• by July 17, 2007

Niels Bohr, the Nobel laureate physicist, once remarked (by way of Woody Allen), "Prediction is a difficult thing, particularly when it deals with the future."

 

 

In the marketing community, we are constantly trying to predict outcomes. Return on Marketing Investment (ROMI) is a very popular but elusive prediction destination. The road map to this destination is fraught with detours and dead-ends.

Our industry searches for a more disciplined approach to ROMI, linked to agency compensation to improve value for money in that relationship, but it is not proving to be an easy undertaking. While we continue to map this course, there are parallel, shorter-term methods that can enable us to achieve more value in the marketplace and from the client/agency relationship.

These methods are derived from the understanding that advertisers and agencies need to maintain and enhance their relationships. There are far too many account reviews these days, typically driven by the arrival of a new chief marketing officer who is expected to work brand miracles - quickly. But unnecessary reviews are the last thing that today's brands should be expected to endure. By better aligning the work practices of both advertisers and agencies, relationships that would have been tossed by the wayside these days become far more productive and profitable for all parties.

The alternative described here is a process chain linked together by three distinct tools deployed in tandem. Morgan Anderson recently used them for a major U.S. retail chain that is a pioneer of value-based compensation, and together we presented the results at a recent conference of the Association of National Advertisers.

According to the latest ANA survey (conducted at the end of 2006), only 3% of advertisers now use value-based compensation, but clients like the retail chain and others that are willing to try new techniques will eventually drive this method of remuneration to the forefront of industry practices. These processes are as follows.

1. Client Agency Practices Evaluator (CAPE), a qualitative survey tool with a web-based diagnostic interview component regarding best work practices and processes.
2. Client Optimum Method of Payment (COMP), a quantitative tool containing an incentive component for agency compensation plans.
3. Agency Relationship Optimizer (ARO), a web-based periodic agency performance evaluation tool.

Each tool can be used for any kind of client, most every type of agency, in any geographic or brand configuration. Used together, they add value and productivity to the agency relationship and product while fostering a re-examination of the links between best practices, agency resources, compensation and financial incentives.

Before describing these three tools, it's helpful to examine the organizing principle involved. As with every human endeavor, if one improves their practices to a best-in-class level and constantly tries to perfect them, they have a better chance of getting a more favorable outcome and even predicting what that outcome will be.

You can't score well in golf unless you learn the basic swing and raise it to a best-practice level. That doesn't guarantee a low score or even predicting the final score, but you have a much better chance of playing well and expecting a favorable result. Likewise with ROMI, if you get your business practices right you should expect more value in the marketplace and from the client/agency relationship.

CAPE is a series of approximately three dozen questions related to the practices engaged in between clients and their agencies. These common practices have been defined, codified and measured with five best practice clients and their agencies. Up to eight more customized questions are possible before overloading the survey.

Both client and agency input their perceptions for each criterion and the resulting gaps in perception are analyzed. The survey is accompanied by a select number of diagnostic interviews for a deeper dive. Finally, actions for practice improvement are recommended. In our retailer case study, CAPE revealed, among other things, that the client's interactive agency had more junior staffers on the account when compared to industry benchmarks.

At the same time CAPE is being fielded, a COMP analysis is launched. This examines the client's/agency scope of work (SOW) and examines the agency's staff in terms of size and experience to "fit" the SOW. The agency's economics for both direct and indirect costs are benchmarked against industry and proprietary databases and finally (if the parties agree) an incentive profit plan is determined.

The incentive is normally based on a tailored combination of the agency's performance evaluation, the attainment of the client's sales goals, brand or ad awareness perhaps, and other measures related to the agency's work product. For example, if a media agency were being evaluated, media delivery would probably be a component in the incentive formula.

These criteria are customized and weighted for each distinctive relationship and then measured and monitored over the year. The incentive formula is generally imbedded in a web-based system to track data more easily. In the case of the retailer, this exercise revealed that its agency's salaries were below the industry benchmark but its overhead rate was above.

Finally, the agency performance evaluation system (ARO) is applied. This, too, is a web-based tool comprising criteria that can be customized for every different relationship. Results from both CAPE and COMP may be used to generate the criteria, although that is not a necessity.

ARO provides the agency performance evaluation score for the incentive plan and is a trend-able device to improve the client agency relationship. The beauty of web-based applications is that advertisers and agencies anywhere in the world can participate without leaving the office and the results tabulated very quickly.

The processes that I have described are not at the top of every agency's wish list, because they require putting agency cost variables under the microscope. But our experience has shown that, while agencies can sometimes see a decrease in revenue as a result of value-based compensation, overall agency profitability can rise.

Steve Fajen is a Principal at New York-based Morgan Anderson Consulting, marketing communications management consultants to global advertisers. He can be reached at sfajen@morgananderson.com