Close-Up: Are agencies getting paid what they're worth?

Agencies must stand their ground when negotiating with a tough-talking procurement director, Bob Willott argues.

With the budgeting season over and the industry's bean-counters having put away their abacuses for the Christmas holiday, the challenge for the New Year is to earn the income that agencies have budgeted.

There's nothing new about that, except for increasing uncertainty about how future income may be calculated. For, if a rumour from the IPA has any credence, the time approaches when clients are confronted with an industry ratecard for each job title and agencies will expect payment on that basis without question.

That sounds a fairly laughable and untenable scenario. Would it be a cartel? Certainly it would provide a starting point for rate discounting among weaker agencies, and deny any prospect of premium payments linked to real value delivered. So let's hope it was no more than an unfounded rumour at best or a momentary lapse of judgment at worst.

But clients are still agitating for a more rational approach to agency rewards, procurement police are seeking more savings and consultancies are advocating alternative payment methods, some of which will no doubt provide ongoing revenue streams for their proponents.

The tension that underlies all agency remuneration debates is compounded by, on the one hand, a desire among many clients to achieve cost savings and, on the other, a nervousness among many agencies that the effectiveness of their campaigns will be too hard to measure and even harder to reflect in premium rewards.

And the situation is not helped by an over-supplied industry, where some agencies will always buckle when it comes to agreeing financial terms.

Even though most pitches focus on providing the best creative solution, the slightest hint from the client that price is important can send an agency into a blind panic. "Agencies then tend to want to win at almost any price," Doner Cardwell Hawkins' finance director, Graham Golding, says.

Yet it is utterly ridiculous to treat creative advertising services as a commodity for which price is the only key influence on the buying decision.

Quality - and therefore effectiveness - must matter more.

If the lowest price in the market is unduly influenced by excessive supply, it depresses the foundation on which clients may be prepared to build a performance-related scheme. Thus price-cutting agencies start with a double disadvantage - a low starting point for negotiation and a lack of confidence in their ability to extract an adequate reward for truly effective work.

ISBA's director-general, Malcolm Earnshaw, seems to accept that agencies are the victims of over-supply and under-confidence. But he still expects them to move towards a value-focused reward structure. What he doesn't say is whether ISBA's support for value-focused rewards will prove something of a smokescreen for attempts to reduce agency profits and profit margins.

Such a suspicion will be fuelled by the fact that the 2003 ISBA/ARC survey conducted by Jonathan Lace did not ask clients whether they had achieved cost savings by adopting their chosen remuneration model.

Cynics will fear the worst and be looking for some hard evidence that good clients would actually pay more for proven effectiveness, rather than seek to treat conventional rewards as the ceiling for any future value-focused scheme.

There is some evidence that clients and agencies can achieve a win-win outcome, but experiences vary hugely. The starting point for a successful performance-related arrangement is a client who genuinely believes that the deal should benefit both parties. Sussing out such a motivation during a competitive pitch can be extremely difficult and often the true intent will only become clear after the euphoria subsides.

Even where the client's motives are whiter than white, the performance triggers may prove unrealistic. "The natural enthusiasm to win the account, coupled with the limited knowledge of the client's business, may result in the performance bar being set too high," Fallon's finance director, Steve Waring, who chairs the IPA's Finance Policy Group, says.

Bartle Bogle Hegarty is a strong believer in performance-related models which reinforce the agency's belief in quality. "About 75 per cent of clients by number have included some form of performance ingredient in the remuneration package," according to its group finance director, Steve Illingworth. "We would like it to apply to 100 per cent of our clients."

But it takes a confident agency with a strong finance team to negotiate a meaningful deal. Some agencies may baulk at the cost of maintaining a heavyweight finance team for this work, but, judging by BBH and Fallon's profit margins, the investment pays off.

So what types of remuneration model are finding favour? David Wethey of Agency Assessments International advocates the Procter & Gamble approach where the agency's reward is geared to increases in brand sales. Alternatively, he would favour a bonus geared to a basket of specific performance measures.

One major brand owner that favours a "basket of measures" approach marks up its agencies' costs by reference to a list of performance criteria which in aggregate could result in a healthy profit margin on income if the agencies excel under all headings.

The DFGW finance director, Ian Cole, is not fully persuaded that performance-related schemes that purport to reward success by offering their agencies better profit margins actually do deliver what they promise. "Some clients disallow legitimate agency costs from the profit-margin calculation," he claims. The result is a notionally better margin than reality.

Another danger with all such schemes is one of timing. Some campaigns have longer-term pay-offs (or short-term gains that cannot be sustained) with the result that the reward in a given year may not be a fair reflection of the quality of agency output.

In extremis, a newly appointed agency could fortuitously gain from the efforts of its predecessor. Waring would like to see a minimum contract period of three years to cater for these inherent risks. Nevertheless, every client is different and remuneration models will probably have to reflect that if they are to work.

Any scheme that tried to link fees solely to agency hours and industry-approved hourly rates would reward institutionalised inefficiency rather than creative effectiveness. Agencies need to be more professional, not more protective, in securing their income. Wouldn't procurement personnel have a field day, showing how good they are at beating agencies down from supposedly secure scale fees?

Yet Lace's research found clients were less satisfied with the remuneration agreement when their purchasing departments had been involved. Illingworth suspects such involvement in isolation can reduce the debate solely to issues of price rather than quality. For this reason, he believes the ideal client's negotiating team should include both the marketing management and the procurement staff.

Anyone expecting an easy solution is likely to be disappointed. Even the "value-focused" ISBA needs to remember that the Lace research found the diminishing number of clients who had stuck to commission-based remuneration were far more satisfied with the arrangement than those who had negotiated a fee-based model.

- Bob Willott is the editor of Marketing Services Financial Intelligence ( and a special professor at the University of Nottingham Business School

75% - Of Bartle Bogle Hegarty's clients include performance-related renumerations "We would like it to apply to 100 per cent of our clients" - Steve Illingworth

80% - Of DFGW's clients include performance-related renumerations "Some clients disallow legitimate agency costs from the profit-margin calculation" - Ian Cole

80% - Of Doner Cardwell Hawkins' clients include performance- related renumerations "Agencies tend to want to win at any price" - Graham Golding

100% - Of Fallon's clients include performance-related renumerations "The natural enthusiasm to win the account may result in the performance bar being set too high" - Steve Waring.