Commentary
Agency Compensation: Toward A Deliverables-Driven Project Model
- by Maarten Albarda , Featured Contributor, April 3, 2017
Calling the event a European event was a bit of a stretch, not only due to its location (London), but also because, as far as I can tell from all the different sessions, about 90%+ of all content was delivered by Brits. So perhaps the event needs its own Brexit, which might drive more European participation.
There was a panel on the future of agencies chaired by Grey London CEO Leo Rayman. Panelists included Jon Wilkins, Executive Chairman of Accenture creative agency Karmarama; Camilla Harrisson, Anomaly London’s CEO; Mark Eaves, founder of Gravity Road, and Matt Lodder, managing director EMEA at R/GA. Spot the mainland European in this list (hint: there isn’t one).
The discussion eventually went to the thorny topic of agency compensation, as there had been U.K. industry research saying that two-thirds of agencies would be "happy" to work with a pay-for-performance model.
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At the same time, there are those that have serious concerns regarding the “p for p” trend. The key issues frequently raised by agency heads (and it was no different on this panel) is that agencies tend to over-service their clients (anything to keep them happy and not want a pitch) so profitability goes down — and that the measurement tools and data for the performance part can be inconclusive.
The problem is that all agencies and most marketers still tend to think in terms of long-range client-agency relationships. But I think it might be time to throw that “Mad Men”-era thinking overboard and completely rethink the client-agency compensation model. What clients want today is a list of stuff that doesn’t really fit into a singular comp model anymore. So why not group it differently, and charge differently, too?
There is the high-end stuff like major, national or even global creative and branding platforms. Then there is a whole bunch of ongoing creative output that sits “underneath” this platform. This can range from derivative executions and versions to adaptions across all sorts of content and distribution platforms (video, print, social, outdoor, PR, etc.).
Then there is the “salesy stuff”: activities that directly or almost directly are related to selling product or services (promotions, CRM, e-commerce, email marketing, etc. but also in-store materials).
Then there is marketing tech, measurement and insights, production, media planning, buying and management, PR. The list is long and will vary from brand to brand, year to year.
The large agency holding companies can probably tick the box for all of these (and perhaps even a few more). But where they and their clients go wrong — or, perhaps put better, where they have failed to innovate their thinking — is in how these services are contracted and compensated.
I think the answer should no longer be an all-encompassing mega-agency (holding company)
contract. I think the future might be more about short-term agreements on specific deliverables, with a beginning, middle and end. That way, the assessment of the agency’s performance will be
much easier to determine.
So out with the multiyear agency holding-company contracts, and in with a pay-for-performance model tied to specific projects on a deliverable-by-deliverable basis.
What do you think? Would that work? Is it doable?
I originally wrote a really long note, and then deleted in favour of this answer. Yes, it works, and it is do-able, and we are enabling it.
Interesting to see someone else reach the conclusion that value-based pricing is far more sensible than arbitrary cost based pricing.
It makes total sense within this solutions based service sector where everyone is doing bespoke and custom work, and nobody wants to pay for that work unless it delivers results.
I guess it all depends on what is meant by "deliverables". If we mean that the advertiser decides that a great product positioning strategy is needed, followed by TV "creative" and production, while the other functions will be handled by the client---market research, sales analysis, media planning, media buying, etc. ---albeit probably farmed out to specialist shops---that's one thing. It would be interesting to see how one comes up with a short-term, campaign by campaign fee for that specific but isolated project assignment. Or the client might know exactly what medix mix is needed, how much is to be spent and when, and wants a media agency to deliver said buys exactly on target at the cpecified CPM---or lower. Meanwhile the other functions are handled by someone else. There, one might use established norms---like a 1% fee for broadcast TV buys, 2-3 % for cable, etc. But what happens if the agency "undelivers"? Is it to behave like an ad seller and give the client make goods at its exense? Or an advertiser may opt to make the agency a short-term "partner"---per brand ad campaign-----but without having any say regarding product quality, pricing, packaging, etc. and, even ad or promotional spending or, to be honest, about the media mix. Which puts it all on the "creative". It that deal's compensation is based on some measure of incremental sales, then few agencies in their right minds will consider it.
I should also note that many agencies do think long term for their clients due to the shortness of tenure of many CMO s and brand managers. I have seen many cases where brand managers were shifted from brand to brand so often that the only people who really knew the brand's history were the agency account, research and media people. In such cases, the agency's long term knowledge and "relationship" stood the client well. Without it, you had lots of terrified brand managers---who didn't really know what to de---except avoid mistakes---playing it safe, which, of course stifled any straying from the usual paths.
Bottom line: No one knows how to do this. Value - based on what ? Clients can be as clueless as possible and also want work and not pay. Everything is based on gauging and guessing based on experience and that is just as shakey as ever. House of cards with more doors and windows than Carter's Little Liver Pills with people running and peeping in and out faster than a speeding bullet.
We have been implementing a outputs or deliverable based modle accross Asia Pacific for the past decade based on defining the specific outputs or deliverables required by the brand and or business. The consideration for this are well documented on our website and have been embraced across multiple categories including Consumer Goods, Financial Services, Beverages, Automotive and more. See here https://www.trinityp3.com/2017/03/define-an-agency-scope-of-work/
The value based deliverables of output model is especially usefui for those marketers who have implemented Zero Based Budgeting, particularly those embracing the 3G strategy, as this provides certainly in cost / investment and flexibility in the selection of the agency to undertake the work as explained here https://www.trinityp3.com/2016/05/value-based-compensation-zero-based-budgeting/