• by Arthur Anderson , May 5, 2009

So here we are in the midst of a painful economic crunch, with marketers and agencies attempting to do more work with ever-fewer bodies and financial resources. Which makes it an ideal time for everyone to understand that only by working to align their respective business interests can both parties survive and prosper.

The agency relationship - representing anywhere from 5-20% of a marketing budget - remains one of the single most important drivers of ROI for an advertiser's marketing communications investment. Switching agencies without making an honest and thorough attempt to examine what's wrong with both partners in the "marriage" is not only extremely disruptive to brands, it's unnecessary.

We've certainly come a long way from the old days, when agencies were paid an overly generous fixed commission of 15% of the client's media spend. With so much money sloshing around, agencies could do whatever clients asked, even if it was at the very last minute or the umpteenth time the client requested a re-do of a piece of creative.

During the 1990s, procurement staffers gained more sway over marketing contracts and budgets. The result was that marketers succeeded in building quantitative financial efficiencies into their relationships with agencies. In other words, they were able to push total agency compensation costs down. However, they seldom addressed qualitative process efficiency on both sides of the table or linked compensation to how well the agency's output performed in the marketplace.

This reflects the reality that procurement people and chief marketing officers see things through different sides of the prism. The former are tasked - and incentivized - with "getting it for less," while the latter, understandably, are more concerned with agency effectiveness and efficiency, along with brand value.

Discontinuity and gaps in client/agency perceptions, understanding, cultures and communications are often huge. It is these gaps that drive significant inefficiencies and ineffectiveness. Filling them is far less disruptive and time-consuming to brands than searching for a new agency. Increasingly, marketers are coming to understand that the time and energy they would expend in an agency search is better spent on a process of deep listening and absolute candor to fully determine what is and what is not working with their present agency.

These days, most marketers budget a fixed amount of money each year for agency fee compensation. As a result, agencies must allocate specific people and other resources to a given account (known as "labor" or "deliverables-based" compensation). To protect their profit margin, agencies should know exactly how many TV ads, print ads, etc., they will be asked to produce, and of what complexity, along with how much "rework" the marketer will require them to do.

Below are six key steps in the effective management of agency relationships and marketing communications expenditures.

1. Assess the agency Scope of Work (SOW) in detail and specificity, so that agency staffing plans become directly linked and benchmarked for effectiveness and efficiency.

2. Benchmark staffing of full-time employees for the SOW against industry standards.

3. Identify and correct inefficient client-agency processes that impair agency efficiency and effectiveness. In our 22 years of experience, we've learned that most process and work practices inefficiencies are client-based.

4. Benchmark agency contract and compensation with industry standard methodology and metrics. Do an annual contract compliance audit.

5. Innovate a robust performance evaluation program that links agency compensation to incentive for continuous improvement. Give the agency a big reward if it moves the client's business forward, but only a nominal profit if performance is static.

6. Kick off the new year or a new agency relationship with a facilitated "on-boarding" process to assure client-agency communications are mutually understood for achieving strategy and execution objectives. Consider using external expertise.

Editor's note: This is the first in a four-part series.