Much of the talk at the Digiday Agency Summit, taking place in New Orleans this week, has been centering on the “broken” model of client-agency relationships. Agency executives from both the media and creative worlds complain about the outdated models of how agencies make their money for clients.
There are a few current models: one is a commission-based system where a portion of the media spend goes to an agency. That has its problems. As Alister Adams, vp, digital at Publicis Modem puts it, the media spend and the amount of work an agency puts in don’t necessarily track. Plus, media spends go up at the end of the year, and go down in the middle, which puts undue stress on an agency CFO.
Other models also have their problems. The current “full-time equivalent,” or FTE, model, reduces the equation to hours worked. And that forces agencies to either skimp on creative because enough hours aren’t built into the assignment to begin with, or over-inflate figures to justify why someone is spending so much time on a project.
That said, pay-for-performance has its own set of challenges. One agency executive who preferred not to be named said clients are reluctant to operate with effectiveness as a metric because it could create a situation where the agency does such great work that it blows budgets out of the water. Others hinted that the problems about money go much deeper than compensation — Sophie Kelly, CEO of the Barbarian Group, said that agencies have gotten into the habit of giving away so much work for free during the pitch process, that it creates lowered expectations.
We took the opportunity to canvas the industry elite at the Digital Agency Summit with one not-so-simple question: So, how would you would go about fixing the compensation model?
Alister Adams, vp, digital, Publicis Modem
At the end of the day, agencies just want to make fair profit, do great work and help their clients succeed. The model of the future will be an output-based model where agencies are compensated based on agreed-upon deliverable. This way, the scope of work is defined and staffed and planned against, but agencies are free to find the most efficient and innovative way to deliver against the mandate. As with all current and future models, it should be augmented with a payment-by-results component to the agreement, where agencies put real skin in the game — demonstrating that we believe in and stand behind our work.
Rohit Thawani, director of digital strategy and social, TBWA/Chiat/Day, Los Angeles
Clients need to choose two of the three when they are thinking about paying agencies: good, fast or cheap. Clients are starting to take digital seriously, but don’t want to pay for it at the same rate they do for other above-the-line production and media. They also expect the creation of digital to be closer to real time. So it’s all about managing expectations right at the beginning and not letting them get away with it.
David Baldwin, founder, Baldwin&
One of the most important things an agency can do to get paid fairly is to stop giving their ideas away for free at the beginning of a relationship. Our coin of the realm is ideas and yet we hand them out like candy on Halloween by pitching everything on spec. This can make it hard to make a profit for your first 12-18 months after a new business win. Get paid for your pitching, you’d be surprised how many clients will actually write you a check to do it.
Sophie Kelly, CEO, The Barbarian Group
Agencies need to establish clear success criteria to evaluate performance. What exactly are the “return on creativity” measures? They need to also have a meaningful and collaborative relationship with procurement. This means quarterly meetings with clients, including all procurement teams, to track what work is flowing through the system versus the fees being charged. No surprises. And rethink the entire pitching process. Too much of it is asking agencies to spend hundreds of thousands in free work, upfront, with not enough protection of intellectual property. Also, be open to different models: FTEs is only one way. Think project fees based on deliverables, equity based deals, and performance-based comp.
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