Agency competition was stiffer in 2016 than ever before, and clients have become well aware of their position of power. Furthermore, the number of account reviews and disruption caused in part by the K2 Report from the Association of National Advertisers, which revealed numerous non-transparent business practices, including cash rebates to media agencies, has created both more uncertainty and opportunity in the marketplace.
For example, brand procurement officers are becoming bolder and increasingly creative over with how they compensate agencies, making them difficult to measure. Underlying this dynamic is the years-long digital disruption that is shifting resource demands.
We’ve seen this particularly with the pressure on compensation models being felt across the industry. In the name of transparency, clients are demanding more detail on the work that is performed and often asking to tie very specific detail to fees. Yet agencies don’t have the leeway to gather information informally. And, when the traditional retainers give way to project-oriented work, the creative process becomes more scripted, and, well, less free-form. To provide accurate financial reports on this data, a time-tracking culture, akin to traditional consulting, becomes necessary.
There are five major models of compensation we’re seeing in use today.
Fees: A fee is agreed on between the advertiser and the agency for the services provided. These can either be an hourly or daily rate to be applied by role and multiplied by the number of hours or days taken.
Project Fees: This is usually where a project is defined and a project fee with a fixed price is set, usually based on an estimate of the time and resources required, but charged on the output, no matter what the outcome.
Resource-Based: This is the most common approach, where the cost of the resource is based on a formula with the direct salary cost of the resource multiplied by an agreed overhead and profit multiple to determine the annual fee for the resource. It is then divided by the percentage of the time they’re required to commit to the project. This is the underlying approach for most retainer arrangements. It is also considered the ‘cost recovery’ method because it recovers the agencies largest cost, people, and the associated overhead.
Performance-Based: Some or all of the agency compensation is put at risk, with payment determined by meeting or delivering a pre-determined set of results or performance criteria. These performance criteria usually fall into one of three categories: Soft (relationship, service delivery, client satisfaction), Medium (marketing and advertising metrics), and Hard (sales and financial performance). I will expand on these below.
Value-Based: This is relatively new compared to the other approaches, but basically it is where the advertiser determines a value or price they are willing to pay for specific services and outputs, and the agency works to deliver these within the set price.
Amidst the emergence of these models, more and more creative, digital, and full-service agencies are confronting the fact that their financial software systems are creating service issues. Traditional "agency" software offerings were created for agencies in the pre-Internet world. Older and smaller firms running legacy software don’t have the resources to evolve their business models to the new reality.
Recently, the CEO of a leading digital agency told me that his clients are asking for transparency and their demands are what dictates his business system needs. As clients’ needs change, he needs to adapt the business system. Today, it is a unique set of reports or even a mobile client portal. Tomorrow it could be a client-specific workflow that necessitates sign-off by CMO that needs to be logged (and audited) to retain and attract new brands. The days of software that meets industry needs "off the shelf" are long gone. The requirements change every day, and the software needs to adapt as well. Without systems that can handle this complexity, processes are pushed into Excel sheets and custom reports reside outside of any controls or integrity. And, once the integrity of the business information is compromised, the decisions that come from it are going to be questionable.
As the digital revolution continues, the pressures for agencies to work more efficiently with their people are going to mount. Systems and platforms need to be as dynamic as this change. Leaders will have to make investment choices to arrive at new workflows, dashboards, and reports that give them insights to make the right decisions at the right times.
For more information on how today’s technology is enabling these new approaches, please take a look at a new NetSuite report headlined Rethinking The Ad Agency Model.