News

How to avoid wasting agency fees

Pittsburgh, PA - October 15, 2009

By Michael Esterin

There's an age-old saying that half the money a brand spends on advertising is wasted. The trouble is nobody knows which half. And while that sentiment may still hold water, it misses the mark somewhat these days. Brands still worry about the "fat" in their media buy, but it's the financial incentives in their agency compensation model that should keep the executives in the C-suite up at night.

After all, the wrong model (from the brand's perspective) could let the agency take the client to the cleaners. It's a common complaint from brands -- generous retainers and deals that give the agency a cut of the brand's media buy fail to closely align client and vendor, and even more worrisome, create a perverse system of incentives that leave the brand with poor results and big bills. Get informed! To learn more about agency issues, attend the iMedia Agency Summit. December 6-9. Learn more about the iMedia Agency Summit.

But the wrong model (from the agency's perspective) can be equally crippling because they put the agency on the hook for delivering (sometimes) impossible results for (often) ridiculously low fees.

So, is there a solution out there that keeps brands and agencies happy? In a word: no. At least there's no silver bullet, one-size-fits-all model that works for brands and agencies alike. But there are solutions, and finding the right model -- one that balances costs for performance and properly aligns incentives -- is the responsibility of both agencies and brand clients alike. So, we asked industry professionals for some advice on how to do just that, and this is what we found.

The good
While there's no single model that works for every situation, there are common elements to all successful compensation agreements. But above all else, says Russel Wohlwerth, principal at Ark Advisors, a consultancy that helps brands search for and hire ad agencies, the key is to strike a deal that is fair for both parties. According to Wohlwerth, agencies and clients need to agree on compensation that is easy to administer and is competitively priced.

It also helps if the agreement calls for some form of a performance-based component, Wohlwerth says. But while many agencies may cringe at the idea of having to align profits with results that are often out of their control, performance-based compensation doesn't have to be nightmare for the agency, if they are able to think outside the proverbial box.

For Barak Kassar, president of Rassak Experience, the perfect performance-based model means equity for the agency.

"Nothing changes a relationship more between client and agency than an equity relationship," Kassar explains. "Wherever possible, brands would benefit from granting or selling meaningful amounts of equity to agencies. And agencies would do well to seek out equity. This makes the agency feel like an owner and act like an owner because they are an owner."

Of course, equity isn't always an option, and Kassar admits that it will never replace fee-for-service entirely. But he says that if shared goals and a true partnership are the real goals for the brand, there's no substitute for equity.

Short of equity, Jay Friedman, a partner and co-founder of Goodway 2.0, advises that any deal that treats the agency as the brand's No. 1 salesperson is likely to yield positive results for all parties because, as he puts it, sales are the "core reason" why a brand hires an agency.

"It helps to begin by seeing an agency as a brand's largest salesperson rather than [as] an 'agent,'" Friedman says. "This takes the focus away from paying for services rendered because those services may or may not generate profitable activity for the brand. With this idea in mind, most salespeople make a healthy base salary but have significant upside to their pay to motivate them to focus their time and energy on ideas and activity that will generate real sales."

But what about the vast majority of relationships that, for better or worse, don't aspire to the ideal? Is fee-for-service still viable?

Maybe
Even if equity is out of the question and a brand refuses to see its agency as its No. 1 sales person (or if an agency isn't comfortable assuming that role), it is still possible to have a strong working relationship using an old-fashioned fee-for-service model, provided there's transparency on both sides of the table.

While Michael Brunner, CEO of Brunner, says he isn't keen on fee-for-service, preferring a value-based approach that compensates an agency for results, he believes there is room to work in a fully transparent fee-for-service model.

"Both sides need transparency for this arrangement to work," Brunner cautions. "Clients need to be more accurate and specific regarding scope of work, objectives, and the amount of rework. Agencies need to articulate the list of deliverables, time frames, and assumptions they used to build the fee and address how it will be monitored."

