How Much Are Agencies' Ideas Worth?

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Credit: Illustration by Andy Martin; Animation by AdAge

Last year, a multinational transportation business slashed the fees and services of its global creative agency because the company faced financial pressures, according to a C-suite executive with knowledge of the matter. Fast-forward to this year: The multinational realized it was no longer receiving the proactive thinking it had grown accustomed to because the agency was so thin-staffed and underpaid. In the annual review, the client determined it had cut the fee too much and increased it to get more value and strengthen the relationship.

Money has always been a high source of tension for creative shops and clients: Marketers cut costs and agencies suffer for it by not being able to deliver strong work. But agencies can also be their own worst enemy. The more agencies say no and try to negotiate the fee, and then walk away if necessary, the better, says an independent agency leader who asked to remain anonymous. "Most just don't have the guts to do it," he says.

It's a far cry from the days of Johnny Carson's "Tonight Show." A half-century ago, agencies were paid a commission every time an ad aired on TV. "You made money while you slept," says BBDO Chairman North America and Chief Creative Officer BBDO Worldwide David Lubars, even though this was way before his time. "It was unfair for decades on the clients' behalf. And now it's unfair on the agency side."

The right mix

That's because fixed or flat-fee payments, with no performance-based incentives, are pretty common. Basically, no value is placed on big ideas that could end up being worth millions of dollars, says Lubars. Retainers based on hours and labor, another typical compensation option, are rather arbitrary too, he says, because "a lot of the best ideas come in a burst, like when you're in the shower, so you're penalized by how creativity works." And hourly rates provide little incentive for an agency to work faster.

The question, then, is, what's the right mix? It depends on whom you ask.

Around 60 percent of agency-client compensation arrangements currently are labor-based in one form or another (for example, one that has to do with staffing), says Tom Finneran, executive VP of agency management services at the 4A's, while 25 percent are fixed-fees, and the remaining 15 percent are combinations of commissions on media and production, and sales or other hybrid models.
For Lubars, the middle ground is an incentive-based fee model, where the agency is paid a base amount for the talent put on the account and is compensated again depending on business results.
The "holy grail," according to McCann Worldgroup Chairman and CEO Harris Diamond: "A compensation-beyond-fee arrangement based on the success of your idea."

Most of the time, McCann and the client come to an agreed-fee arrangement, which is built on hours or the scope of work. But Diamond says the group is "willing to take risk"—i.e., a lower fee—in exchange for a performance-based agreement because it's confident in the power of its work.

Incentive-based roadblocks

"We've talked about the incentivized/performance-based model for years and years," says Ken Robinson, partner at Ark Advisors, an agency-search advisor to brands. "Most often, the agencies don't come up with metrics to make it worthwhile and clients find it hard to manage a cash flow if it's incentive-based compensation."

For example, if you're a marketer, it's difficult to figure out your budget for the rest of the year if you have the looming factor that you may have to pay your agency millions of dollars if a campaign performs well.

Robinson adds that it can be difficult for everyone to agree on specific metrics with which to measure success, be they impressions, sentiment, sales or other measures.

Lynn Power, CEO of JWT New York, says she prefers to have a performance metric associated with compensation because "we should have skin in the game," but "it falls a bit short in reality."

Sometimes, she says, clients are reluctant to fork over incentive payments—even if terms were already agreed upon and the fee was reduced—because they look at it as a bonus, so it's a struggle to get paid. Worse, Power says, she's seen clients agree to an incentive-based model just to pay a smaller fee with no intention of coughing up the extra dough.

"It's in a contract, but since it's based on metrics, it's sometimes squishy, especially if it's a subjective metric," she says.

More commonly, JWT goes with its own "core-team-plus model," which is about putting a dedicated small group of leaders on the business, such as a strategist, creative and analytics person, and then "having a more project-based mindset on how to staff the team around that," says Power.
After a smaller retainer is locked in place, clients buy additional resources and talent as work evolves, "so we're not putting people on business and then having them do far more than the scope," she adds.

