We all understand the power of incentives. It seems curious, then, that, as more clients pursue innovation and commit bigger budgets to top-line growth, both sides of the industry apparently remain wedded to a payments model that neither incentivises agencies nor rewards outstanding commercial creativity.
Of course, the time-based payment model linked to input or output has a role, and may continue to account for the bulk of client-agency remuneration models. Nonetheless, although it can surely be improved, time-based payment is not geared to reward the kind of commercial creativity that creates value, drives innovation (and its corollary, risk-taking) and, ultimately, provides the client with business-transforming ideas.
Models that reward agencies for outcomes, for ideas that create shareholder value or encourage the sharing of risk, are ripe for exploration.
The beauty of this is that it benefits both sides, and deepens the relationship. The client achieves value, and the agency a higher margin. The relationship becomes more like a long-term partnership, and we know those deeper relationships produce better work and results. However you look at it, it’s a win-win.
There is a growing feeling that clients recognise this. Martin Riley, global CMO of Pernod Ricard and president of the World Federation of Advertisers (WFA), says an increasing number of global advertisers are adopting payment by results (PBR) schemes. They are following trail-blazers such as Coca-Cola, Procter & Gamble and Kimberly-Clark.
Digitisation is a key driver: it offers both accountability and proof of outcome; allows space for agencies to develop IP, whether in app development or ecommerce; and demands agility and responsiveness of client and agency, making traditional working and payment practices less relevant.
We asked what clients really value and how we can provide it. And what they really value is work we call ‘thinking for them’ that truly transforms their business.
We can see the push for change here in the UK, too. At last month’s Performance Adaptathon, the IPA and ISBA jointly published the first iteration of a new Performance Charter (see box), a client-agency compact that provides a framework which can underpin a change both in business performance and relationship performance. The fact that we did so together underlines just how great an appetite for change there is on both sides.
So where does the journey begin? According to Debbie Klein, CEO of the Engine Group, it’s about changing the mindset. "Too often we think of ourselves as in the service business," she says, "but we’re in the product business. We have to believe in what we do and the value we add."
Earlier this year, Klein launched an initiative to lift the group’s margins by rebalancing its business-model portfolio toward value-based payment.
"We asked what clients really value and how we can provide it. And what they really value is work we call ‘thinking for them’ that truly transforms their business – like the 118 118 launch campaign we ran. It set a target of gaining 20% market share; it got 60%. The outcome far outweighed the output."
Klein adds: "It’s not easy, but we segmented our client base and found a handful that have an appetite to work with us on transformational issues."
It is this kind of attitude that helps agencies become true business partners to their clients, also a critical part of rebalancing process. "I want my agency truly connected to my business," says Riley. "[This] means we start our conversations with the big questions about solving business problems, not just communications ones.
I want them to be entrepreneurial. I want them to challenge us. This makes them a real business partner, not a supplier. Innovation is a big part of our business, and we want to get agencies involved, so we’re looking at how we can reward them for success in that area. Then they’ll have skin in the game with us."
Digital agency AKQA is another that has transformed its relationship with its clients, and in so doing adopted a more flexible business model that allows for PBR and, in some cases, risk/reward-based payment.
"We changed the conversation," says AKQA general manager Amanda Morrissey. "We focused on becoming the most valuable partner for our client. That means we have big conversations and debates about solving issues before we even think about rates and methods of pay."
I want them to be entrepreneurial. I want them to challenge us. This makes them a real business partner, not a supplier.
Working with senior client executives on broader business issues benefits the agency in other ways, says Klein. "It really motivates our people, and helps us get an unfair share of talent."
Successfully changing the model to pay by outcome or value added, however, depends on getting the metrics right. First, it’s vital to define the goal in such a way that it can be measured, and is one that both client and agency are behind.
Second, the KPIs have to be clear, fair, and framed so that the agency’s contribution can be ring-fenced. "We are forensic about measurement and we take a very collaborative approach to that with our clients," says Morrissey.
However, agencies must be sure to measure success by KPIs they can control. "Be careful what KPIs you wish for," cautions Dominic Grounsell, personal marketing director of insurer RSA. "If you pick the wrong ones, you’re open to risk you can’t control. Pick KPIs in areas you can influence."
So, the door is open on a new era. Opportunity beckons. We’ve seen great examples of what’s possible. The new models won’t work across all clients, on all accounts or for all agencies. Agencies might therefore be advised to try a portfolio approach, mixing different models and levels of risk.
But experiment we should. We know that, as agencies, we can produce transformative, creative ideas that have an enormous commercial impact for our clients. It is in both in our, and our clients’, interests to do it. The alternative – a race to the bottom of the ratecard – is in nobody’s interests.