Businesses have been trying to make creativity a commodity for years now. If only it was that easy.
Coca-Cola announced on April 27th, 2009 their intention to move toward a pay-for-performance model. P&G has been experimenting with this model for a while now. The idea in itself is nothing new and honestly is not a bad idea. At first glance is seems a great idea for both agencies and their clients. Agencies are challenged with a goal and have to provide the “creative” ideas and executions to answer them. That’s what we all claim to do, right? Step-up or shut-up. However, there are many things to consider in the actual application of this theory that makes it challenging.
- Who actually determines what these “goals” are and what is financially reasonable to reach them?
- How do we define that these “goals” have indeed been reached?
- If the model is a percentage, how is the level of “success” decided?
From the 10,000 foot perspective all of these questions are easily answered. In all honesty, it is quite similar to what the “traditional” process has been for quite a few years now:
A goal is set = the brief;
the agency develops strategy, tactics and execution = the creative;
the effort is reviewed and critiqued by the clients = the feedback;
the creative is modified and launched = the execution;
the goals are either met or not = the results.
Simple. The difference is, the agency is only paid based on the results and not on a previously generated estimate.
Here, in our opinion, is the way that the pay-for-performance model could work:
- The agency and the client need to work hand-in-hand to set goals. It will take a mutual respect at this phase. While it’s great to set huge goals, the goals should be based on at least on a semi-realistic expectation and then add a bonus option for quantifiably overachieving. As the relationship evolves and the agency continually “over-delivers” on results, then raise the bar. It’s good for both of us.
- Recognize that some goals are quantifiable and some are not. If the assignment is coupon, direct mail or click-thru based, it is easy to track specific redemption of offers. If you are working on more “brand” driven efforts, it is much harder to quantify exact results. Again, agree on some attainable general results that can be justified. Please, please, please don’t under-value the power of brand. It is always a vital part of your marketing equation, but most definitely not the only one.
- When setting the goals and targets of the project be perfectly clear of what the definitions of success are. If this is not implicitly done the project will invariably end up in a “he said – she said” stalemate. And we’ll tell you right now, the client will always win – and they should.
Accountability vs. Ownability.
One of the other difficult points comes from the perspective of client changes. If the agency has done complete due diligence and the client makes changes that the agency thinks will affect the performance of the effort, where is the line drawn?
“If all targets are hit, the agency could make as much as 30% on a project; if all targets are missed, the agency won’t make any profit at all.”
To use the Coca-Cola model above as an example, if the client wants to make changes to an effort the agency believes to be the most effective, does the agency’s “risk factor” go down? In real world ideals this (very roughly) means that if the client makes significant changes, can the agency charge for work done as the client will have to accept more of the risk since their changes are being included? Also, the wording “if all targets are missed, the agency won’t make any profit at all”. Does this mean that the agency can charge hard costs and then gets a percentage bonus on performance review? Confusing indeed.
What now?
In all honesty, we’re not against the pay-for-performance model at all. In fact, we like the basic premise of accountability and shared risk/reward. We’re not afraid to stand behind what we do. But we need to find a simple (or as simple as possible) way to handle the nuances and risk/reward balance.
We welcome and would love your comments and thoughts. Please chime in!
UPDATE: June 8,2009
Unilever is now looking to some really stringent guidelines as well? What does this mean for agencies?
Unilever Set to Join Cost-Cutting Push
Agencies working for the CPG giant face lower margins, extended payment times
June 7, 2009 -By Andrew McMains
Given that Unilever’s creative shops cut across four holding companies — WPP Group, Interpublic Group, Omnicom Group and Publicis Groupe — the impact of the margin change alone is significant. What’s more, sources describe the cut as “structural” and therefore unlikely to revert to the previous percentage even when the economy — and Unilever’s business results — rebounds. As one agency CEO put it, “Once things go this way, they tend not to come back again.”
While Unilever’s drive to slash agency costs comes during a downturn, that’s not necessarily the driving force. Rather, sources point to the influence of new Unilever CEO Paul Polman, a former CFO at Nestlé who replaced Patrick Cescau as the packaged-goods giant’s top gun this year. Before Nestlé, Polman spent 27 years at Procter & Gamble, originally in finance roles and lastly as group president for Europe.
“He’s there to shake up Unilever and to shake up the status quo,” said one source.
Said another: “He took a look at the overall marketing costs and believes that too much is being spent on fees and production” costs. “He has got benchmarks from Nestlé and P&G.”
