Now as Professor Dan Ariely points out, getting something for nothing is a powerful offer.
But how was the marketer going to make sure they get the benefit of this offer?]]>
1. The total cost of the proposal was just under $2 million per annum.
2. The discount / bonus was valued at about 10% of the total proposal
3. The client represented about 8% of the agencies annual remuneration.
So here are the issues:
1. The value offered free is less than 10% of the total cost. Yet, if delivered this would reduce the projected profitability by 75% and at best 50%. If they lose profit here they will need to make it up elsewhere.
2. The level of MD resources is almost double the size of the account in the agency, so what is happening with his other clients, especially the larger or more profitable clients?
3. From personal knowledge, the Head of Strategy was already committed by almost 120% on other client agreements so the extra 30% means he would need to work solid 48 hour weeks with no holidays, public holidays, sick days or any non-billable work.
What to do?
1. Always get the agency to value the resource and then add this as a discount to the overall remuneration. That way when you feel you are not getting the resources you can feel that you can complain because you are paying for it.
2. Work out and agree with the agency how these "free" resources will be delivered. Is it weekly / fortnightly meetings or quarterly / half yearly reviews or specific projects.
3. Make sure everything is committed in writing within the contract, including discounts, agreed use, etc as invariably when the annual or contract review comes up this will become the first point of contention because either the resources were not provided or the agency will feel the deal is not sustainable in the current form.
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Here they are:
1. I / we don't have the money / budget.
I'm sorry, does the CEO and CFO of your company know you have no money? Do the shareholders know that this big multinational company who reported a pre-tax profit of many billions of dollars now has no money? It is ridiculous to say this, so don't.
Sure, you may not have allocated a budget for this unseen cost, but that happens all the time in business and what you do is reallocate from another budget to cover it.
We are not talking about millions of dollars here. In most cases you are lying for a difference of thousands of dollars. Is your integrity really so cheap?
What you are really saying is that you don't want to pay for fixing this problem and therefore you would rather a much smaller company, who's total turnover is a thousand times less than your annual profit, subsidise your work for you. Right?
2. Think of it as investing in the relationship.
And what type of relationship is that? One where every time we do business you try to screw a lower fee? Or threaten to go to a competitor? I wonder if they manage their personal relationships the same way?
"Yes, would love to go out to dinner, but only if you pay and only if a better offer does not present itself between now and then".
I had to bite my tongue when they said this on Thursday because I knew that in the past 3 years we had "invested" many times in this relationship and as yet have got no return as they are still dating our competitors. So I am sorry Procurement, I am not into a non-performaning investment or a polygamous relationship.
3. I have a lower quote I need you to match if you want the work.
This is the classic negotiating position. Not a good one, but a classic one.
The problem is that it is hard to justify when there has been no formal tender process and you are not comparing like-for-like and you are clearly just fishing around for leverage to get a lower price.
I am happy to give a little here and there, but when this becomes the Procurement person's standard line it really just shows they have no concept of value.
On the basis of "pay peanuts, you get monkeys", it means these procurement people are happy to work with monkeys. Well so be it.
I am, and more than happy to, leave them working in the zoo they have created.
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So if it is no longer relevant to use ATL or BTL, then what should we use?]]>
CHANNEL and CONTENT.
Media companies create content and distribute through their media channels.
Movie studios commission or acquire content from producers and distribute through their distribution channels.
Record companies sign artists who create content to distribute through retail and online sales.
Publishers commission or sign authors to write content for publication and distribution through retail and online sales.
And the advertising and marketing communications can be categorised the same way.
Marketers commission various agencies to develop, select or buy channels to reach their audiences and create the content to and engage their audiences.
Media agencies are now talking about how channels can now be "Bought, owned or earned".
Traditional creative agencies create content - advertising for use over mass media channels.
Digital agencies build content - web site, application and banner ads for accessed and interacted with over a mass channel - the internet.
Direct marketing create content - personalised and customised eDM and Direct Mail - for distribution through mass channels - email, telephony, fax, internet and mail.
Database marketing is defining channels and strategy for content.
Public Relations use media relations strategies to develop content for particular media editorial channels.
Can you suggest a more useful distinction?
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Okay - so what is the difference between compensation and remuneration?
Lets look at the definitions from Dictionary.com
Compensation:
–noun
1. the act or state of compensating.
2. the state of being compensated.
3. something given or received as an equivalent for services, debt, loss, injury, suffering, lack, etc.; indemnity: The insurance company paid him $2000 as compensation for the loss of his car.
4. Biology . the improvement of any defect by the excessive development or action of another structure or organ of the same structure.
5. Psychology . a mechanism by which an individual attempts to make up for some real or imagined deficiency of personality or behavior by developing or stressing another aspect of the personality or by substituting a different form of behavior.
Remuneration:
–noun
1. the act of remunerating.
2. something that remunerates; reward; pay: He received little remuneration for his services.
It makes me think that perhaps the word you use to describe how you pay your agencies could depend on if you believe you have done them harm and need to compensate them for handling your business or if they have done a good job and you want to reward them for the work.
Then again, perhaps the Americans simply have trouble putting the M before the N in
R-E-M-U-N-E-R-A-T-I-O-N
and not renumeration - which is not a word.]]>
This is the most common and is effectively the outsourced agency resource.
