeback system so that when the fiscal year concludes the total expenses roughly (or in some cases, exactly) equal the total revenue (chargebacks). Clients (internal customers) are charged based on actual usage of the department's services.
- Allocation Model: The creative department is funded centrally through a per FTE cost to all business units--this funding model is common to other non-revenue generating shared services departments such as IT, mail services, facilities, procurement, etc.
- Hybrid Model: Potentially the best of both worlds is the hybrid model in which the department must recover a portion of its expenses through a chargeback system and the remaining costs are allocated through a per FTE cost to all business units.
Some of the most significant pros of a chargeback system include:
- Increased Resource Flexibility
- Insulation From Corporate Performance Swings
- Explicit Innovation Funding
- Foundation for a Business-Based Metrics Strategy
- Increased Value Recognition
- More Efficient Use of Resources by Clients
- Cost Savings for the Company
- Fair and Balanced Support for Clients
Some of the most significant cons, some of which can be overcome, include:
- Uncertain/Unsecured Funding
- Increased Administrative Costs
- Increased Scrutiny
- Time Tracking is Counter to Creatives' Nature
- Time Tracking can Stifle Creativity
- Positions Creative Team as a Vendor
If you are just setting up a creative department or are reviewing your funding model and have the opportunity to lobby for one over another, the hybrid-funding model is the most appealing option:
- You are mostly insulated from the swings of corporate performance
- You are collecting data that demonstrates the business justification for additional staff
- You don't have to worry about the costs you can't control such as overhead
But if you can't have your cake and eat it too, we recommend selecting the chargeback model--so long as your team does enough volume that it makes good business sense. If your group is less than 10 people, it probably doesn't make sense to institute a chargeback system.
If you are in an allocation model and don't have trouble with justifying staffing increases--keep living the good life and don't rock the boat. And enjoy knowing you're in the minority.