IPA president Ian Priest
IPA president Ian Priest

IPA ADAPT: Testing different payment models for clients and agencies

Clients and agencies worked together in lab sessions at the IPA Performance Adaptathon this week (8th July 2014) to test three different payment models.

Recommendations included greater use of the IPA’s ‘relationship contract’ (developed during the Alliance strand), and longer-term contracts. 

1. Time-based models

Is it possible to breathe new life into that staple payment mechanism, the time-based contract?

Yes, said Omnicom Media Group UK’s CFO, Martin Telling, the process can be improved. Despite the focus on new models such as payment by results (PBR) and risk/reward-based payment, there was still a real place for time-based remuneration. "We are a people-based business, so we are comfortable with time-based remuneration. But it can be improved and made fairer."

Typical issues include: vague or imprecise scope of work; lack of budget information; changes to scope of work; responses based on agency guesswork; approval processes; rate cards used in pitching; and client procurement teams querying hourly rates.

Is it possible to breathe new life into that staple payment mechanism, the time-based contract?

As part of the time-based lab led by Telling, groups looked at a model developed by Grey that helped clients develop detailed scopes of work and establish hourly rates for staff working on the project, agreeing what job title levels will be responsible for which areas.

The lab also looked at a tool used by Cadbury and Kraft brand owner Mondelez with its EMEA digital roster of agencies. Mondelez marketers issue a brief to which agencies respond with an estimate, including hours and job titles.

Rather than acting as a price list, the Mondelez model (a simple Excel spreadsheet) is about setting the level of ambition (bronze, silver or gold) and allowed the work to be broken down in to different parts, from strategy to creative to production.

The tool gives the marketer a summary with guideline output costs, and improves over time as more information is stored.

The lab made three recommendations: one, link time-based mechanisms to the IPA’s relationship contract to minimise the emotional damage caused by poor briefing and scope of work management; two, generate more best practice case studies; and three, produce benchmarking information on costs.

2. Value-based models

Generating real value for clients depended on agencies being able to access and understand its key business issues, the value-based lab reported.  At the same time, it would also require clients to accept that marketing was an investment, sustainable and incremental. 

Reporting on the broad themes agreed by the lab, Deborah Cornwell, head of marketing procurement for EE, noted that participants felt that such models would be difficult to make work without the agency having longer contracts than normal – for example three years.

Longer contracts would be make for stronger, more aligned relationships.

"There was a clear feeling that, because trust is fundamental to value-based remuneration, longer relationships are key," she said. "Alongside that, having budgets set over the longer-term was also regarded as crucial."

Other important factors included: transparency of, and access to business data, and concerns that marketing departments did not always have access to the right data; make the upsides clear to both sides; mechanisms to make sure the targeted outcomes or values are planned and reviewed regularly; and ensuring the balance between risk and reward is right, so that the agency was not merely risking its profit margin but was achieving a genuine reward.

It was also felt that clarity of purpose and shared agreement on measurement of value were the most important factors in developing a value-based system.

3. Risk/reward-based remuneration

Not all clients are suited to risk-based remuneration, reported lab leader Nigel Vaz, managing director of Sapient Nitro, describing an area that ranged from co-investment and joint ventures to IP licensing.

Agencies therefore need to focus their efforts selectively, finding problems they could solve, selling in their abilities to the right decision makers, and stressing their skills in innovation and creative thinking.

"Look at your client base and take a portfolio approach," advised Vaz, "mixing low, medium and high risk."

Agencies need to focus their efforts selectively, finding problems they could solve.

"Agencies are also seen as the long-term guardians of the client’s relationship with the consumer, so that gives them a good level of access," he said. "But they have to overcome the assumption by the client that the IP will always be transferred."

Other keys to successful risk-based investment, the lab identified, are: building a long-term relationship around a shared definition of success; linking short- and long-term definitions of success; establishing the right size threshold – too small and it’s not worth it, too large and the risk may be too much; and ensuring the agency has access to the right data.

Risk-based projects can go wrong if they are not backed at all levels by the client, or if the deal is not compelling enough for both sides.  

Agencies should also be clear about what business they are in. "If they target risk-based investments to boost their overall margins," said Vaz, "that’s fine. But they shouldn’t behave like a private equity house."

Get involved  on Twitter with the hashtag #ipadapt

Visiting the IPA’s ADAPT hub www.ipa.co.uk/adapt where news from the events as well as the findings, photos and videos from this Adaptathon will be posted.