• by April 20, 2004

STAND AND DELIVER -- Arthur Anderson knows how to deliver a good speech. Especially if it's about deliverables. In the case of Anderson's speech today at the Association of National Advertisers Agency Relations Forum in New York, those deliverables would be the services agencies provide their clients and the compensation they get back in exchange. In fact, Anderson, head of advertising management consultant Morgan Anderson Consultants, has even coined an apt name for this approach: "deliverables-based agency compensation." And it is an approach that Anderson promises will create better and longer lasting relationships between agencies and marketers. He should know. As one of Madison Avenue's leading management consultants, Anderson has presided over some pretty big reviews - media services ones included. These days, Anderson sounds more like a marriage counselor than a boat-rocker, but that didn't stop him from taking a sizeable shot at Madison Avenue.

Noting that during the period between 1984 and 2003, the major agency holding company revenues rose nearly 11-fold (1,068 percent), Anderson went on to point out that the "average profit margin of large U.S. advertising agencies increased by 50 percent" during the past seven years (a margin of 17.1 percent) compared to the previous seven years (a margin of 11.3 percent).

That's not exactly the kind of point agencies would like to have had made during some opening remarks at a meeting about their relationship with their biggest clients, especially when those remarks also pointed out that media shops also haven't done the most immaculate job of preserving their clients' costs amid rapidly rising media inflation.

"It now costs twice as much to buy a viewer. A dramatic erosion of price/value relationship," Anderson told the audience of about 200 attendees at the forum, citing the rise in network TV costs between 1984 and 2003.

While Anderson wasn't necessarily correlating the rise in media costs to the rise in agency revenues and profit margins, the implication was there, especially when he went on to cite research showing that advertisers are growing increasingly concerned about their agencies profits. "When it comes to agency compensation, it's a mystery in the margin," said Anderson, quoting a major advertiser speaking at an industry meeting last year. "You could almost here a pin drop," recalled Anderson.

The solution, he told the marketer and agency attendees, was to move to a deliverables-based approach that lays the cards out on the table upfront and before the work is assigned. And then sets reasonable, agreed upon goals and establishes compensation levels that are triggered by delivering on those goals.

"The way agencies are compensated is the big culprit here," said Anderson. "Labor-based fees by their nature emphasize costs. Not value. Not productivity. Not accountability. Not performance. Not ROI."

We agree.