Too often clients enter contract and remuneration negotiations with agencies on the presumption that the agency is already making too much money. This is hardly a fair assumption, so it is important to be able to look inside the agency with independent eyes and determine a true and fair remuneration formula.
As a former agency CFO, I can tell you that some clients do provide very nice profits for their agencies. And many agencies are still managing to do well through stubbornly maintaining the usage of commission/service fee.
When using a service fee/commission structure, the level of profitability can be influenced by:
Whatever remuneration arrangements are made, clients today are not only seeking transparency, but also accountability.
Beginning with the premise that the agency should be allowed to make a profit, should the client be allowed to determine how much profit the agency can make? Is it the client's business to control the profitability of an agency? Or is it up to the agency to control its costs so they can maximize profit?
And how can a client know when a proposed remuneration package is reasonable? How far can the client push the agency to cut fees?
Agencies will often do almost anything to retain or win business. They figure that once the client or the new financial arrangements are in place, they will find ways to generate sufficient income to make a reasonable profit. So they bow to client pressures, ignore the CFO's advice and agree to reduce the service fee level or the hourly rates. They throw in freebies like research or strategic planning, which ultimately costs the agency in non-billable time.
Sometimes the client is off on its predictions of planned expenditures. When the income and profit levels don't match up to the forecast, the agency scrambles to find ways to improve profits. They cut back on service and pull back on proactivity or speculative brand building ideas. Maybe they use more junior people and less of the top creative team's time. The natural tendency is to give the unprofitable client less attention than clients who are paying their way.
It becomes a downward spiral, as the client becomes disenchanted with the agency. When the account goes up for review, everyone loses -- including the client and the next agency.
The solution is quite simple. Remuneration arrangements should reflect the individual circumstances of the relationship. Service fee/commission is simple, convenient and, in some situations, can be appropriate to the relationship.
But transparency and accountability are the key words to remember. The client should be able to ensure that their agency is profitable while maintaining trust in the relationship. Regular and mutually acceptable reporting and audit procedures should be put in place at the outset. Time invested at the start of a relationship developing fair financial arrangements and procedures will likely pay dividends in a long and healthy agency relationship, with the client getting the agency's top thinking and priority attention.
Bill Mastellon is President - U.S. Operations of FIRMDECISIONS, a company that advises marketers on financial and administrative aspects of relationships with their ad agencies.