Suspend disbelief for a moment. Imagine a world where agencies are paid solely on the basis of commercial results. An ideal world where marketers can isolate the specific commercial contribution of each agency, and where agencies are empowered to focus on only the things that contribute the most. In this world, everyone makes the money they want.
Rather like the elusive Higgs Boson, although we all assume such a world must exist somewhere, it is difficult to observe for more than a very short time, and only in very special circumstances.
For those of us working in what we call the ‘real’ world, although we all say we’d love to do it, in the end basing any remuneration on results is just too hard, too controversial and too complicated.
Instead, the question of agency remuneration depends on budgets, head hours, rate cards, resource levels, scopes of work, mix of resource, overheads, estimates, mark-ups, disbursements, ad serving costs, payment terms, a large serving of guesswork and a dollop of gut feel. Maybe ROI might get a look-in now and again. Not often though.
Like most problems that first present as binary choices, there is of course another solution.
The Output-based Cost Model
The principle behind it is simple.
Instead of determining the costs of a piece of activity from the bottom upwards – and therefore pricing all the inputs required to achieve the result – an output-based approach forces a top-down view, and determines cost by the value of the activity to the business.
Here are five things this means in practice
1. It means you can focus on the big things
If a campaign is strategically important, or has significant ROI expectations, or is likely to attract the attention of a wide group of stakeholders, then a set cost of x+20% will allow for the appropriate levels of strategic and creative focus to ensure a great result – but without letting costs spiral out of proportion.
2 It means you can stop sweating the small stuff
If a campaign is tactical in nature, or expectations for ROI are not high, then a set cost of x-20% would ensure that the development process is suitably lean and efficient and the project takes up far less of the marketer’s or agency’s time. And if a proposed initiative has no clear benefit to the business, then you simply don’t do it. This alone can liberate hours and hours of marketer and agency time and effort currently spent on what is really pointless busy work.
3. It means your agencies are correctly incentivised
Your agencies now need to be as efficient and fast as possible in executing your briefs. They won’t want to pack meetings with bodies. They won’t want multiple rounds of presentations. They’ll insist on a clear brief and a lean approval process. They’ll want to get to the creative solution rapidly and effectively.
4. It means you and your team need to up your game
Fuzzy briefs, unclear feedback, poor process and loose stakeholder management will be punished by extra cost right away, because your agencies won’t have the comfortable cushion of a fat retainer to fall back on when you ask them to rework the proposal the third time. You and your team will need to be responsible. You’ll need to make sure everyone is brilliant at his or her job.
5. It means the liberation of your campaign development process
Imagine you and your agency teams incentivised to focus on the most efficient process to produce the strongest results. No more back and forth with time sheet reports, overages and extra charges. No more pointless games of ‘guess the budget’ with the agency. No more suspicion of padded estimates or hidden charges.
Using the output-based approach for business improvement
An output-based model can be implemented rapidly and relatively inexpensively. Applying our benchmarks across a twelve-month range of a company’s typical marketing outputs, developing the detailed model and constructing the tools to enable implementation usually takes us around six weeks, with normally a week or so for induction.
Output-based models are already commonplace in the US and UK, and they are fast becoming so across Europe. Where we have already implemented them here in Australia, and agencies and marketers become familiar with how they work, they invariably tell us they would never go back.
So, if rejecting the current agency remuneration stalemate saves marketers and agencies time, money and effort, and if as outlined here the output-based approach improves efficiency, effectiveness and relationship quality, then why isn’t everyone already doing it in Australia?
It might be because you need to be brave. It requires a marketing team and an agency roster that is ready to put its performance out there in plain sight. It involves a refusal to accept the current binary choice between a results-based utopia and a grindingly inefficient status quo. Not everyone is up for all that. Which is fine, of course.
But for those who are, significant commercial advantage awaits.
Find out more about the TrinityP3 Agency Remuneration and Negotiation service here
