Performance based compensation agreements for ad agencies … Aligning goals and measuring outcomes.

May 26, 2009

cokeThe trade press is all a buzz about the new trend towards to pay for performance compensation. The recent article on Coke and their approach seems to have everyone watching to see what happens next. The reality is that this is nothing new and both clients and agencies alike have been wrestling with concept for as long as I can remember.

While many clients feel that they should pay only for results, and many agencies lament the fact that they are not compensated anywhere near where they should be for those brand building ideas, there is an old adage that comes to mind. “Be careful what you wish for because you might just get it!”

While the concept appears to have a lot of merit, the success or failure of such an approach relies on the ability of the two parties to align the goals and most importantly measure outcomes. The best scenario is one where both agency and client alike get bonused on the same outcomes or results.

My experience has taught me that a balanced compensation program that provides a measure of ongoing funding on a monthly basis combined with an incremental bonus program based on results is the best way to go. Almost none of our client marketing leaders are remunerated on results only so in my opinion it follows that why should we? That said, how do you go about agreeing on the goals and adequately measuring them?

Aligning Goals:

The first change that needs to happen is that the setting and aligning of goals must become a collaborative process and not an edict from the client. This often requires a big change in mindset, especially with large client companies who have been used to calling the shots.

With aligned goals comes aligned strategy and shared risk, which is accomplished once again through a collaborative process. This is often another big change for many client/agency relationships. The agency needs to have the ability to debate the go to market strategy and a certain amount of influence in the final outcome and implementation.

Measuring Outcomes:

One of the most difficult areas of agreement is the measurement of outcomes. In many instances the agency’s ability to impact final sales or results, diminishes fairly early on in the marketing/sales process. How can they be accountable for issues like; product out of stock, poor distribution, product quality issues, pricing, sales force inadequacies etc.

Add to the above measurement issues and verification of them, and you find yourselves with a complex matrix that is often hard to implement, and can cause unnecessary aggravation and strain on the relationship.

I am a big proponent of a balanced performance based compensation approach- however I am also cognizant of the problems that can result from it. My advice is:

  • Go in with a positive attitude
  • Be pragmatic, ask the tough questions up front
  • Make sure you are aligned on the shared goals and shared risk
  • Agree on the agency’s role and ability to influence strategic go to market decisions
  • Define expected results and how they will be measured. Benchmark current numbers whenever possible
  • Achieve bonus together or lose it together. Do not bet the whole farm on it.
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New ad agency capabilities. Do you build them internally or find the right partner?

May 23, 2009

pr copyBefore considering expanding your agency capabilities I suggest that you do some homework. There are so many variables that need to be considered before moving forward plus the cost of a wrong move can be devastating to both agency and client alike.

Developing new agency capabilities is the 5th pillar in my 5 pillar approach to profitable agency growth. It allows you to sell more services to existing clients and also to attract new clients to your roster who may not have been interested in you before. Some capabilities require an incredible amount of investment capital to develop. Others do not, and some take more money and effort to maintain than you may think at the outset.

Here are some factors to consider when making a decision:

Time to market: Is this a capability that you need immediately to address a current client need, or do you have the time to start slowly and build it as you go? If it’s an immediate need you may have to partner. You could also consider doing a blend of both. Partner now, bring on board a core group and transition over time. On the other hand, if you have the funding you could go out and acquire an existing company.

Cost to develop and ROI timeline: What level of investment will this require and how soon do I need to have a positive ROI? Positive cash flow is king. You may not be able to afford the initial investment or if you can the ROI time period may be unacceptable.  

Availability of expertise: Is this an area where suitable expertise is hard to find ,and if you can find them, they want too much money?  Then you have to ask yourself if it is better to partner with the best or build a mediocre internal capability. What are the risks of mediocre? Can you sell mediocre etc?

Credibility of capability: Is credibility of the capability important and if so can you hire suitable talent or build a credible capability in the time required? Are the leaders out there untouchable because they are so well compensated where they are now? Are you able to even attract them let alone whether you can afford them. Do you add to your brand credibility by partnering with the right partner?

Utilization: Do you currently have enough work in house to support an internal capability? If not how long do you think it will take to get there? Can you sustain the investment in the interim? Do you require it as support for other work you do or do you see this as a self funding proposition? If self funding do you have a plan to help make it that?

Core to your business vs. commodity product: Is this new capability core to your agency offering or is it just tactical support for your programs?  Street teams and sampling are a great example of this. You may create and develop the promotion but do you need to own execution too?

Ability to develop and manage it. Ask yourself honestly, do you have the ability, time and expertise, to help lead and develop this new capability? Or will it just overwhelm you given what you already have on your plate? Do you know enough about the business to know when it’s going well, or more importantly, when it’s going wrong?

Risk vs. reward: Are the anticipated rewards worth the inherent risk? Are the margins worth it, or is this a commodity product at a commodity price? Could your time and money be better spent elsewhere?

Liability: Is there a high liability risk associated with this capability? Could an issue be big enough to cost me my whole agency? If so, should it be housed within a separate company entity? Once again, online sweepstakes and games are a perfect example of this.

Tools/research/technology: If I invest in the people and the capability, do I have the resources to support:

  • The cost of buying or developing the tools or technology needed to             support it.
  • The cost of ongoing research or data required to fuel it.

While this is not an exhaustive list it’s a solid start. If you address each and every one of these questions before making a final decision, you are unlikely to make a wrong decision.