Advertising agencies have been around for decades but advertisers still can't agree on the best way to pay for theirs services. Stuart Pocock, co-founder of The Observatory International, outlines the best way to make it work.
One of the greatest sources of frustration between advertisers and agencies is fee negotiation. It’s tedious but more critically for all involved, it can be demotivating.
An agency and advertiser team that’s constantly wrangling about money will invariably be less likely to deliver business-changing solutions.
The impact of money issues is so significant that a survey we recently conducted with the World Federation of Advertisers found that more than seven in 10 of the world’s biggest multinationals think that they’d have a better relationship with their agencies if they paid them differently.
This research study – based on responses from senior procurement experts with global or regional responsibility at brands spending more than $84bn annually on marketing – reveals that while the advertising landscape has changed dramatically in recent years, the core issues surrounding remuneration and getting it right still fall into five traditional areas.
The biggest issues tend to include:
- Negotiations are often based on ill-defined scopes of work so it’s hard to truly nail down what marketers want their agency colleagues to contribute and what the best way to reward that work might be. Marketers need to work much harder to accurately define what they want from their agencies.
- Post-appointment stress when the agency discovers the reality of what they are required to do (usually much more than they quoted for). Naturally they are going to come back and ask for a different deal. Agencies need to push much harder for guarantees that the scope of work is the scope of work and procurement should support them in this.
- In-house concerns around labour-based fees, which are still used by 35% of our sample across all agency types. That’s because an agency can get precisely the same income whether it performs well or badly on the business and few people have a clear idea over the best way to overcome this. The rise in Payment By Results (PBR) as a remuneration model and the decline in labour fees since similar research took place in 2011 shows how many have responded.
- Procurement are often accused of seeking to simply reduce agency costs, without mind to the level of workload or the quality of the output and sadly it does happen. The agency solution is typically to put less expensive but less talented people on the business, leaving the marketing team frustrated with their output.
- General confusion over what the most appropriate model or elements of each model should be used. This is particularly important when it comes to recognising value creation – something all advertisers need their agency partners to deliver. Having a combined, aligned focus on this aspect between marketing and procurement is key – and all too often, if this doesn’t happen both parties are left floundering trying to resolve issues.
But there is a way to avoid all five issues and at the heart of it is a process that’s driven by common sense. We have plenty of evidence to show that a well-constructed PBR scheme can re-double agency efforts and quality of work.
Great PBR, which actually motivates agencies, is built around well-developed foundations that provide the basis for truly fair payment for agencies and are not geared purely towards the benefit of the client’s budget bottom line.
Such schemes also work better when procurement is regularly involved. That means monitoring it and discussing it with the stakeholders on a regular basis rather than simply agreeing a budget and disappearing for the next year until it’s time to re-negotiate.
These simple changes, combined with a clear knowledge of how agencies can be paid and what models work best for which discipline, are at the root of the way forward.
Buying professional services is a very different art to buying commodities and experienced marketing procurement people know that but clearly the lesson has not got through to all companies.
The reality is that buying agency services is not rocket science. Doing it well requires an understanding of the needs and desires of all stakeholders and building a remuneration structure that delivers for all.