Advertising Agency Compensation - Exploring Alternatives

The premise here is simple: aligning agencies and clients around results, rather than squabbling about costs and time, which further drives the commoditization of agency services, is a win/win situation. Ad agencies are in a fight for survival. The opportunity for the brave and innovative to flourish has never been greater than right now. For those who don't/can't start thinking differently, look out for the tar pits.

This post takes up on some of themes introduced in the December 5th post, Achieving Balance in an Agency, where the value of certain agency activities and deliverables (e.g. a breakthrough idea) was examined.

Value-based pricing is not a new idea, but it's a good one that has been in place for a long time in the consulting and pharmaceutical manufacturing arenas among others. Many agencies and clients are stuck in the familiar worlds of commission-based or hours/labor-based compensation. At their worst, these approaches encourage reach-oriented (i.e. tonnage) marketing programs, support running up the clock to justify billable hours and perhaps worst, crush innovation and performance.

The barriers and risks to adopting this approach are not insignificant and include:

• Agency and client comfort/momentum in doing things the way they've always been done.
• Having enough influence on an overall program so that the value you envision and agree upon with a client can actually be created.
• Clearly defining success and therefore value (raise your hand if you've been part of a view-through debate)
• Determining pricing so that nobody loses their shirt and the agency doesn't miss out on the upside.
  

There are various individuals and groups that are promoting this approach. Ignition Consulting Group and The Verasage Institue spring to the top of searches on the topic. Ignition even has a presentation on the topic posted on slideshare.net that is quite informative: Burying the Billable Hour.

So, what does this have to do with Project Management? In a study that Ignition and VeraSage conducted on behalf of the American Association of Advertising Agencies (AAAA) and the Association of National Advertiser's (ANA), the 2, top-rated agency value-drivers according to marketers were:

1. Working in a collaborative way with the client by creating an environment of mutual respect.
2. Ensuring that agency functions are integrated and agency divisions collaborate on behalf of the client

Along with the fact that Project Managers are often at the heart of conversations around pricing, these two tidbits should help give you voice on important discussions about evolving your agency's relationship with its clients. On the business development front, RFP's almost always allow responses for alternative means of compensation beyond the cost+ calculations they require. Putting a value-based option in front of a prospect isn't likely to get taken up at the outset, but at least it will show that your agency has some life.

Speak up. Watch out for the tar pits!