2. Retainer / payment based on outputs or deliverables
This model, reportedly used by Coca-Cola, values advertising like a manufacturing process.
3. Retainer / payments based on outcomes or results
This model, increasingly applied in some shape of form to varying success, links value created to cost of advertising to provide accountability.
In each each case we will look at the model, the value calculation and the strengths and weaknesses.]]>
1. Retainer / payment based on resource alone
The model: This is outsourcing at its worst. Basically the marketer pays a fee or retainer for a quantum of resources (people). There is no direct correlation (relationship) between the number of people and the amount paid in the retainer or fees.
Value: The only calculation of value is the number and experience of the people and their cost.
Strengths: Often this works in the favour of one or other parties (agency or marketer) as it can be difficult to quantify. With the increasing involvement of procurement it is usually financially in the favour of the marketer at the expense of quality people working on their business (False economy)
Weaknesses: If you try and review the value of the model there is usually huge disagreement largely based on subjective opinion in regards to the huge amount of variables:
a. The number of staff - FTEs - who is in and who is out and how much time is required and why?
b. The number of hours that constitutes full time equivalence - FTEs - are public holidays, sick leave and annual leave counted?
c. The experience and quality of the staff - a tough one.
d. Their salary rate - industry? or actual? - both with traps for unwary players
e. The overhead multiple - inclusions and exclusions and level?
f. Indirect salary costs - Is the agency CEO / Managing Director a head count or an overhead?
g. The profit margin - how much is too much and how little is too much?
No wonder agency remuneration / compensation becomes a confusing discussion of contradiction under this model. (Note to self - if the discussion does become confusing and difficult it is probably because you have this model)
Also, as you are effectively outsourcing, cut your budget / spend and the agency will probably ask you who they should cut from the team.
2. Retainer / payment based on outputs or deliverables
The model: As Coke realised, paying for the inputs (people) and their costs (salaries, overhead and profit) does not equal a sound basis for value. Therefore if you think of advertising (including media) as a manufacturing process (say making bottles of carbonated flavoured and sweetened water?) then instead of paying for inputs, you pay for outputs.
Value: In this case you can calculate the value as the outputs divided by the cost. Therefore if a TV campaign cost you $500K in agency fees and now if costs you $400K in agency fees you have got a 20% improvement in value. Of that website cost $750,000 for 20 html pages then this is $37,500 per page. Now if another website costs you $2 million for 120 pages that is $16,666.66 which is almost double the value.
Strengths: it is certainly easier to define and measure the outputs of an advertising agency (including media, pr, digital, direct marketing etc) and then measure the "value" of these outputs. It also allows you to simply adjust the fee for the agency based on the increase and decrease in your requirements. Sort of like speeding up or slowing down the advertising production line to suit demand.
Weaknesses: Of course measuring the quality of these outputs is still subjective. And without a measure of quality (read effectiveness) is it really a measure of value?
3. Retainer / payments based on outcomes or results
The model: This is often seen as performance based remuneration or payment by results. PBR. The trouble is that it is often ineffective and fails because it is applied in a half-hearted manner. Usually the carrot (payment to the agency) is too small to drive behaviour and alignment to results or the stick (loss of revenue) is too high and is a deterrent.
The other problem is that in trying to make the process accountable, the measures become too complex and often too expensive to measure and calculate and therefore again fails in driving and rewarding the behaviour and alignment to results.
Value: Assuming the advertising is delivered at cost using the first two models above, this means that the profit is paid to the agency is the marketer achieves or betters the results required.
If the marketers objective was growth (sales, revenue or profit) then it becomes part of a return on investment calculation representing real financial value.
Strengths: If the carrot is big enough it can provide a link between the agency cost and the financial results achieved, however tenuous. The upside being if the marketer makes profit the agency makes profit.
Weaknesses: There are so many ways people get this wrong.
The agencies will say they do not control all variables that impact on profit so why should their profit be at risk.
Procurement will say that while their profit is at risk, the up side for them can be no more than they made when it was not at risk.
Marketers will say that it is difficult (if not near impossible) to get a direct correlation between the agency activities and the sales results. (Excluding direct response an online transactions)
But in summary, if you want to achieve a value based remuneration model, agency remuneration needs to move from a cost base / input model to a value-based output model. And the steps along the way are somewhere in between.
In the words of Jim Rohn “You don't get paid for the hour. You get paid for the value you bring to the hour.”]]>
While the report in Marketing states this is a concern across all sectors, marketing is often the focus of this type of allegation and concern.
"While the risk of supply chain fraud cannot be eliminated entirely, companies can take steps designed to reduce the risks, including company-level anti-fraud controls and risk-specific anti-fraud controls," said Bill Pollard, partner of Deloitte Financial Advisory Services LLP.
While personal experience over the past 10 years as a pitch consultant leads me to believe open corruption is relatively rare in the selection of marketing suppliers, I have heard of several examples of obvious cronyism and back room deals that have compromised the integrity of all concerned.
Only by continuing to apply rigorous due diligence and robust governance process to all aspects of marketing procurement will these concerns be minimised.
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