Close-Up: Will others follow Coke's remuneration model?
campaignlive.co.uk, Friday, 19 February 2010 12:00AM
As Coca-Cola brings its 'value-based' compensation system to the UK, are other big clients likely to copy it, John Tylee asks.
Ten months after Coca-Cola unveiled its plan to impose a "value-based" compensation model on its agencies across the world, which reached the UK this month, the best that can be said of it is that the jury is still out.
The worst - in the words of a leading pitch consultant - is that the scheme is so "downright barmy" that no other big client in their right mind would copy it.
The model, still being rolled out until it covers all Coke's creative and media agency relationships by 2011, goes much further than any payment-by-results incentive that now forms a part of a significant number of agreements between agencies and clients.
In short, Coke agencies are being promised profit mark-ups of up to 30 per cent if certain targets are met. If they aren't, agencies will recoup nothing more than their costs. It also means greater uncertainty for roster shops accustomed to knowing what profits are coming in before the creative work goes out.
The world's sixth-largest advertiser, with an annual spend of around £2 billion, not only wants agencies to truly earn their money but to spark a worldwide movement among clients to take a similar path.
The Coke system overturns the usual definition of value based on how many agency staff and how many hours are needed to complete the work. Under its arrangement, value is determined by a range of factors - including a campaign's strategic importance and the talent involved.
According to a senior manager at a Coke network agency: "Each brand has a different matrix. For example, Diet Coke compensation is linked to where the creative work runs. That means the more countries that run an agency's work, the bigger the fee."
At the moment, the main concern among Coke's agencies is about the time being taken to find out if the new model works. The company says it will be making no comment on the initiative - or the thinking behind it - until the first full year's data has been reviewed.
"Coke is paranoid about anyone knowing too much about this," a source within one of its media agencies confides. "The company drives as hard a bargain as any client I've ever come across."
"The difficulty for us is the large sums of money involved and the long delay before we know what the results are," another Coke agency insider explains. "So it may well be a long time before we get any profitability."
This, however, may be the least of the scheme's shortcomings, a UK intermediary suggests. "The plan is too leveraged and too risky," he says. "I fear agencies will be conned into going along with it against all their instincts."
He adds: "Coke seems to be hoping that by doing this it will become a more formidable client.
But agencies will always aim to do their best possible work for Coke. And it's not as though there's any shortage of good people wanting to work on its business."
The move reflects what Debbie Morrison, the ISBA director of consultancy and best practice, says has become a relentless search by clients for new systems of remunerating agencies.
Last year, Procter & Gamble, frustrated at not being able to react to shifting media trends because its budget was locked into a fixed fee with a single agency, began evolving its so-called brand agency leader model. This sees one executive and one agency put in charge of a brand's entire marketing.
Stephen Woodford, the DDB UK chief executive, believes the trend towards more payment by results will accelerate - and agencies shouldn't be frightened of it because it usually stops at between 10 and 15 per cent of an agency's remuneration because clients have not usually had the appetite to go further. He says: "I think this proportion will increase - and good agencies should be prepared to stand or fall on the business contribution they make."
But he warns: "If agencies are putting revenue at risk, there has to be a bigger upside. They have relatively high fixed costs in terms of people and if revenues become less predictable, they will need to reduce those costs and rely on more freelance help. That wouldn't be a good thing."
Ian Armstrong, Honda's head of customer communications, has similar misgivings. The car manufacturer has operated a scheme for the past six years under which some of its agencies are paid bonuses if they deliver against certain agreed matrices.
"Coke obviously believes its scheme is right for its business but it would be a step too far for us," he says. "The danger is that an agency is left too exposed financially and that it tries to cut people costs to sustain its margins and the client doesn't get the most appropriate people on his business."
Guy Hayward, the JWT UK group chief executive, says: "Such a scheme can only work if the matrix is fair about what the agency can influence. We could spend a month making a TV commercial that will have value to a client for the next ten years - but we're only paid for a month's work."
There is also a thought that the trend towards new remuneration models will require agencies to change their old skillsets. And while adland is, on the whole, open to this idea, there are fears that the right people to implement it are difficult to find.
Nigel Jones, the Publicis Groupe UK chief executive, says: "In the old days, you had account people who were brilliant at selling creative work but couldn't read a balance sheet, while there were others who were great business people but wouldn't recognise a great ad if it bit them. Now we need to have those skills within a single person - and those people are few and far between."
But despite the many naysayers, the ever-optimistic advertising industry has thrown up some people who are excited at the idea of the drive towards a full-blown system of payment by results by major clients, and that is the creatives.
Gerry Moira, Euro RSCG London's chairman and director of creativity, says: "It's good for clients and agencies to be in it together as long as everybody is agreed about the goals."
Leon Jaume, the WCRS executive creative director, agrees. "Success is very difficult to measure and it would be wrong for a client to transfer all responsibility for success or failure on to an agency," he argues. "But payment by results can sharpen an agency's creativity and I like that challenge."
Others believe that Coke's plan may move on even further and pave the way for clients to move beyond just payment by results and offer their agencies a direct stake in their business.
Publicis has been working on the big-budget launch of a new product from an as yet unnamed client, with the agency taking a share of future sales.
Jones says: "The incentive for us is to put in the extra hours on the business. But the downside of such an arrangement is the lack of upfront investment which can make it difficult for some agencies to take business on this basis."
Nevertheless, Morrison detects no client stampede to emulate Coke. She says: "I think it's more likely that clients will take elements of what Coke is doing and adapt them to suit their own agency relationships."
Proceed with caution is the best advice to agencies working on the payment-by-results model. Not only must firm ground rules be agreed between both parties about what constitutes value and how it should be rewarded, but no agency promised jam tomorrow should be left with too little jam today.
This article was first published on campaignlive.co.uk
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