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!