The social and financial considerations of agency remuneration

Watching Mad Men reminds me of the wonderful life of advertising before the demise of media commissions and service fees. A time where the agency was full of people with the time to go to long lunches, indulge in intra-office affairs and where meetings were filled with ten or more agency staff without the client worrying about the impact on their retainer costs.

It was a time where the relationship between agencies and advertisers were more like partnerships, partners in creating advertising, because the only time money was ever discussed was at the time of appointment, and then just to accept the “industry standard” or when the client was approving the production cost of the next big television campaign.

Well Toto, we are not in Kansas anymore. Apart from a few die-hards, the media commission for agencies is virtually dead and now the relationship, as Professor Dan Ariely would say, is now more a financial market than the social market of that past.

Unfortunately, many agencies are acting like the wish it was still the old model and have not embraced the commercial realities of the financially driven arrangement, often putting the social relationship ahead of commercial realities.

In 2008 / 2009 when many advertisers were reducing their spend by 20% or more, agencies were still delivering the same amount of work for 20% less because they were investing in the relationship, believing that like in the old days that when the client’s spend came back so would the agency revenue.

But instead we are seeing many advertisers now operating on the basis that if the agency can do the same amount of work for 20% less then when they get their budget back they want the same “value” now and expect getting 20% more than they got before.

On the flip-side, marketers still want their agency to behave like a partner, doing favours, moving budgets and costs around so that the client get their plans executed when “Blind Freddy” could tell that they were trying to do too much with too little.

This give and take built the relationship between the agency and the client. The agency became indispensible in smoothing the way through for the client, knowing that the agency would be more than rewarded with an increase in media spend with increasing revenue.

Too often we see the same thinking in agencies around the world, with a very different outcome. Because now, instead of media commissions, there are fixed retainers. So when the agency takes on those little extra tasks for the client, there is no increase in revenue for the agency, beyond perhaps what they can grab through the non-retained production costs.

What demonstrates the old way of thinking about remuneration is that the agencies will assume that if they take on more work for the client it will build the relationship and they will be compensated for the extra work. But the client sees the retainer as a fixed cost for all of the agency’s work. There is no more in the budget, so if the agency takes on that work they do so within the retainer.

Invariably we see the outcomes of this approach being the agency asking for the significant increase in the retainer and the client rejecting it. In one case the agency had incurred almost half a million dollars in non-recovered extra head hours.

This would never happen in a law firm or an accounting firm who take a more financial approach to their client relationships with six minute billing increments.

When we investigated the discrepancy, we found the agency had taken on much of the marketing department work, outside their remit. The agency happily asked to do the work, the marketers happily gave them the work, but no one had any intention of paying for the work.

So the clear message is, if you are an agency discussing remuneration with your client, define exactly what you are being paid for and if you do more don’t assume you will get paid. Because it is likely you wont. Unless you negotiate that up-front as well.

Published in AdNews Friday August 30 2010

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About Darren Woolley

Darren is considered a thought leader on all aspects of marketing management. A Problem Solver, Negotiator, Founder & Global CEO of TrinityP3 - Marketing Management Consultants, founding member of the Marketing FIRST Forum and Author. He is also a Past-Chair of the Australian Marketing Institute, Ex-Medical Scientist and Ex-Creative Director. And in his spare time he sleeps. Darren's Bio Here Email: darren@trinityp3.com
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