TheONEThing

If you do one thing this week:

Make sure you have systems in place to monitor trademarks within online search. Google are very likely to roll out the relaxed rules on the use of trademarks in the UK, enabling everyone to use/bid on trademarked names, which could have a number of implications for brand owners. Not only could their trademarks be abused, but the cost of using those names within online search bids could significantly increase.

Important
 Developments

• Omnicom has recruited procurement specialists to help its negotiating unit OPera in the United States. Apparently, they will help with negotiating strategies and will assist in the management of vendor relationships. This has been tried in the UK a number of times before, without much success, so it will be interesting to see if it works over the pond.
   
• Mindshare have launched a new metric for measuring web-based video – Gross Rating Points. This will effectively bring online video the same measurement standard that traditional TV uses, with the ability to deliver and measure reach and frequency. This will bring traditional media metrics to online, which will help many advertisers feel reassured, but could take away some of the reasons for using online advertising in the first place. Is measuring the reach of 19 year old men with an interest in mountain biking and snowboarding in North Wales really worth while?
   
• Organisations are facing a ‘credibility gap’ in procurement, due to a disconnect in the relationship between procurement and the rest of an organisation. A multinational research project carried out by 4C Associates, in conjunction with the Procurement Leaders Network, has uncovered a number of key challenges that procurement professionals face in really driving the impact of strategic procurement across a wide range of businesses. Click here for more information.

Is the Agency Payment Model Broken?

By Tony Squires
 

A growing number of clients seem to think so. Over the past few months there have been a number of high profile examples of multi-national advertisers completely changing the way they remunerate their creative agencies. Last month Coca-Cola announced it would operate a “value-based” compensation system for the agencies that work across its 400-odd brands. Instead of paying for hours worked, they will now get paid for results achieved.

Unsurprisingly, and possibly understandably, some agencies are very sceptical, let alone worried. Not only is “value” very difficult to measure, but given the current economic climate, moving to a different and usually untested model is a very brave decision to make – assuming they have the choice!

There are some agencies though, who have welcomed this approach, seeing it as the perfect way to work much more closely with their clients by aligning the agency’s remuneration directly to the advertisers business profitability. Interestingly, similar discussions are also taking place in other industries; accountants, lawyers and management consultants are all looking for ways to move away from billable hours in favour of payment for results.

Is time up for billable hours?

In a typical ad agency only half of the fee goes towards staff costs, with only 25% of the fee going towards the real reason the agencies are employed – the creativity. The remaining fee goes to cover overheads and to keep the shareholders happy in the form of profit!

Ultimately, the non-creative people costs still need to be covered, albeit with good management and knowledgeable procurement involvement. Timesheets are still a fundamental tool for both agencies and their clients to use. If nothing else, this rational information is very useful for understanding how the agency operates and for being reassured that the money is being wisely spent.

There is the other side of the ad agency though, where timesheets and billable hours are meaningless. A great idea that delivers real client profitability is still a great idea, even if it only came from a 10 minute conversation in the pub!

Creative agencies are not the only ones reviewing different payment structures. At the recent Festival of Media in Valencia the question of remuneration came up a number of times, with all the leading media agency groups agreeing that they need to move to a more outcome-based model built around a campaign’s success.

Jack Klues, managing partner at Publicis Groupe’s VivaKi said “we are going to have to take on a shared responsibility with our clients to make sure we have the data to which we can base such remuneration on.”

Going against the procurement grain

Relevant data and accurate measurement are the common themes, which if you can identify and agree with your agencies, can provide the base of a remuneration structure that works for both parties, particularly, if as in the Coke model, there is a guarantee to cover the advertising agencies basic costs. So what is stopping more clients changing their agency fee structures to reward improvements in business performance?

Finding the right metrics (and measuring them correctly) is obviously a difficult area, but this is surmountable, at least for those clients and their agencies that have an open and honest working relationship built on trust and mutual understanding.
 

But there is another issue lurking at the back of most clients’ minds – how do I know I’m not paying the agency too much? But is this the right question to ask?

Based on experience, I think not.

So what questions should you ask that will help your marketing colleagues achieve better business results?

1. Does your business have a clearly defined (and measureable) set of KPIs for success, which marketing can influence?
2. How can I really understand how my agencies deliver value?
3. How can I ensure there is a culture built on clarity of expectations, sharing of information, accountability and mutual trust?

Finally;

• Structure a pricing model so that no one loses out and especially that the agency doesn’t lose out on the upside.
• Get some advice – although each structure should be specifically related to the client’s needs, there are some overarching principles that can save a lot of wasted time qnd effort.