NEW YORK (AdAge.com) -- For the first time, the 4A's is taking a stance on how agencies should be thinking and talking about compensation -- within their own walls as well as with clients out in the marketplace.
The 13-page position paper took some four months to put together, led mostly by members of advertising agency trade group's finance committee. It's expected to be released widely later this week, but Ad Age has obtained an early copy.
Why now? According to the group, the genesis of the missive on the long-debated topic of agency compensation was recent feedback from members, indicating that negotiations are becoming increasingly thorny. And interestingly, it's not just clients and procurement officers who are being blamed for the escalating problem.
Here's one sample quote the trade group received that illustrates the issue: "Agency senior management and client service ARE the problem and sometimes give away more than necessary in exchange for what they hope will be a long-term relationship."
And here's another one: "Due to the oversupply of agencies and low barrier to entry in this industry, we continue to kill each other on pricing. Our industry's problem is our inability to demonstrate value on a regular basis or to remind the client about this value on a regular basis. Somehow, this gets lost in the negotiation process with procurement."
Tom Finneran, exec VP-agency management services at the 4A's, said its time for the trade group to take a stance on agency compensation because it has become more complex than ever. "It's the economy, it's the role of procurement, and the fact it's difficult for agencies to differentiate not only the value of marketing and advertising services, but also [the difficulty of] quantifying what that means in terms of the benefits to a client."
Mr. Finneran added that "the agencies that are doing the best job [at negotiating] talk about marketing as an investment that should be optimized, rather than as an expense that clients will want to minimize."
The 4A's is looking to generate support broadly across the industry for transforming agency compensation methodology from a price-based to value-based approach based on four key principles. They are:
- Increased involvement from agency management in transforming pricing discussions with clients. "Agency compensation will continue to deteriorate unless agency management gets involved in pricing strategy and client compensation discussions. 4A's urges agencies to evolve pricing as a core management competence."
- Focusing not on costs and fees but on scope of business benefits. "The foundation for all agency compensation discussions should be a value discussion. 4A's recommends that all compensation discussions frame agency value creation and scope of benefits as the pre-requisite for discussing agency services, compensation and proposals."
- Agencies should consistently negotiate appropriate arrangements with clients and adhere to internal standards. "4A's recommends that agencies establish internal agency standards on critical servicing, compensation, intellectual property and contracting principles prior to initiating negotiations with clients and prospects."
- Do not segregate agency finance and client procurement in negotiations as it may decouple the value the agency's services from scope of work and level of remuneration. "Agency compensation should not be negotiated in silos. Compensation discussions should include all key stakeholders, i.e. client marketing and client procurement along with agency account management and agency finance."
The document further lays out the types of information an agency could include within a comprehensive compensation and contract principles policy -- delving for some time into what performance-based compensation plans could look like and guidelines for protecting intellectual property.
"A framework is nothing unless there is some adherence of principles," said Greg Stern, CEO and founding partner of Butler Shine Stern & Partners in Sausalito, Calif., who helped put the 4A's document together. "It's really about spreading the word to clients and agencies and establishing a path towards evolution for the discussion between clients and agencies. Ultimately, the goal is to allow agencies to be paid on the basis of the results they achieve for clients."
"Right now," he said, "we're selling time."