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The expression, the pendulum never spends any time in the middle, aptly captures the state of affairs in agency compensation. The interactive and mainline marketing agency industry has at times charged its clients too much for services that technology was rapidly making less expensive to deliver, ranging from media planning and buying to resizing banner ads. The imbalance between fees and value creation brought us the aggressive sourcing phenomenon led by purchasing officers. They have been charged by senior management to use the same kind of negotiating leverage they had perfected in the purchasing of raw materials and commodity inputs for the manufacturing process.
The commoditization of agency services is the inevitable consequence of the pendulum’s swing of market forces. However, in accepting this inevitability, we devalue our innovative industry, in which a team of marketers can translate a deeper understanding of a brand’s most valuable consumers into a turn of phrase, a flash application, a mobile application or one of the other miracles of interactive marketing. If we are capable of such creative actions which can actually transform a brand, why should we accept victimization by the mechanical nature of the market’s pendulum? At Rosetta, we think there is a better way. Here is our argument and proposal for what we term Value-Based Agency Compensation.
Whether it is called value-based compensation, pay for performance, or incentive-based compensation, just about everyone in the industry understands the premise: agencies are compensated above their basic costs if they achieve or exceed results as measured by agreed-upon metrics.
For the past several years, a number of clients and interactive agencies have strived to devise the right framework for value-based compensation. Several consumer goods companies have announced their participation in such agreements.
It is too early to call any one of these a success, but they are clear attempts to create more rational compensation models.
Value-based compensation is a natural occurrence in the industry’s life cycle, coming as both sides strive to determine the best way to focus the client-agency relationship on the highest value-creating initiatives and programs. But developing a new approach to compensation is also driven by the twin challenges of fragmented and constantly changing media and consumers who are ever more difficult to reach. Value-based compensation may well become the catalyst that produces changes leading to greater accountability and more lasting and mutually satisfying business partnerships – as well as greater shareholder value creation for those who hold stock in those clients and agencies.
The best interactive and direct agencies already have the assets that are required for accurate value-based compensation:
However, today, the traditional compensation model starts with the annual relationship, in which the agency and client agree to the coming year’s goals, tasks, staffing and hourly rate – aided by the client company’s purchasing officer. That rate is generally called the blended rate, an average of all team members’ rates.
This rate conjures up voices from the past, in particular Frederick W. Taylor and his time and motion study approach which analyzed a task to find the most efficient way to accomplish it. The fallacy in these Tayloresque methods is that they severely constrain the time for understanding the client more deeply, for getting to the core of why the client’s product matters and to which consumers, and knowing how to position and communicate its benefits most effectively.
On the other hand, there is no question that the industry has gone through a period of excess, charging premium prices for non-premium work, or simply overbilling for an activity the client chooses not to handle itself. Clients were gouged by a few agencies intent on being overcompensated to a degree that became unimaginable. As we all know, these practices continue to various degrees.
To compensate for what was perceived as over-compensation, the purchasing officer sought that blend between the $500+/hour team member and the $165/hour member. The potential outcome is that the client winds up with a team depleted of the right kind of senior talent and expertise. All work is treated as a commodity; the agency is de-incentivized to put its best and most creative brains on the assignment; and this limits the opportunity for creation of the breakaway value that leads to profitable share gain.
Here are some examples of what just one percent gain in market share – that breakaway value – can mean:
With scores of millions of dollars in annual profit in play, is the shareholder best served with a pricing scheme in which seasoned business problem solving and creative genius must occur within the predetermined number of clicks of a stopwatch? At Rosetta, we think not!
It is time for agencies to reassert themselves as the brand-and business-building partner they should be. They should be willing to “co-invest” with their clients by putting a portion of their profit at risk because they believe in their creative marketing solutions. The agencies should also admit to a fact of interactive life – that much of the work related to the web has become a commodity. Granted, the technology requires more work, but not necessarily more thinking. This is work that should be bought at a basic hourly level.
The blended hourly rate approach, which reduces agency activities to tasks rather than strategic partnering, does have its place: in a mature, commodity-led market. However, interactive marketing is neither mature nor a commodity, given that the right idea, executed and managed brilliantly, can generate hundreds of millions of dollars in shareholder value.
We believe agencies must take back the role of the invested, expert marketing partner to reverse the commoditization of our industry. In our experience, there are a number of contextual factors that define the ideal client circumstances for an effective value-based client/agency relationship:
The agency that chooses to offer value-based compensation options also requires a certain personality.
Rosetta has constructed an environment and rules of engagement that form the foundation for our approach to a value-based relationship. We start with formation of the Rosetta Client Service Team which meshes with the client marketing team to build a culture of continuous improvement. This team demonstrates the ideal: democratization of agencies in which everyone sits at the same table to achieve what’s best for the client, including R&D, analysts, creatives, technologists, account managers and brand stewards. These steps have led to strong partnerships with clients, because we have demonstrated that everything we do is in the client’s best interest.
Just as important, we put skin in the game. In implementing value-based plans, we create specific compensation structures for each element of the work we do. We see it as a spectrum.
At the one end we have straightforward projects that are part of any relationship. There is a well-defined assignment that requires thoughtful and expert execution but it is a relatively routine task. In this case we bill time and materials at a competitive rate.
At the other end is the innovative breakthrough work that will bump the brand to the next level of revenue. This is the sort of work that requires genius – work that cannot be achieved to the strains of a ticking stopwatch. It is the nexus of identifying the business opportunity, linking it to consumer need and then melding that to the art of the idea. It’s the ultimate challenge for an agency, to develop a category-defining concept that is then pushed to the ultimate level of execution.
Here are two examples of creative work that illustrate the magic to which agencies – and their clients – aspire.
We have found that central to our success is working with the client to create a collaborative environment. Without understanding and trust on both sides, value-based compensation will fail or at minimum not lead to the long-term relationship that should be the goal of this approach. It is also up to us to build in measurement and adjustment. If we are achieving the top tier of performance, then we must raise the bar. “Promise, test, measure, continue” has become our mantra. There’s no time to rest on laurels.
If we have done our job right, by the second year, we have demonstrated our capabilities and kept our promises. That positions Rosetta to move up the trust gradient and expand the set of initiatives that has been proven to drive material business impact, resulting in even greater results that drive base fees and bonuses. Our willingness to take a risk grants us an unusual degree of freedom and allows us to be properly rewarded for the strong business impact we achieved.
The environment has shifted and today we see an industry ready to accept changes in what had become a hidebound method of compensation. Both clients and agencies are more interested in exploring and participating in this kind of collaborative, integrated approach and sharing of the upside. Yet value-based compensation is unlikely to become the industry standard. That would deny the premise that exceptional outcomes should be rewarded.
However, the top interactive agencies will be offering value-based compensation as one of their primary compensation options. If, in the next several years, 30 percent of the top agencies’ client revenue comes from value-based compensation partnerships, this lengthy and sometimes rocky process in creating a new compensation model will prove to have been a catalyst for increased – and needed – accountability in our industry.
Long-term, this model should enhance the health of the client/agency relationship, leading to more effective brand building programs generated by the leading agencies and the compensation that rewards such value creation, thereby reversing the commodity doom loop in which the industry currently finds itself. While we can’t control the physics of the pendulum, forays into a brave new world of compensation should benefit all client/agency partnerships, ultimately yielding a more productive equilibrium.