Simon Hakim: why it’s time for agencies and clients to move to value-based pay

PARTNERSHIPS AND PROCUREMENT

Recently I had the chance to chat with a New Zealand magazine about my thoughts on agencies and some of the challenges we’re facing as an industry. We covered a lot of topics and many that will be familiar to anyone that deals with agencies on a regular basis: new remuneration and business models, procurement and why many agencies now prefer to bow out of pitching for new business. The conversation got me thinking though, about what these issues say about the relationship between agency and client and where we’re headed.

What many agencies strive for, and this is definitely true at Hunter, is a real partnership with clients. That’s not just a word we pay lip service to and it’s why we’re very selective about who we work with and why we’re not an agency that’s the right fit for every client. Agencies like us want to get down to brass tacks: what’s your business challenge or opportunity – because almost everything can be boiled down to one or the other – and how does it fit into the wider landscape in its category? Only once we know and understand that can we start to approach a strategic and creative solution. This stuff takes time, it requires trust and collaboration on both parts. It’s not a client giving us a brief and then walking away until we go back hoping we’ve got a solution that works; it’s a partnership in every sense of the word.

Sometimes it feels like ‘partnership’ is a concept clients are committed to only when times are good, like a fair weather friend. This isn’t true of every client and we have and still have many great mutually rewarding client relationships but every agency faces this situation at some point: a client who you’ve put a lot of blood, sweat and tears into successfully building or re-building their brand hits hard times for reasons unrelated to the work you’ve done, but in comes procurement asking you to boil your creative and strategic input down to a rate card price. Suddenly you aren’t a partner but a cost that needs cutting.
Pennies

Look I get it, businesses go through ups and downs, and in the down times it’s harder to justify expenses. The “safe” way to save money is to go through your vendors and shave dollars where you can, line item by line item. This methodology is fine if your vendors supply your coffee cups or the ink for your printers or whatever widget, but this methodology applied to creative services is completely wrong.

Advertising is more than the cost of building a website or time spent on a strategy, it’s an investment in your brand’s cultural and reputational capital. Advertising and brand building (and the creative and strategy that goes into them) should add value to your business, not take away from it – so don’t treat them like they do.

I’ve worked with really great procurement people who do get what we do is about creating value, but those guys are diamonds in the rough. In general, all procurement does is force agencies (and clients) into workarounds. From talking with other agency CEOs I know this happens. Agencies lower rates to make procurement happy, but then increase the hours billed. The agency gets paid what they would anyway, and procurement feels good they got the rate down. And from talking to clients, the people who work day-to-day with the agencies, I know they too find ways to side step around rules that only make doing business together unnecessarily difficult. This isn’t a real solution, it’s a stop gap at best.

This might be a case of agencies having made their beds and now finding lying in them is uncomfortable because as an industry we’ve always accepted compensation based on the least valuable part of our work, the cost of production. For decades it was commission and the creative and intellectual property we created was little more than a freebie. We’ve moved away from that and retainers and time of staff head hours, sometimes with a performance component, is now the norm. It still essentially means agencies are compensated on how much a digital campaign is worth or how much time is spent on it, not the value created for the client or the results achieved.

I believe that moving to a remuneration model based on the value agencies create is a win-win for agencies and clients. It requires some more work up front, maybe, where both parties must sit down at figure out a mutually acceptable agreement building in wins in both the good times and bad and ways to measure success – but I believe the result will be a stronger partnership and better outcomes on both sides.

I’m not alone in this, value-based billing is the way many in the industry feel we are moving. Tim Williams from Ignition Consulting Group advocates strongly for value-based pricing for creative services and he writes a lot about how the model can and does work. I’ve been following him for a while and have been keen to see the model catch on in Australia and New Zealand – but so far I’ve yet to see it happen. We’re certainly keen at Hunter to give it a go.

Unknown-74-1-226x160Simon Hakim is CEO at Hunter
Twitter: @nomis_mikah

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3 comments

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    The Coca-Cola Company has been a strong advocate of VBC (value based compensation). Coke’s Sarah Armstrong has even led VBC workshops at the ANA and has shared Coke’s model in hopes other advertisers would follow. I worked with Sarah on the “birth” of VBC when she was part of my team in Atlanta.

    So far the uptake has been very low because it is hard to find and align on the measures that are going to determine success, requires discipline and expects transparency on both sides. These are all things both agency groups and advertisers find hard to implement in real life.

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    For all those claiming they want to change the BDA remuneration model… Check out Anomaly. They sell their intellectual property, they do not sell time. In fact, no one in any of their offices fills in a time sheet. You should also see my review last week of “Madison Avenue Manslaughter.” Michael Farmer makes an extremely forceful argument for a better system of agency remuneration… And presents a methodology to achieve this.
    Cheers/George “AdScam” Parker

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    Thank you George!
    The fact is, ad agencies are already being paid on value as perceived by their clients. Fees are 2.2x the cost of assigned agency people. That’s a low value. The Bains, McKinseys and strategy consulting firms are paid 5x the cost of their assigned people, more than double the agency rate. Both types of firms have to deal with procurement.
    In a marketplace with many buyers and sellers, market price defines value.
    If agencies want to be paid more, they need to do something different, like deliver measurable results rather than “creativity,” which earns today’s low fees.