Ad Exec: Agency fees — performance before profit?
by Tom Fels (@thomasfels) As fuel for my series on exploring potential commercial models for advertising, I’ve delved into other industries to assess how professional services are rendered and paid for. By contrast, our industry seems to be facing a real watershed, while lawyers, doctors and others remain steadfast in their rather intimidating fee structures.
The ‘commoditisation’ of creativity has levelled the playing field to a point that almost everyone agrees the traditional advertising model is in its dying throes. Scarily, local research shows 47% of marketers believe the current agency model won’t survive even another five years. Yet no-one in adland is visibly innovating their remuneration approach to cater for the next decade of communication requirements, despite a significant 63% of polled experts agreeing that accountability for ROI is a key factor shaping the industry today.
If the holy grail is therefore shared value, I have a cat to put among the pigeons…
We’re all chasing money
When things get complicated in business, it’s best to follow the money. The value exchange in communications should be simple; Marketers pay agencies to produce scoped-work that generates a consumer return and grows brands. However, theory and reality seldom collide.
When the impact of the work cannot be quantified, or when sales are stifled, often the first place to cut budget is in agency fees or the production allocation — but, by taking from agencies, there is a literal and subconscious extraction of exchanged value and, hence, vested interest. While expectations seldom shift, enthusiasm threatens to dwindle.
Payment by results
Many of today’s client/agency relationships are subject to fundamentally misaligned interest, so if you believe in the power of shared success, it’s time to cut your agency in on your business performance. It’s not hard to imagine that this would fundamentally change the way the agency thinks and acts. The focus would shift from compliant delivery to strategic understanding and challenge; agencies would be contentious where needed and energetic about value.
Today’s marketing dynamic sees only a small number of clients allowing their agencies to play this role, as expectations for delivery are set against tightly-scoped resources and, in most instances, deviations from the ‘plan’ are seen as frustrating and unnecessary.
A practical structure
Marketers can’t expect agencies to work on-risk unless they are prepared to put a meaty incentive on the table. So how might this approach work?
Agencies are able to survive if their people and overheads are covered, so let’s assume their identified profit component goes into a pot. So far, this is just a performance penalty, if not retrieved. Advertisers should therefore match this value on the upside.
Now both will have real skin in the game, and a new set of evaluation criteria need apply. Arguably, the two most-important criteria for performance today are sales generation, and brand-equity improvement. I would put half the performance pot to the former, and a further quarter to the latter, to be earned incrementally against identified milestones. The remaining quarter I would base on an enhanced scorecard measure that captures the spirit of the partnership and, because the pot is worth more than ever before, some stretch goals could be incorporated within the scope.
There is a natural assumption inherent in the above that both parties will work in good faith, and that agencies will become a core part of the organisational workforce. The agency can’t influence what it can’t see and so transparency is a precondition in a pay-for-performance structure. This is not a pipe-dream and is achievable, given the right chemistry.
While highly experimental, the beauty would be in working together to chase your numbers, accepting that the relationship will become both more fractious and more rewarding, and acknowledging that you now have a true stakeholder seeking to liberate your brand through work that works.
Thanks to the RedZone and Answered for access to the “Industry Trends: Marketing and Communication Industry View on Integration” research report, from which all statistics were sourced.
With a decade of local and international experience in leading brand consulting, design, shopper marketing and integrated advertising roles, Tom Fels (@thomasfels) has gained a deeply relevant understanding of the dynamics of agencies. His skills are put to work daily as group managing director of Publicis Machine. He contributes the monthly “Ad Exec” column to MarkLives.
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