• by Arthur Anderson , May 6, 2009

While models for compensating advertising agencies have changed dramatically over the last two decades - rendering the 15% fixed commission a quaint artifact - along the way one thing has changed very little: agency non-transparency. Masters of consumer psychology as agencies are, they have proven to be quite adept at masking their cost structures, from overhead to staffing.

Although it is time for this to end, this is unlikely to happen. Instead, new methodologies, definitions and performance metrics have been developed and codified, producing quantitative and qualitative measurement of the marketer-agency relationship that, in virtually all cases, can be independently benchmarked against industry standards. This helps to shift the focus of the discussion from "money," even though agency resources needed to do work for the marketer impacts both money and compensation.

One of the new tools is a Best-Practice Agency Scope of Work ("SOW") document. Back in the salad days of the agency business, because they got the overly generous fixed commission based on the client's media spend (in addition to a markup on production costs), agencies would do whatever clients wanted - even if it was at the last minute or the fifth time the agency was asked to re-work something. Waste was okay, because all but the most profligate agencies minted money nonetheless.

Although the concept of a SOW document has been around since the demise of media commissions, only recently has it been given a full context of metrics and measurement to make it a key performance indicator for agency efficiency and effectiveness. A Best-Practice SOW, therefore, is one that is sufficiently defined and codified in terms of deliverables, complexity, "rework" and results expected.

It is not uncommon for an agency to propose assigning, say, 132 full-time employees (FTEs) on a $250 million account that, based on similar accounts, could do just fine with 110 FTEs. Such disparity can easily represent a difference of $5 million in fee costs over a year's time. Moreover, each agency has its own opinion as to not only total account staffing levels but the seniority of each individual staffer involved. Without benchmarking to industry norms, who's to say what level of staffing is appropriate? A Best-Practice SOW document results in an optimal staffing resources plan, and getting there encourages constructive dialogue between client and agency.

In this difficult economic environment, agencies are well advised to be proactive and collaborative in their clients' efforts to bring greater transparency to the table. If the agency is reluctant to talk about underlying economics, marketers most certainly should talk about staffing resources, SOW and work practices. Done right, the existence of a quality SOW document is a win-win. To protect their profit margin, agencies should want to 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.

Above all, a best-practice SOW is a "living" document and a "communications tool" that can help to forge dialogue and transparent negotiation from its inception and throughout the year. It is a touchstone document for the effective management of the agency as well as discipline tool for the marketer.

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