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 demand
This 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 Fees
A number of clients still use this buyer/seller mode of remuneration, with the client buying media/services and the agency supplying these with the remuneration based on the volume bought, not on the quality of work or outcome.
Retainer and / or Project Fee
These 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.
Value Based Remuneration
Value based moves from the resource model to the pricing and ROI model setting a price on the delivery of outputs and a ROI bonus on the outcomes of those outputs.
Rather than based on the level and cost of resources, the focus has moved to the value of the agency outputs to the client and ROI of those outputs.
Advantage:
1. The price is set up front for both the buyer and supplier
2. The expenditure with the agency moves from a cost to an investment
3. The agency can share in increased returns where the outputs they produce contribute to increased revenue or profitability
Weakness:
1. Setting the required output and placing a price or value on that output can be challenging
2. Agencies can be unwilling to have their remuneration linked to measures they believe they have little or no influence over
3. Marketers are unable to budget the bonus or variable component of the agency fee based on results
Performance Based Remuneration (PBR)
PBR is a relatively common 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 Evalu8ing.com
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 Behaviour
So 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.
Conclusion
Not 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.
We have had years of experience in developing customized remuneration models based on industry benchmarks and best practice. But in most cases the primary driver for the marketer and procurement is trying to deliver transparency and accountability to ultimately reduce costs, not necessarily build sustainable relationships.
In other words they see their agencies as suppliers.
What relationship do you have with your agencies?
