I was talking to Nick Paul, founder-president of O'Keefe Reinhard & Paul, Ad Age's 2015 Small Agency of the Year, and he told me how his agency takes "both downside and upside" risks on fees, based completely on the goals of its clients.
You don't hear much about incentive fees these days, and Nick said the system "helps us to ensure incentives are aligned and helps us to let our clients know that we are so involved in their business success that we are willing to earn less if our work is not effective enough."
My feeling is that agencies need to embrace incentives if only to rebuild frayed relationships with clients and to keep procurement people off their backs.
Nick believes incentives change "the dynamics of the conversation" so clients start to think in terms of value instead of cost "because we are willing to stand by our work." In our Agency of the Future print issue, we talked about everything except new forms of compensation.
If agencies and clients continue to rely on the kind of fee arrangement used by lawyers and accountants, it will be difficult for clients to think of their agencies as partners. As we said, "at the nexus of the confusing and continually evolving mashup of business operations and marketing are clients who need a partner to help them stave off their own impending winter."
It's not so much a question of who will be their partner -- the holding companies, consultants, a media owner, an e-tail giant -- but how they'll be paid.
What agencies need to do is have skin in the game that goes beyond one-on-one relationships.
Agencies, in their efforts to more closely align their interests with their clients, should broaden revenue sharing to include not just a particular client but also efforts to derive income from the collective clout of all clients. After all, media agencies can't make a dime without their clients, so why not share money they make from all their clients' buying power? If clients continue to discern that agencies are raking in bucks by pooling revenue, they are going to be not only suspicious but also litigious.
John Montgomery, North American chairman of GroupM Connect, warned about the possibility of agencies getting stuck defending punitive clauses in contracts. At the 4A's conference in Miami earlier this year, he noted that the past year will best be remembered as a time dominated by discussions of supply chain risk -- issues like fraud, viewability, malware, piracy, transparency and ad blocking. "There is a real risk that agencies will find themselves defending punitive clauses in contracts for areas of risk that are outside their control," he said.
If I were running an agency, I'd be more concerned about punitive risks that are within my control, foremost the broad issue of financial transparency.
At the same conference, WPP's Martin Sorrell took a cavalier attitude toward the issue. In an interview with Ken Auletta, Sir Martin maintained that WPP has "a high level of transparency." He said WPP agencies act as principal in buying premium inventory, and clients can participate or not. But he couldn't resist adding: "We are transparently not transparent."
I wonder how far that last comment would go if WPP found itself defending punitive clauses in contracts that may not be outside its control?
And that's the crux of the matter. The 4A's seems to be quite protective of all the ways agencies make money outside of the individual client-agency relationship. One of the 4A's transparency principles, for instance, states that when the agency is paid by the media for services provided such as barter, content production or research projects, "the agency may consider such relationships confidential and commercially sensitive."
The problem is that agencies are making their money these days by aggregating their clients' activities and deriving revenue from the total spend -- or other valuables like data. The big issue between clients and agencies is whether the clients should get a cut of these proceeds.
Of course they should, and agencies should make a big deal out of sharing the wealth with their clients. If all this collaboration results in increased sales for their clients, agencies should share in the upside. And since putting skin in the game also means sharing the pain when sales are down, clients should be pleased that their agencies are doing everything they can to keep sales moving ahead.
O'Keefe Reinhard & Paul had other incentives in mind when I visited the agency after the Ad Age Brand Summit. The partners, Tom O'Keefe, Matt Reinhard and Nick, hosted a cocktail party and asked conference participants to name their signature cocktail: bourbon, ginger beer, banana liqueur, Aperol, fresh lemon juice and honey syrup. The nominations -- names like the Chemistry Check, TV Is Dead and the Bronze Effie -- were all clever, but I submitted Monkey Business and made an impassioned plea to name it for the ingredients, not for names that had nothing whatsoever to do with the cocktail's basic raw materials. "Monkeys and bananas go together," I asserted. "I hate to take a negative approach about the other nominees but I am very comfortable doing it."
I am proud to say Monkey Business prevailed, and I was awarded a bottle of bourbon and a bunch of bananas for my heroic efforts. I gave the bourbon to Ad Age's Chicago staff, and they promised that I could have a drink, even if I stopped by for breakfast.