The bad
While there are a lot of workable facets to a successful compensation model, there are also some ideas that -- while still in widespread use -- tend to be frowned upon because they are often too lopsided.

According to Jeff Berkwits, a former marketing manager at Upper Deck, one often onerous compensation model that always sounds his alarm bell is the commission on media approach.

"One approach that I generally avoid is percent of media, as it encourages an agency to 'spend big' regardless of whether it's appropriate for my needs," Berkwits says.

To that end, any compensation agreement that allows -- or encourages -- an agency to run up the score simply isn't going to work for long. But by the same token, many agencies pointed out that partnerships with a disproportionate amount of risk on the agency weren't feasible either.

The contradictory
"I feel that the fee-for-services model is equal opportunity in that it disadvantages clients just as often as it disadvantages agencies," Wohlwerth says. "Sometimes, clients don't receive all the services they paid for. Sometimes clients have substantial scope creep and agencies do a lot more work than what they got paid for. The fee-for-services model is fundamentally flawed because it is based on 'selling' the agency's costs rather than the outcome of its work. This system does not differentiate between good and bad work. When you're working against the clock, it is in your best interest to eat up a lot of time. It's madness. Lastly, agencies do not do a good of job tracking time, so I am suspicious of their self-reported time -- another reason to abandon this system."

Wohlwerth isn't alone in this. Brunner, who says that fee-for-service can work under the right circumstances, admits that it's really his compensation model of last resort.

"The least preferable option for me is [hourly work]," Brunner says. "Being paid by the hour has zero relevance on the outcome of the services provided. Further, the hourly method does not promote efficiency or effectiveness; it rewards an agency for taking more time, not less, to accomplish the work. It also places equal emphasis on an hour of time regardless how the time was spent."

And where does a brand come down on this?

While Berkwits concedes that there are pros and cons to the fee-for-service model, he says he's not willing to abandon it altogether. In fact, Berkwits says that depending on what the brand needs, fee-for-service can be the best way to keep an eye on costs, especially if the project is a larger, one-shot assignment. But he adds, he's always been open to discussing performance-based models. And for Berkwits' money, it's always going to come down to adjusting on the fly.

"There's no right or wrong compensation model: the best approach really depends upon my needs for a particular project," he says.

Money isn't everything
While we've dedicated a good deal of space to compensation, it's important to keep some perspective on the matter. That is, while money is at the heart of the transaction, it's seldom the determining factor in a brand's decision to hire a particular agency, or at least it shouldn't be, Wohlwerth says.

"It's generally not compensation that causes agencies to lose pitches," Wohlwerth explains. "We seek to neutralize compensation before the finals by getting the agencies to submit costs in advance. That way, agencies are being selected on their own merits -- not their cost. While fees are clearly important, a client that selects an agency solely on price deserves what they get."

But when it comes to price, it pays for an agency to be creative and flexible above all else. While Berkwits says he understands that it's often hard to bend on the money issue, he points out that agencies that can't, or won't, step into the brand's shoes will surely lose the client.

"Very often I have had agencies express to me how we're partners in whatever project we're undertaking, yet when it comes time to discuss compensation, they're inflexible," Berkwits says. "I understand that both parties need to profit, but starting off extremely rigid sends a signal that's often at odds with the collaborative sentiments otherwise being expressed. If they can't at least think creatively about compensation, then I begin to suspect they may not be able to think as creatively as I might like about my brand."

Brunner is a $200 million independent advertising agency with 200 employees and offices in Pittsburgh, Atlanta, and Washington, D.C. The agency provides a broad range of services in research and planning, branding, advertising, digital marketing, direct/one-to-one marketing, public relations, promotion, and design services to clients, such as Cub Cadet, CONSOL Energy, The Dow Chemical Company, GlaxoSmithKline, GNC, Philips Respironics, and Zippo. In addition to being a Top 100 U.S. ad agency, Brunner ranks among the Top 75 digital marketing firms in the country.