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by Gau Narayanan. As the ad agency, how do you prove the value of an idea and monetise its contribution to a client’s business? Agencies come up with business- and brand-transforming ideas which they execute to drive fame for clients’ brands and grow their business. But getting paid fairly is easier said than done.

The $bn question

For example, an agency in the UK once developed an idea called “Try something new today” for a UK supermarket. It won an IPA Effectiveness Gold, helped deliver £2.5bn incremental revenue across three years for the retailer, and the idea permeated throughout the organisation as HR used ‘trying something new’ as a KPI for all managers.

I’d say the agency added value and helped marketing deliver for the business. So, what was the commercial value of that idea? How was the agency rewarded for this idea, given the above impact, and how did it charge for its intellectual property? If you solve that, you’ve really answered the $bn question.

For now, let’s imagine it were the age-old formula:

Fee = scope of work
Scope of work = [(resource hours x resource hourly rate) x margin] + bonus

Convincing clients to pay for the value we add is hard, because measuring it is hard, even in extraordinary examples such as these. So, what about the ordinary and the day-to -day work we do?

A broken model

What is clear is that the current client-agency commercial model favours working slowly, forces the agency to add layers, and results in duplication of resource to justify hours and fees. In a word, it is broken. Analysis by Michael Farmer, who has been looking at this for a while, shows agency fees declining while scopes of work have increased; the nett result is we need more from agency talent for less, and that’s why our best talent is leaving.

I think agencies and clients need to react quickly. Collectively, we need to do three things to fix the broken model, and they are inter-related:

1. Clients must prove the effectiveness of marketing and the agency’s contribution
2. Agencies need to radically change the way they work
3. Both parties need to align on the principles of value exchange

Proving our effectiveness

The first question I’d ask us to think about is whether the agency is a cost-centre or a value-centre to the client. To answer this, we need to objectively measure the contribution marketing makes to the top and bottom line. For this, we need clear, robust measurement tools and methodologies. Is what we have good enough? To what degree do we look at econometric modelling and rely on meaningful business metrics (rather than likes and lols)?

If we get this right, we can assess the impact of marketing on the brand, the brand on the business and, crucially, the agency’s impact on the marketing. This key task rests with the client as they have access to the research budgets and tools, brand data, conversion as you go down the funnel and, crucially, business results. The agency may partner the marketing department but the willingness to prove its efficacy should rest with marketing.

A rethink of the agency operating model

Commercially, agencies are incentivised to work slowly, which is counter-intuitive and counter-productive to both agency and client P&Ls. The faster they solve problems, the better; so they need to embrace the principles of lean and agile and solve quickly. Gather the right people around a problem so that this may be done, through intensive periods of strategic and creative development that bring the client to solve business and brand problems in two days, rather than two weeks. It isn’t necessarily cheap upfront but it is faster overall and, as the client is involved, the solution is more likely to be right, facing fewer barriers from the wider business.

That’s where the efficiency in resources deployed comes in and, more importantly, there is a speed-to-market advantage. Agencies already do this in pitches but they should make this the way they work all the time. And, helpfully no one will argue with the above — not the client, not agency teams, not agency management and not the networks. When agencies do this well, they get to better ideas faster and, by involving clients, these ideas have a better chance of making it through internal stakeholders. It’s a win-win: better ideas live and get to market faster, which positively impacts brand and business, which is good for the client. And the agency will be more profitable as the process is more efficient.

The principle of value exchange

As stated above, marketing needs to be valued by the C-suite and the agency needs to be valued by marketing, procurement and the business. If the agency isn’t valued, then there’s a problem but, if it is, then we need to look at what value is being added and whether the agency is paid commensurately. Just as in paying their own executive bonuses, clients should reward the agency for their role in driving growth, rather than trying to squeeze them. A degree of maturity and mutuality needs to accompany objective data on business results, brand scores, and agency performance. If clients aren’t willing to give financial credit where credit is due, then the model will continue to stay broken.

Remuneration models

First, here’s a useful article by Angelika Kempe here on MarkLives, outlining the various remuneration models, that’s well worth a read. Increasingly, we are seeing a blended model featuring scope-based income relating to resource hours (basic fee); agency delivery and performance (soft measures); brand results (medium measures); and business results (hard measures). We’re rightly seeing more of the fee moving to medium and hard measures, aligning agency remuneration with metrics clients are judged on. And to further drive this alignment, there is often agency and client skin in the game in the form of a bonus or malus component. The above is moving in the right direction but don’t we need to look at more-radical ways of tackling how agencies are paid?

Below are a couple of ways to change things up but we need the above three things to happen before we can assess feasibility:

Fewer hours = more $$$

What if the contracts embraced lean and agile working? The agency gets paid more the quicker it solves problems. So, if a completed campaign took three months and 250 hours, rather than the six months and 500 hours quoted, the agency should earn more, not less, as long as it delivered for the client!

Client revenue = agency revenue

Or, even more radically, how about a fee-based on a percentage of client sales, with clear caveats of a minimum and maximum income and accounting for forces that are out of the agency’s control or influence? This is the most-direct sense of mutuality and partnership. Clearly, it would need to be carefully worked out to ensure the client is getting fair value and the agency is paid appropriately.

However, I still haven’t answered the $bn question.

What is the value of an idea?

What is the value of Just Do it or Think Different to Apple and Nike, and what were the two agencies’ commercial contribution to that? It’s clearly very difficult to calculate. However, I do know that those two relationships have stood the test of time and both the agencies and clients have profited from this relationship. It seems paying the agency fair value has to start with the principle of valuing the agency in the first place.

 

After 13 years at AMVBBDO in London, Gau Narayanan came to South Africa to become MD of Net#work BBDO and regional director for BBDO Africa in December 2014. His monthly “Unorthodoxy” column on MarkLives questions the orthodoxy of how we thought marketing and advertising worked, looking instead at best practice from the world of behavioural economics, neuroscience and data from the IPA that shows us how marketing and communications works and how it can help the business.

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