The need for a 'Switzerland'

Boxed Chief Marketing Officer Jackson Jeyanayagam, who started his career in the agency world, says he's used a variety of compensation models, but his ideal situation is to have a small baseline retainer for ongoing support, with "heavy incremental budgets tied to key campaigns" and real-time activations relevant to the business.

He believes this model is the fairest because it rewards ideas and how they're executed, rather than just paying for bodies working on an account. And on the Boxed side, he says it allows him to plan and budget with more discipline.

Boxed, an e-commerce company that offers consumers bulk shopping, doesn't have a procurement team, but Jeyanayagam says, "If I was at a Fortune 500 company that had several brands and dozens of agencies, then I am sure I would work closely with procurement."

Deb Giampoli, former global director of agency relations for Kraft Foods and Mondelez International, says she worked with all sides when it came to agency compensation, serving as a "matchmaker."
She says the value in her position "was that I could be Switzerland, so I was trying to get the brand team to play fair with the agencies, and with the agencies I was trying to help them understand the brand team's pressure." Giampoli left Mondelez in January and co-founded Stone Soup Consultants in July.

More for less

While a lot of agencies are saying that clients want them to do more for less, Jeyanayagam says he's had a different experience. "As far as I am concerned, it's more that the expectations and needs from the agency are changing," he says.

No longer are creative agencies serving as the lead agency for all creative, strategy and execution, he says. Instead, creative shops now play more of a key role in a specific area, while brands build out more internally, and take on more creative and strategic responsibilities, as well as media planning. "The agency role is ... still important—just not as central to every marketing initiative as once before," says Jeyanayagam.

Robinson, though, says he sees "too many clients cut into the bone and don't realize that they get what they pay for. If you've been cutting fees the last three or four years, it will directly correlate to the level of talent on the business and the level of satisfaction you have with the work from the agency."

Is there a 'right' model?

The most common compensation model that Robinson says he sees on the creative side right now is a retainer based on full-time equivalent. FTE, which is where time sheets come in, is about the portion of time each individual devotes to an account, he explains.

Robinson says he's also negotiated some flat-fee deals recently, and in those cases, the marketer still wants to at least see a staffing plan, even though there are no time sheets.

One of the smartest models, according to Robinson, is when agencies, like Bullish, offer their services in exchange for a stake in the company, because then they truly have a horse in the race.

MediaLink senior VP Bernhard Glock believes there is no right or wrong option when it comes to agency compensation. In all of the models, he says, marketers have to set proper expectations from the beginning and align on objectives.

"Then, move on to determining fair and sufficient compensation that leads to profit and truly allows an agency to deliver on a scope of work," he says. This should be based on what the client needs from the agency in terms of the seniority of staff, its experience and its capabilities, adds Glock.

Borrow from consultants

The 4A's, however, wants agencies to use market-based rates in labor-focused compensation models. In other professional services, such as legal or consulting, Finneran says there's published information on hourly rates, so the trade organization figured out labor rates that agencies should charge clients based on survey information from its members.

The agencies surveyed were asked to provide actual rates that they billed clients for specific positions last year, such as art director or copywriter, using "representative rates," not their highest or lowest charge. For example, an agency may charge between $103 and $175 per hour for a copywriter in New York City, and $224 and $515 for a chief creative officer.

The full findings, available to 4A's agency members, are meant to serve as industry benchmarks.

Power says agencies should expand their capabilities and start "borrowing from consultants a bit to look at how they're structuring and charging."

"I don't think agencies in general are great at defining our value or getting paid for what we're contributing," she says, adding that creative shops need to figure out how to better prove their worth to clients in the results.

According to Giampoli, the best incentive a marketer can give an agency to do great work is simple: Be a great client.

"Then you'll have a creative team clamoring to work on your business," she says. "It's not a financial payout; it's just about having a good relationship."­

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