When contacted about the rationale for changing aspects of its agency compensation, a Unilever rep said only, “We don’t usually comment on our remuneration policies.” Likewise, affected agencies including Ogilvy & Mather, Lowe, DDB, JWT and Bartle Bogle Hegarty, declined to comment.
Executives from roster shops and their holding companies are said to be involved in the compensation talks, which are ongoing and date back to the end of last year. Unilever global CMO Simon Clift is playing a leading role on the client side at the direction of Polman, said sources.
One source characterized the talks as collaborative, noting that agency pushback on payment timing may result, in some cases, in keeping it at 30 days, though Unilever this year has raised the notion of extending it to 60 or 90 days. That said, sources acknowledged that agencies these days have little leverage with major marketers, short of resigning the business — not really an option in an ever-shrinking marketplace.
“Clients have never had a higher demand for big ideas, greater creativity and innovation,” said a source. “At the same time, they have never been more prepared to treat everything we do as a commodity.” The source added that the trend “has been happening for a while, but the intensity of it now … is just pervasive.”
The trend leads some sources to suspect that certain clients are using the “wet blanket” of the recession as an opportunity to extract further concessions from agencies. “It has happened a lot,” said an agency CEO. Some clients do it “because the business needs it,” while others use the “moment to stand on the shoulders of an agency to push down.”
Lost in the focus on agency costs — and in particular the base profit margin — is the concept of value, according to Arthur Anderson of Morgan Anderson Consulting in New York. “Clients are under pressure, tremendous pressure. They are trying to contain costs without loss of quality in advertising work,” said Anderson, who described the syndrome as “cost containment with loss of value.”
That, of course, puts the onus on agencies to demonstrate value and differentiate themselves from others. Such efforts may be lost on client procurement executives, but shops will continue to make the case. As one agency CEO said: “The only leverage that you have in any service industry is that you have to be very good and you have to be such a valued resource” that clients can’t do without you.
Original article from Adweek can be found here.
2 Comments
Great discussion of a critical issue. I believe that in practice, many of us who take pride in our work love the theory of pay for performance, but it never seems to work for the reasons you mentioned and some others:
a) Clients tend to be more schizophrenic than Agencies. Rules, goals and priorities change mid-year or sometimes monthly. Maybe for legitimate reasons, but it still mucks up the model.
b) The Client has the right to ignore your advice and “make the damn logo bigger”, but is it fair to penalize an Agency whe their advice is ignored.
c) The big game changing moves come from strategic decisions. Agencies have ceded this ground – many clients don’t want them there. Fringe tactical decisions don’t change the key metrics.
d) Since Creative IS subjective and since everyone wants to keep agency costs down – there is built in disincentive to judge subjective matters A+ when it’s going to cost you another $100,000. Mediatiation – yuck?
I deal often with brands that discuss this concept at the beginning of the engagement, we embrace it, but it never seems to happen for a lot of reasons and most clients seem as confused on it, if not more so.
I agree with the premise that the pay for performance concept can work to everyone’s benefit. I have yet to successfully execute this model with clients for reasons I can explain but that’s another story.
There are tasks that are developmental such as creating strategies, business plans and creative work. These tasks are more about the “what” than the “how”. Clients are use to paying for development services. Hourly or project based compensation is the norm.
There are tasks that are executable or tactical such as managing the sales process, hiring staff, buying media, measuring success, adjusting tactics. These are the “how” tasks. This is the tricky part. The reason it’s tricky is that the clent will need to “partner” closely with my agency and I will want to be sure that the development work integrates perfectly with the tactical work. That means I will need to have some control over how it all gets done. Companies resist this.
Bottom line is that if I say “I will guarantee results” then it is up to me to determine under what circumstances I wiil actually make that gaurantee.
So my model goes like this:
If the client wants development work they pay for the deliverables. Could be a reduced rate if performance based compensation is a component.
If the client wants a guarantee for performance (results) they pay for that at some negotiated rate (percentage of increase and/or equity in the company and/or a residual).
Also there will need to be at least 2-3 people from my agency invloved. A principal to oversee the relationship, an account manager to manage the client/project as the primary contact and an administrative assistant. The client will need to dedicate people with similar responsibilites from thier staff. Everyone must be held accountable to each other.
So it’s very doable under the right circumstances and will require a high level of trust and collaboration to be successful.