'Pay for performance' can be a win-win for brand and agency
A view from Alain Portmann, House of Kaizen

'Pay for performance' can be a win-win for brand and agency

Performance-based remuneration is a growing trend, but it's important to tailor the model to suit the client and its agency.

McDonald’s recent decision to appoint Omnicom to its US ad account, on the basis of a pay-for-performance component, together with the Association of National Advertisers’ Media Transparency Initiative, highlight the industry’s increased need to combine performance and remuneration.

Furthermore, the adoption of programmatic trading and operations is becoming a source of disruption for established media agencies and their remuneration models, as evidenced by the entry of Danish start-up Blackwood Seven into the US and European markets.

The burgeoning media agency is offering brands such as Unilever’s Dollar Shave Club a SaaS (Software As A Service) model. The traditional compensation model with a monthly fixed fee is being replaced with access to a proprietary platform for planning, buying and forecasting of media.   

While agency executives argue it is harder to make sustainable margins given procurement departments continually squeezing them on compensation, clients are left wondering if their existing agency is good value for money given the call for increased cost efficiency within their organisations.

More often than not, consultants and auditing companies find themselves caught in between, serving as well-paid therapists for both agencies and brands.

In my experience, while a performance based commercial model between agencies and brands does not lessen complexity, it can provide a win-win solution for all parties.

Having negotiated, implemented and managed performance-based commercials models with two Fortune 500 brands in the travel and software industry, the reality is that not all performance models are made equal and suit different types of agency and brand organisations.

If these models can deliver a win-win for both agency and client, why are they not more prevalent?

The truth is that running a client account at an agency, even for a global brand, is very different to running a business. The average senior agency executive is not, in most cases, trained to be commercial.

Furthermore, disrupting the status quo at an established agency requires time, perseverance, political wit and potentially putting careers on the line.

On the other hand, the average client has handed too much control to its procurement department and frankly needs to be truly invested (beyond a bonus or promotion) in order to explore and set up a performance model with an agency.

There are broadly three types of performance-based commercial models that work for agencies and brands:

Pure performance – the agency pays all costs including media, tech and resource. The agency is paid on a revenue share or commission for products/services sold online.

Reinvestment performance – The client pays for media and pays agency a baseline retainer. The agency is paid on a revenue share or commission for exceeding specific targets, with an agreement for the agency to reinvest "profit" into additional media to fuel additional payments 

Cost performance – agency gets paid a retainer to cover staffing "at cost" and is remunerated on the basis of specific targets (which can include online and brand metrics) being achieved to generate profitability.

When considering a performance-based commercial model, it is important to evaluate and keep in mind the following factors:

The model will evolve from quantity metrics to quality metrics

One of the brands I worked with under a performance model, in the second year, requested the model differentiated between existing customers and new customers. This "quality" metric was overlaid into a "quantity" of customers and revenue. 

Bring finance on to the table from day one

The biggest challenge for an agency, big or small, when managing performance models, especially pure performance models, is cash flow. Finance teams can help both agencies and brand owners to project the fluctuations of the model relative to cash flow and currency exchange variations. 

Invest heavily into process and business intelligence

We invested over £250,000 in upgrading and building a robust business intelligence platform for one of our clients. While the on-going licensing cost of the SaaS platform was covered as part of the agreement, the initial capital investment was covered by the agency.

Hire and empower an integrator that works on both sides

The integrator is key to ensuring agency and brand owners are aligned, communicating and not working in silos. The integrator role has to ideally be agnostic in order to be effective. Case in point, we agreed with a client on splitting the cost of the role, which ensured the individual was seen as working equally for both parties.

Agree on a research and development fund

The nature of performance models can sometimes lead to business as usual thinking and decision making. Having an R&D fund that is jointly funded and used to test, experiment and showcase innovation is a must. Even performance led commercial models need an influx of creativity to be effective.

Control and centralise channels

The effectiveness and sustainability of a performance model is driven by how many levers it can control. If the performance model does not include all paid, earned and owned channels it is essential there is a single truth of measurement. The measurement framework, data processing and dependencies such as seasonality are key to ensure the model allows for true flexibility and contribution.

Alain Portmann is partner and head of strategy and insights at House of Kaizen, a digital performance marketing agency