There Must Be a Reason Agencies Do What They Do…

14 Oct

deliverables based compensationI just finished reading an excellent AdAge article entitled;How Much Longer Can Agencies Afford to Undersell Themselvesby Syracuse University Associate Professor of Advertising, Brian Sheehan a long-time advertising agency executive which deals with the notion of basing agency remuneration on “deliverable units.”  Of note, I wholeheartedly agree with the Mr. Sheehan’s premise regarding the efficacy of this approach and its ability to strike the requisite creativity/ profitability balance so often referenced in the context of agency compensation discussions.

The core issue, however, is less about the path forward and more about the reasons for agency resistance to this concept, which also serves as the root cause of the challenge with valuing agency delivery… the lack of systematic controls, processes and a disciplined commitment to accurately tracking time-of-staff investment and agency outputs in a timely and transparent manner to enable all parties to correlate agency resource investments to delivery.

Let’s be fair.  No agency ever signed a contract it didn’t choose to.  While client procurement teams may be wired to push for advantageous terms and pricing, agency-side negotiators are no less clever or determined in their approach to insuring their profitability when sitting down at the negotiating table.  The issue isn’t what is negotiated into the letter-of-agreement (LOA), but how (or whether) the agency delivers against the statement of work and or staffing plan agreements.  To be sure, this is necessary for clients to have confidence in the agency’s performance vis-à-vis the LOA.  However, it is even more important to the agency in assessing its return on their resource investment.

As Mr. Sheehan rightly points out, “other” professional services providers, such as management consultants have been able to bridge this gap.  Thus, the issue appears to be rooted in culture rather than a technology or methodology.  Agency holding groups, which represent a disproportionately high share of sector revenues, are publicly traded organizations, run by some of the most astute management and financial executives in the business.  That being said, there must be a reason for agencies “deep aversion to regular tracking of their scope of work” as the author suggests.  This can be evidenced by the fact that there has been little movement to change current charging practices and begin attaching value to agency deliverables. 

Part of the reason, I believe, is that agencies have done an excellent job of integrating technology into their work processes to enhance efficiencies which have boosted outputs per salary dollar invested.  When combined with guaranteed profit levels of between 12% – 15% (which are typical of most LOAs), incremental intercompany revenue yields on core client business, the non-transparent revenue generation opportunities being realized and the agency community’s unquenchable thirst for new business, one might assume that agency bottom-lines aren’t under stress at all. 

With regard to agencies being rewarded for the “value” of their work and or their ability to “completely transform business performance,” how are they any different than other professional services providers such as management consultants?  It can easily be argued that the technological, logistical, financial and marketing strategies which emanate from a management consultant are no less transformative than the creative ideas generated by the advertising community.  Too often we forget that for every “Aflac Duck” success, at the other end of the spectrum, there is a Schlitz beer, a Lisa computer or an Edsel automobile.  Advertisers are the ones who are financing these brands and incurring the risks associated with the marketing and advertising campaigns which support them.  When there are successes, today’s LOAs provide incentive compensation opportunities which reward agencies for their contribution.  And let’s not forget the most important financial reward of all… the opportunity to continue working with an advertiser to insure a future revenue stream.

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