Agencies Are Getting a Free Pass

Why Some Clients Give Away the Store When it Comes to Compensation

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More clients are using performance-based incentives to compensate agencies, but most of them are still letting their agency partners off the hook.

According to the ANA's Agency Compensation Survey, 61% of clients use some kind of performance incentive with their agency partners, up from 46% in 2010, when the study was last conducted.

Even more significantly, 36% of clients use a risk-reward incentive structure, in which the agency is paid more if it meets its goals, but risks losing compensation if the goals are not met. This is up from 21% of clients that used a risk-reward structure in 2010.

But why are the majority of marketers (64%) still not holding their agency partners accountable? Not using a risk-reward structure essentially gives agencies a free pass, and in the process clients are leaving money on the table and not managing their agencies to the fullest.

Here are four reasons why clients are willing to give away the store:

1. Scared of the Relationship
Many clients don't want to confront their agencies and fear that they will upset or even damage the relationship. Many clients worry that their agency is " too hot" or specialized in a specific area and will not accept a risk-reward form of compensation. In reality, the best agencies strongly believe in performance and generating results for clients, as long as those results are articulated, well-defined and fair. By not having the discussion or inviting their agencies into the debate, clients are simply kicking the can down the road. Eventually, without clear risks and rewards identified and outlined, the relationship is in fact at greater risk, not less.

2. Don't Have the Metrics
Clients tell us all the time, "We can't judge and pay our agencies based on the numbers -- we don't have them." In today's data and digital world, that is a little hard to believe. The real problem seems to be relating the metrics back to the actual work the agency does for the client. Agencies should be judged using the same metrics the client is using to evaluate marketing performance. Marketing is a team sport, and the agency is an important part of that team. Therefore, the total team needs to outline at the beginning of the year its roles, how the team will judge success (or failure), and what that means financially to the client and agency.

3. Don't Want to Give the Agency Too Big a Voice
A client of ours once said, "If I ask my agency to risk their profits on our business results, I will need to give them a bigger voice." Yes, you will. But why wouldn't you want to? Being a client means you always have ultimate approval. But if you treat your agency in this fashion, you don't really have a partner -- you have a vendor. Clients that do not want their agencies pushing them, challenging them or bringing forth unsolicited ideas want to manage by command and control. By behaving in this manner, clients are wasting their money and might as well do the agency's work themselves. We have never found an agency unwilling to be paid based upon results. Why? Because savvy agencies believe they have much to offer as long as they have a real voice in the brand's future. Isn't that what clients should want -- real partners that bleed or succeed with them?

4. Not a Top Priority
Establishing metrics, determining agency contributions and paying your agency based on a performance plan is without question more complicated than a standard flat fee. But it does not have to be complicated, and furthermore, that thinking is out-of-date in a world where marketing accountability is the new norm. Marketing people are clearly under pressure to perform in order to stay in their jobs, and agencies should be right alongside them in terms of accountability. By forming this bond up front, marketers should want to make performance-based compensation one of the top 10 items they tackle in their first six months on the job, or risk their own survival in the process by ignoring or procrastinating the decision.

Those agencies receiving anywhere from a 15% to 25% profit margin just for showing up are not being well-managed or led by the client. Agency work without accountability or clearly defined risks and rewards is not a sustainable business model for either party.

Today's world is much too competitive for anyone to be given a free pass.

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