trinityp3 webinar series: the latest trends in agency remuneration

marketing management consultants

The latest trends in agency remuneration

TrinityP3 Webinar Series Presented by Darren Woolley

26 August 2015


What we will discuss today

•  Remuneration considerations

•  Remuneration or compensation

•  The various models:

•  Models

•  Strengths & Weaknesses

•  Trends

•  Applications

•  Questions

•  Next sessions


ConsiderationsSimple to understand and easy to administer. Fair to both advertiser and agency. Aligning advertiser and agency interests and priorities. Finalised before agency resources are committed. Recorded in a ratified advertiser / agency contract. Flexible enough to accommodate changes in the future. Involving senior management, with principles clearly communicated to the teams on both sides. Capable of standing the test of time and being understood by any future Marketing Director. Based on agreed and understood terms and definitions. Inclusive of specified tracking and review dates.


Remunerate or Compensate

Compensation: – noun

1. the act or state of compensating. 2. the state of being compensated. 3. something given or received as an equivalent for services, debt, loss, injury, suffering, lack, etc.

Remuneration: – noun 1. the act of remunerating. 2. something that remunerates; reward; pay.


Remuneration Models

•  Most common remuneration models: •  Commission & Service Fees •  Resource Package Fees (Retainer) •  Variable fees based on actual hours •  Project Fees •  Hybrids

•  Latest Trends: •  Move from cost to value based •  Return of the commission •  Incentive based models


Commission & Service Fee

Advantages •  Simple in the case of media

advertising. •  Easy to calculate and

administer. •  Parties focused on quality not

cost. •  A crude form of PBR with a

higher Media spend leading to greater agency earning.

Disadvantages •  Based on volume of Media

spend, not scope of work. •  Inappropriate were Media is not

a major component of the output.

•  Does not encourage Media neutral solutions.

•  Cancellations of spend has a severe effect on agency income.

•  Based on the traditional media commission paid by the media proprietor

•  Making a come back in digital media •  Or used in combination with other models.


Resource Package Fees (Retainers)

Advantages •  Agency knows its income and

can resource appropriately. •  Advertiser knows cost and

can budget appropriately. •  Encourages more Media

neutral solutions.

Disadvantages •  Requires the scope of work to

be accurately defined. •  Does not allow for major

changes in scope of work. •  Input based and therefore less

accountable. •  Often time consuming to

negotiate and administer.

•  Ideally based on an agreed scope of work. •  Based on salary costs of required resources at % of

their annual billable hours by an overhead factor and the agreed profit margin.

•  Most common remuneration model in the market.


Variable Fees based on Actual Hours

Advantages •  Relatively easy to administer,

provided agencies maintain accurate timesheets.

•  Reflects advertiser needs and agency activity.

•  Allows flexibility should scope of work changes.

•  Allows agency return based on clearly defined process and actual deliverables.

Disadvantages •  Difficult for advertiser to budget. •  Difficult for agency to resource. •  Requires accurate time sheet

process and requires audit in disputes.

•  Lack of accountability with no incentive for efficiency.

•  Fees are based on actual time spent using an hourly rate for individual staff.

•  Charge out rates either calculated or ‘market’. •  More common in marketing services contracts


Project Fees

Advantages •  Easy to control expenditure. •  Often used to top up retainers

for work outside the agreed scope.

•  Reflects specific advertiser needs.

•  Suits integrated or niche services.

Disadvantages •  Inclined to encourage a short

term focus rather than longer term relationships.

•  Agency does not have the same level of confidence in remuneration unless scope of work defined up front.

•  Tends to come at a higher cost compared to the retainer.

•  Project fees alternative to fixed annual fees, determined and paid on an individual project basis.

•  Often used for ad hoc projects, paid either on completion of the individual project or for projects completed in the month, quarter or year.


Input/Costs to Outcome/Value

•  Most of the existing models are input / cost based that reward volume of work and not effectiveness.

•  The current best practice is to move to an output based / pricing model that fixes the value based on output.

•  The leading trend is for a value based remuneration model where the reward is based on the value created or contributed.

Input / Cost Output / Price

Outcome / Value


Inputs vs Outputs vs OutcomesModel Positives Negatives

Inputs / Costs

•  Resource / Head hour based

•  No direct link to volume or scope of work

•  Simple to implement •  Multiple points of

negotiation including salary cost, overhead and profit

•  Rewards increased volume rather than effectiveness

•  Based on head hours / timesheets which are unreliable

Outputs / Price

•  Based on scope of work / outputs / deliverables

•  Price agreed and set on historical basis

•  Values the output rather than the cost

•  Makes budgeting easier

•  Adjusting remuneration easier

•  Rewards increased volume rather than effectiveness

•  Issues arise when work commissioned then cancelled

Outcomes / Value

•  Based on the value created by the activity

•  Either all or the bulk of remuneration / profit

•  More like profit sharing than bonus

•  Links agency remuneration to outcomes / value

•  Brings alignment between suppliers and marketers if correctly implemented

•  Requires measurement of marketing effectiveness

•  Difficult to get many agencies to agree on measures


Performance or Incentive

Benefits: •  Improved agency performance. •  Improved advertiser performance. •  Goal alignment and congruence.

Types:

•  Bonus - additional to the agreed profit margin. •  Cost recovery - represents all profit. •  Shared risk and reward - agency puts % of margin

at risk and advertiser meets that % in pool. •  Earn back - agency puts % of margin at risk to be

paid in results.


Performance Criteria

Business Performance (Hard) •  EG. sales, traffic, profit, market share, volume growth, etc. These can

be measured by the same criteria that the advertiser uses for their internal bonus systems.

Advertising Performance (Medium)

•  EG: product awareness, ad awareness measures, consumer measures, attitude ratings, persuasion, purchase intent, awards, brand equity, image, effectiveness awards, etc.

Agency Performance (Soft)

•  Relates to the evaluation of agency functional areas: account services, creative and media in terms of: performance, service, relationship, cost efficiencies, etc.


Performance Criteria

Business Performance

•  Sales Volume •  Volume Growth •  Relative Brand

Performance •  Composite

Performance •  Market/brand share •  Customer loyalty •  Brand equity •  Brand profitability

Advertising Performance

•  Advertising Awareness •  Brand Image Shifts •  Attitude Ratings •  Ad enjoyment •  Brand personality •  Predisposition to buy •  Ad scores •  Persuasion index

Agency Performance

•  Agency Service delivery*

•  Relationship Management*

•  Functional competencies*

•  Contribution to ‘branding’

•  Project management* •  Administration* •  Cost Efficiency* •  Pro-activity* •  Collaboration*

* Can be measured, managed and maximised using Evalu8ing. Find out more at www.evalu8ing.com


In Summary

•  The market continues to evolve looking for more effective remuneration models

•  There are popular models but no perfect models

•  There is a trend from cost/input based to value/output models

•  Important to match the model to the situation

QUESTIONS?


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