In the past three
months the team at P3 has been busy with the benchmarking
and negotiation of some major creative and media
contracts. Through these engagements we have developed
some significant insights into the key
issues currently facing advertisers and their agencies.In this edition
of P3 e-news we discuss the basis of the
relationship between advertiser and their agency and the
impact the remuneration model has on this.P3
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is
your agency a supplier or a partner?While many people in the industry
talk about being in partnership with their agency or
with their client, the majority of remuneration models do not
support this position.
Many advertisers and their procurement executives take a buyer/supplier
view of these relationships, while the agencies often approach
the relationship talking about a partnership.
But what is the difference? Which of these is correct?
And what impact does this have on remuneration?
supplier
/ n. one who furnishes with what is lacking or required, to satisfy
a need or demandThis broad description captures
the relationship between advertisers and their agencies, where the
client requires the provision of creative communication
ideas developed for their specific needs and
then executed to an agreed plan. Just because this service is customised
to the needs of the client does not make the agency a
partner.partner
/ n. : Law. one associated with another or others as principal
or contributor in a business, usu. sharing its risks and profits.
The key point here is they share the risks and the profits.
Lets look at some typical remuneration models in the market and determine
if they reflect a supplier relationship or partnership.Media Commissions
& Service FeesA number of clients still use this
buyer/seller mode of remuneration, with the client buying
media/services and the agency supplying these with the remunerated based
on the volume bought, not on the quality of
work or outcome.Retainer
and / or Project FeeThese are a derivation of the head
hour model, where the resource required is calculated or estimated
and the total fee is paid for each service, project or outcome.
Rather than based on expenditure the focus has moved to the client
buying human resources and paying the associated costs.Advantage:1. The buyer
knows the cost up front and is able to budget
2. Guarantees
the cash flow for the supplier against a set human resource.
3. Buyers
can make informed decisions on whether these services
are cost effective and essential.
Weakness:1.No
recognition of the value created in the form of intellectual
property or revenue or profit generated by the supplier
2. Difficulties
defining the service levels and quality of the personnel
required to provide those service levels.
3. Irrespective
of doing an outstanding job or a hopeless job, profitability remains
the same.Performance
Based Remuneration (PBR)PBR is increasingly popular as
a way of providing an incentive for the agency and usually
takes the form of sacrificing profit margin.
The most successful models use a mix of soft, medium and hard measures.
1. Soft measures:
relationship objectives measured by systems such as APRAIS.
2. Medium measures:
marketing measures eg. brand awareness, desirability or propensity to
purchase.
3. Hard measures:
business measures eg. sales increases, market share, market penetration
or even share price.
Difficulties:
1. Achieving
agreement on the measures, especially the hard measures
such as sales.
2. Difficulty
managing the PBR as a floating component within their
budget, with a “use it or lose it” accounting practice.
3. PBR measures
that are complex, difficult, time consuming and costly
to administer and implement.Partnership
BehaviourSo what does constitute
a partnership? Where the agency share in the risks and
rewards.
1.100%
of the agency profit at risk based on PBR.
2. Linking
all agency profit to the sales success or profitability
of the client.
3.Investing
time and resources with a major profit or revenue share.
4.Joint
venture with agency as the outsourced marketing / advertising
department.ConclusionNot every client wants a
partner. Not every client wants a supplier.
The basis of any remuneration should compensate
a supplier for their costs with a reasonable
profit or reward the partner
for the value they create in the business.
Advertisers and their agencies
need to understand the type of relationship they want
and develop remuneration models that reflect and sustain
that relationship, not just pay lip service to it.P3 has experience in developing customized remuneration
models based on industry benchmarks and best practice. To find
out more contact biz@p3.com.au
talking remuneration
P3
founder Darren Woolley recently presented this topic on
Agency Remuneration & Relationships at
the B&T Advertising & Marketing Summit 2004.
The Summit was held on
October 26 & 27 at the Sydney Convention
and Exhibition Centre.
The
junction between marketing objectives and creative
execution is strategy development. Here
is the point where the process can succeed or fail
in a spectacular fashion.
Brendan
van Maanen leads the team at P3Process in
helping advertisers ensure they and their agency are getting the
maximum value from their strategy development
process.
To discuss how P3Process can help you contact
Brendan by email brendan@p3.com.au
benchmarking
your tv production costs online
Imagine the next time your
agency presents a television estimate, instead
of looking at the bottom line you can see how each cost
center compares to the industry average?The P3TV online benchmark application
provides advertisers with a benchmark report instantly showing how
the cost items on the estimate compare
to the industry benchmarks.To find out more try the demo at www.p3tv.com.au/app
