Can An Agency Succeed On Pay-For-Performance?

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Can a pay-for-performance model really work in the agency world?

Last week Mediabrands made the announcement that it was going the performance route and would begin to tie its compensation to the success of clients’ campaigns.  My first reaction was “Oh, just another big release from a big agency” -- but after I dove into it a bit, I actually really support what Mediabrands is trying to do. I think this could be the start of something important.

I understand the gist of it is, the emerging media lab within IPG is putting its money where its mouth is. When its strategists recommend and implement new technology ideas into the mix for their clients, they will be paid on performance rather than the traditional agency model of commissions and retainer fees.

This is a great idea because most clients are reticent at best, and downright fearful at worst, to try anything new!  And in many cases, then, agencies won’t try anything new for fear of a possible poor performance.  In the new model, if a tactic doesn’t work, then the agency doesn’t get paid.  That means both parties share in the risk, and that sense of shared risk contributes to a deeper, more trusting -- a better--  relationship, which is a benefit on numerous levels. 

The simple underlying fact is that innovation requires risk, and risk requires trust.  The current agency model has issues because it is not motivated by client success, but by public performance.  In the days of Don Draper, an agency could take a risk and be willing to suffer the consequences.  In these days of the holding company, risk translates to loss of margin and Wall Street doesn’t like that.  Wall Street performance battles against creative risk taking, but this pay-for-performance model could lead to a turnaround in that kind of thinking.

 In a pay-for-performance model, you are incentivized to take risks, and then learn how to scale the successes.  You may get some mistakes or losses in the mix, but you learn how to cut bait quickly and move on.  That creates a culture that breeds excitement and success because you reward the most creative people in the organization.  It is analogous to the VC model, back when that model was working as well.  You have a few misses, and a few hits, but you scale the hits faster than if you stuck with funding the misses.

Performance-based pricing models are nothing new. Many agencies have publicly said they would adopt them, but I like how this one is tied to the innovation group because that’s where you should want to take risks.  I’m sure there are many levels to this story, but I’m focusing my attention on the top-line.  I’m focusing on the benefit to the industry, and I hope you do, too.

My gut says that it will take a year for this to pan out, and for some case studies to be talked about, but during that time I have to think most other agencies will be watching this experiment carefully. They’re looking for a way of transitioning to a model that rewards risk and scale while empowering agency partners to make a mistake here and there without fear of losing the relationship. 

 If I were running an agency these days, I would try and integrate this model into all of my new client efforts. Over time, I would be recognized as an innovator, and clients would come calling for my expertise in this area. 

I have no relationship at all with IPG, and have never worked there in any capacity, but I think it’s a brilliant move -- and I hope, for the sake of the industry, that it works!

What do you think about this?  Let me know on the Spin Board!

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8 comments on "Can An Agency Succeed On Pay-For-Performance? ".

1. Paula Lynn from Who Else Unlimited
   

   commented on: January 24, 2012 at 7:29 p.m.
   It's a delicate balance with the devil in the details. Who says what works ? Do employees take a hit ? Does the client take a hit if it disagrees with the agencies recommendations ? Specifics and details first before contract. The lawyers are licking their chops.
2. Greg Alvarez from iMeil
   

   commented on: January 24, 2012 at 8:51 p.m.
   The problem will be to try to define somethings actually are not defined. For example, how much will you charge because "150 persons viewed the ad 2 seconds each one"... or ... how much will you charge for an ad in an airport like Charles de Gaulle, Heathrow or O'Hare Int. where the traffic is terrific and there are no actual ways to know exactly how many people saw the ad and for what amount of time? I believe "standards" for this pricing model will be a terrible nightmare.... but as you just said: innovation requires risk.
3. Jason McQueen from Y&R brands
   

   commented on: January 24, 2012 at 9:08 p.m.
   While in theory this sounds great, wouldn’t this actually stifle an agencies willingness to “go out on a limb”? I’d be concerned that this would encourage “safe” plays and repetitiveness over innovation all the way from creative to media. Do what works, get paid, keep job. (Come on, you know you think it) No matter what the V-levels do to sell this in to an agencies “culture”, the folks on the floor will ultimately shoulder this burden.
4. Roy Perry from Greater Media Philadelphia
   

   commented on: January 25, 2012 at 12:03 p.m.
   Yes there's risk. Risk that great ideas whose greatness is in their slow build will vanish from an industry created and enlarged over the past century by just such ideas. Relief from paying for idea failure is small comfort when falling behind competitors or missing a revenue target. Risking money is business as usual. Risking brand momentum is not.
5. Warren Lee from WHL Consulting
   

   commented on: January 25, 2012 at 12:49 p.m.
   Well it looks like the MediaBrands has just completed the circle. I remember the days of going into AvenueA to sell web site ad space and having performance demands placed on our "inventory." Now MediaBrands is putting their talent where it counts. Good job guys and gals, I hope that this model resonates with the industry for any number of reasons, mainly, I think that the creative side of the agency is really going to be given their head. Look for more humor, pop and creative executions. I also look for innovations with media mixes and expanded targeting.
6. Michelle Cubas from Positive Potentials LLC
   

   commented on: January 25, 2012 at 3:35 p.m.
   Thanks for this timely post. I am in the process of negotiating a pay-for-performance model for a prospective client. Benefits are many: 1. This model takes the "clock" out of the equation. 2. Risk is sanctioned on this road. Now the client doesn't see risk as reckless. It raises their risk tolerance, which in turn, releases innovative ideas. 3. Greater client creativity and willingness to break barriers. I'd like to follow more threads on this topic. Please keep me posted. A raving fan, Michelle Cubas, CPCC, ACC
7. Niel Robertson from Trada
   

   commented on: January 26, 2012 at 3:31 a.m.
   Do you know if they are including any creative in the pay for performance system or does the client pay for that in a more traditional way?
8. Dana Todd from Performics
   

   commented on: February 9, 2012 at 9:27 p.m.
   At the heart of performance marketing is risk mitigation. Many risk managers certainly do try to minimize risk, which may impact creativity, and ultimately hit a wall on growth. However, truly talented risk managers know that you can only gain if you risk higher, but you have to have a system around it that keeps you from being stupid. Our company has been doing performance marketing and working with clients on a performance basis for over a decade. About 25% of our revenue is from client ROI. Not all clients can work this way, and not all campaigns *should* be managed this way, but we have an analytic forecasting approach to figure out what works best for everyone. We find that a blended approach is best in many cases, where we agree to a relatively low management fee but an upside on performance. It's very motivating to the teams who work on these accounts, because they are literally invested in the outcomes. I agree that it's not for everyone - and indeed there have been times it certainly didn't work for us - but we like to think that we started a trend that's being noticed by the more traditional agencies.

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