Commentary by Jonah Bloom

Ad Agencies Eye New Business Model, Better Modes of Compensation

Contemplate Idea Royalties and Marketer Profit-Sharing

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"You are what you are paid." The expression is not new, but was co-opted recently by Andrew Levy, director of highly regarded U.K. ad shop Mustoes, to describe an agency's value.
Jonah Bloom, executive editor of Advertising Age.

It's perfect in that context, encapsulating the fundamental flaw in agency-marketer relationships. While marketers claim to want partnerships and big ideas, the majority pay agencies based on a scope of work and on the resources (manpower, hours and so on) used to complete that work. Such a system turns agencies into vendors, not partners, and rewards for process and distribution, not thinking.

Everyone loses
Agencies lose because their work becomes a commodity, the cost of which can be relentlessly pared by marketers and procurement execs, and because they lose all rights to their ideas. Marketers lose because their agencies are motivated to featherbed the account -- to build in unnecessary costs -- and because the system pre-determines the solution is going to be a certain number and type of ads. (That assumption is a sure way to waste marketing dollars.)

Hamish Pringle, director general of London's Institute of Practitioners in Advertising, says: "It's the law of unintended consequences: There's no incentive to get the big brand idea that will really add to intangible assets."

Performance-based compensation
The IPA and ISBA, the British equivalent of the Association of National Advertisers, want to move to more performance-based compensation systems: Systems that help eliminate the featherbed factor, split commercial risk between marketer and agency and allow agencies to retain some of their intellectual-property rights.

While a handful of marketers and agencies operate

At this month's 4As conference, Andy Berlin proposed that U.S. marketers consider moving to a system that shared risk and profits with ad agencies.
such systems in the U.S. -- DDB, BBH, Mother and Anomaly spring to mind -- no multilateral move has been made to go beyond the flawed resources-plus-fee model.

At this month's American Association of Advertising Agencies conference, Andy Berlin tried to change that, proposing the 4A's and ANA "transition from the current standards they recommend for fee compensation [ignored by the majority of big beefy clients] to a new structure of genuine partnerships."

Sharing in the costs
Berlin's proposal, like the IPA/ISBA framework, gives agencies "skin in the game," by expecting that they share some of the costs of coming up with ideas and producing ads, but also that they retain some rights to those ideas. "If the goals are met, the agency is compensated for taking the risk with the client by sharing in the profits," he said. "The client owns the brand and will likely bear the majority of the cost ... the profits would be divvied accordingly. The agency could also demand a royalty agreement for the time its work supports a brand."

Berlin also pointed out that this model is more similar to the entertainment industry's -- and in that respect it is better suited to a consumer-controlled media environment, in which ads that cannot attract an audience will be zapped -- along with their creators.

Such a system would stop marketers from getting ripped off by agencies that are charging them for hundreds of people spending hundreds of hours on a brief when it could, in fact, have been solved by a solo creative in 10 minutes.

Boosting the role of CMO
Such systems have another huge potential benefit: They elevate the entire marketing discipline in the C-suite. Imagine if the CMO, instead of telling his board they are investing millions in the possibility of an uptick in a fluffy metric such as unaided recall or likability, told them the focus is to increase market cap or sales, and that the agency would forgo payment in the case of failure. That kind of compensation system would turn agencies into what marketers need them to be: growth consultants.

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