No one would argue with the notion that, in the past three years especially, the client-agency ecosystem has changed dramatically in response to massive shifts in technology and consumer behaviour. Marrying data with new techniques to generate insight, brands are having real-time, all-the-time conversations with consumers across multiple platforms.
So far, in the initial phases of my ADAPT agenda, we’ve explored new forms of alliances (A), the need to diversify (D) and how both clients and agencies are learning to be more agile (A).
Amid all this change, however, one area has been slower to evolve than others. This is the P, or performance element, of the ADAPT agenda. To some extent, clients and agencies are both stuck on performance or remuneration models that do not adequately reflect the ways in which they now work together.
Most remuneration models centre on time-based reward. But paying an agency just for its time or input doesn’t reflect the reality of the new era, new ways of working or the contribution that a motivated and committed agency can make to a client’s business.
Alternatives such as value-based remuneration, where agencies are rewarded for the real differences they make to a client’s business, or risk-based, in which the system rewards a greater appetite for innovation and risk, can create a win-win for both parties: clients get top-line growth and agencies get better rewarded.
There’s no better time to look at this issue. As the last quarter’s Bellwether Report shows, more clients are chasing top-line growth and freeing up budgets accordingly. The clients and agencies that are the most agile and most focused on innovation will be the ones that achieve this. Performance models that align both client and agency to these goals are therefore critical.
In fact, according to Caroline Johnson, co-founder of remuneration and strategy consultancy The Clear Partnership, some profound changes are already taking place.
"In the past six to eight months," she says, "there’s been a quiet revolution going on. CMO leaders at large global advertisers are saying they want to partner agencies on the basis of value- or risk-based remuneration. When clients can see the agency is driving incremental revenue, we are seeing client procurement departments being incredibly supportive of these new models."
Johnson, who is participating in the Performance Adaptathon on 8 July, is currently working with a range of agencies and clients on these sorts of remuneration models.
There’s also evidence from the World Federation of Advertisers of this shift. According to its latest report into payment trends (see box, right), more than a third of members surveyed said they want to include performance-based payment.
At the coalface of agency-client negotiations, Martin Telling, chief financial officer of Omnicom Media Group, is also seeing a new openness among clients.
"Some are very much up for something new. They’re the ones with sophisticated procurement people, well-grounded in marketing," he says. "They realise they’ve pushed agencies down on price as far as they can, and if you can frame the conversation with procurement around more than just money – for example by aligning our KPIs with the client’s – then you can move the discussion forward and look at alternative models."
Investment, not just cost
One trend taking shape is to look at elements of the marketing budget as capital expenditure, not operating cost. This is partly driven, notes Telling, by the growing recognition among clients of the importance of brand-building over the longer-term – and therefore as an investment – but also by the need for tech-driven initiatives and proprietary platforms supplied by agencies or created in partnership.
"The key point," says Johnson, "is that capital expenditure budgets are separate to and different from operating expenditure, which is where marketing budgets usually come from. [This] opens up the possibilities of licensing, revenue share and more risk-based reward structure. It’s innovative and can change the relationship between client and agency because it creates a partnership that lives outside the day-to-day marketing budget."
At the same time, however, there is no need to throw away the time-based model. "It’s still important for agencies," says Telling. "But we need to approach issues like scope of work and ways of working together with more rigour. If we can improve this, then the ability to take risk with other parts of the remuneration model is enhanced."
Clearly, there’s no pretending this is easy. "It takes two to three years to change the model," notes Johnson. "This kind of transition takes commitment and leadership from clients and agencies."
Yet there’s plenty of evidence to suggest we are pushing at an open door. There’s an appetite for change on all sides, and now is the time to explore, dissect and try different models. There’s no single model right for everyone at all times, which is why it’s right to get clients, ISBA, procurement and agencies round the table.
At the Adaptathon on 8 July, which we’re running in conjunction with ISBA, we’ll have leading senior clients including Alexia Clifford (Department of Health); Martin Riley (Pernod Ricard); Nigel Gilbert (TSB); and Dominic Grounsell (RSA); senior procurement experts from Barclays and Mondelez; agencies like AKQA and the Engine Group, which are pioneering new business models; and senior agency finance professionals such as Omnicom’s Telling.
The agenda for the day, which was shaped following a cross-industry workshop on this, includes multi-stakeholder labs on value- and risk-based remuneration, a look at how to improve time-based charging, and client-agency case studies. Our goal is to take the findings from the day to create a joint agenda for change with ISBA for the year ahead, leading to an industry charter and a new commercial creative contract.
Get involved: Join us for the Performance Adaptathon on 8 July 2014. Go to www.ipa.co.uk/adaptathon for more information.