Tag Archives: Farmer & Company

What is the Right Approach to Agency Compensation?

14 Nov

agency compensationThe topic of effective, mutually beneficial ad agency remuneration methodologies has been discussed ever since the mid-1980’s when full-service agencies and 15% commissions became passé.   

There has been no shortage to the variations on compensation structure that have been explored, adopted and debated over the last thirty years, well before the emergence of procurement in the agency sourcing and contract negotiation mix.  The perception among many industry professionals is that agency compensation is a “zero-sum” proposition… somebody wins and somebody loses.  Further, agency representatives have long alleged that procurement wants one thing, year-over-year rate decreases in spite of the fact that advertisers are asking their agency partners for increasing levels of support. 

Experience has taught all of us who have been participants in constructing agency compensation packages that there is no silver bullet.  The variables which come into play to customize a fair remuneration program which optimizes an advertiser’s return on agency fee investment while properly incenting the agency vary greatly from one relationship to the next.  In our agency contract compliance practice we have reviewed commission only, fee only, base fee plus commission, direct-labor based fees, retainer fees tied to SOWs, flat fees and on and on.  Each has its pros and cons. 

In our opinion, the key to crafting a proper remuneration package comes down to one item, measurement.  It has been said, “If you aren’t measuring, then you are just practicing.”  Time and time again we find that neither the advertiser nor the agency has the requisite inputs to assess and effectively negotiate and or monitor a balanced compensation program.  Ultimately, the way to create a “Win-Win” scenario in this area is for an advertiser to tie agency compensation to agency deliverables.  Unfortunately, advertising is a complex sub-set of the professional services arena and valuing deliverables is a major challenge. 

The good news is that consultants such as Farmer & Company have made inroads in the area of connecting compensation to outputs.  Like most things worthwhile, the initiatives are challenging, but can be tackled.  Farmer & Company takes an in depth, data-driven approach to compile historical project / task level information that many agencies and clients have not maintained.  Why?  They’ve simply never tracked variables such as the effectiveness of the client briefing process, time-on-task, rework levels and or the quality of the outputs.  All are achievable and rewarding, but require a commitment among both client and agency stakeholders to begin capturing this data at the requisite level of detail. 

Recently, I came across an article written for Procurement Leaders by Danny Ertel a partner with Vantage Partners entitled: “Complex Services: Alternative Pricing Models.”  The article addressed the topic of service purchasers achieving their “budgetary concerns with pricing models that do a better job of aligning incentives.”  Importantly, marketers and agencies alike can take solace in the balanced approach proposed by Mr. Ertel for a more “strategic” approach to negotiation, rather than focusing on “trading volume for discounts.”  To quote noted actor and martial artist David Carradine: 

There’s an alternative.  There’s always a third way, and it’s not a combination of the other two ways.  It’s a different way. 

If you’re interested in learning more about balancing risks and outcomes, you will find the article to be thought provoking.  Separately, if you’re interested in discussing how to lay the groundwork for valuing outcomes on this important topic, contact Cliff Campeau, Principal at AARM at [email protected] for a complimentary consultation.

Agency Charging Practices Questioned

9 Sep

ad agency charging practicesEarlier this week Digiday, a media company serving digital media, marketing and advertising professionals ran an interesting article regarding agency compensation and the “tricks” played by agencies to boost their bottom lines. 

In short, the article asserts that; “For ad agencies, it’s harder than ever to get paid. Their services are becoming increasingly commoditized, and their margins are getting squeezed as a result.”  According to the author, Jack Marshall, this in turn is “driving some to get creative with the ways they bill clients, as they exploit loopholes and tricks in an attempt to maximize their rewards.”  Examples of the bad practices employed by some agencies in this particular area include:

  • Artificially inflating the salaries of their employees when developing compensation programs
  • Double-charging clients by including items such as medical expenses in both salary costs and overhead calculations
  • Slow rolling projects and or throwing more people at a project than is required to boost billable hours

Andrew Teman, one of the agency executives interviewed by Digiday for the article suggested that;

“The problem with big agencies is they don’t make money being efficient; they make money billing more hours.”

For practitioners within advertising industry, the aforementioned revelations are not newsworthy.  Attempts to game the system have been ever present and serve as a reminder of the decades long struggle clients and agencies have had in structuring mutually beneficial agency remuneration programs in a post “15% commission” world. 

Ironically, advertisers and agencies want the same thing… a fair and efficient compensation program which incents extraordinary performance, good behavior among the stakeholders and which leads to a solid client-agency relationship.  To that end, neither party’s needs are being effectively served by the games and subterfuge described in the Digiday article.  The solution to the issue, which seems elusive, is actually rather straightforward: 

  1. Development of detailed scope(s) of work (SOW) to serve as the basis for agency resource investment modeling.  This is an important first step, since it is the SOW which will drive agency staffing and the resulting schedule of charging practices.
  2. Completion of a comprehensive agency staffing plan, with personnel names, titles, functions, utilization percentages and billing rates.
  3. Implementation of an agency remuneration program which aligns the client’s goals with the agency’s resource investment.  Of note, there should be full transparency into the various cost elements used to calculate agency fees, overhead and profit levels.
  4. Reporting and control mechanisms to monitor agency time-of-staff investment, performance and outputs to protect the financial interests of both clients and agencies. 

Unfortunately, as straightforward as the solution may appear, few clients and or agencies have effectively implemented the four steps suggested above at a sufficient level of detail as part of their continuous relationship management processes. 

Some would suggest that the real challenge has been in effectively scoping the work required on behalf of an agency.  According to Michael Farmer, Principal of Farmer & Company which specializes in assisting advertisers and agencies in developing and implementing accurate, effective Scope of Work practices and tools, “New metrics are required to track and measure workloads, prices and resource productivity. That’s the only way agencies can evaluate and negotiate changes in the fees they are paid in today’s marketplace — and halt the erosion in agency operational health.” 

We would suggest that putting in place an effective monitoring program in this area is long overdue at most advertisers.  If not addressed, the institutionalization of the bad behavior referenced in the Digiday article sets a dangerous precedent for treating relationship ailments with trickery rather than frank dialog between clients and agencies.  

 

 

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