Agency compensation: Avoiding the goose egg

So you’ve found yourself a new agency and now it’s time to negotiate the contract, or perhaps you’ve come to the end of your contract term and it’s time to renegotiate your contract with you incumbent agency. So where do you start…?

Well, let’s start by saying that a good place not to start, is to say ‘ok, time to beat the agency over the head for the lowest possible price…’ Unfortunately that was an actual quote from a procurement lead some years ago – but hey, it’s inspired this article – so anything’s better than that, right…?

What was missing in that rather unfortunate statement was the basic principle that price is what you pay – value is what you get.  And any approach that solely contemplates price without regard for the value that’s attached to it, is setting everyone up for failure. Here’s why:

Lowest price doesn’t equal best value 

It really is that simple.  And in many cases the idea that the lowest price is best can deliver the exact opposite because even a lowest price has a cost. And that’s usually at the expense of quality.

Sooner or later the agency will cut corners

Why? Because they have to. No service (or product for that matter) can consistently be delivered while incurring a loss for those providing it. Sooner or later, the agency has will have address the issue, either by raising prices, reducing services, cutting resources or lowering the seniority of resources to recoup costs.

It’s the fastest way to creating agency conflict

Whether it’s the agency that comes complaining to the marketer that they’re losing money, or the marketer complaining they’re not being serviced properly, is anyone’s guess. What’s certain is agency conflict will result from low-ball bidding to secure a client’s business.

Business will suffer

Business is going to suffer on both sides of the marketing equation because nobody’s getting fair value.  Agencies aren’t seeing value for the work they’re doing and marketers won’t be getting the value they’d been expecting.

It’s not good business

Everyone deserves to make a fair profit for the services or products they provide for their customers, and by encouraging or participating in a race to zero for agency services is ultimately going to diminish the value of the agency business. For everyone.

In short, seeking the lowest price without consideration for value is goose egg for both agencies and marketers.  So here’s how to avoid it:

Scope of work

Your first step in any agency agreement is to determine your real scope of work – that means considering what you want to do with all the bits and pieces that never made it into previous agreements. If you don’t have a formalized scope of work, now’s a good time to start. As a starting point, look at last year’s scope of work and see what you needed to add throughout the year.  If you’re still unsure, take a look at agency invoices over the last couple of years to put things in perspective.

Define a staffing plan that works

Not all staffing plans are created equal – simply because no two clients are created equal. A marketer with a similar scope of work to a competitor may have different needs and requirements from executive management, account management, strategy and / or creative resources.  So a little honest reflection about your real needs will go help the agency create a staffing plan that’s right for you and your team.

Get procurement on the same page

Because it’s not uncommon for procurement teams to negotiate contracts on behalf of their marketing counterparts, it’s essential to have procurement and marketing teams on the same page.  It’s important for both teams to come to a common understanding of value so the business relationship is set-up for success from the get-go.

Look beyond the rate card

One of the biggest traps we see marketers fall into is looking at an agency rate card or blended hourly rate as the key driver in compensation.  A rate card is virtually irrelevant if looked at in isolation, because it can predict how many resources or the effort required for particular tasks.  Define the time required for key tasks, together with the resources required to deliver those tasks, to build up a more accurate picture of costs

Benchmark costs so you know what’s real

Perhaps the most common complaint we hear from marketers is ‘they cost too much…’ to which we invariably ask, ‘what do you think you should be paying…?

If you’ve not benchmarked costs in a few years, chances are you may be out of touch with how costs have evolved.  And before getting hot under the collar at the agency for their charges, it’s probably helpful to understand where they’re at relative to the market in your area.

Include pay for performance

Pay for performance is a great way to galvanize and incentivize both agencies and client teams. The key in any pay for performance agreement is defining performance metrics that are truly measurable. Pay for performance should never be all ‘stick and no carrot’ and similarly not positioned as a ‘bonus’.  Formalized evaluation processes are needed to ensure performance is accurately measured and payouts calculated accordingly.

The process to uncover value should never be a myopic look at the cheapest rate card, lowest blended rate or smallest fee.  It should be a considered analysis that looks at the marketer’s requirements and how agencies propose to charge to deliver against those requirements.

Looking at costs against scope provides much deeper insight into how agencies plan to deliver, and at the same time smoking out unsustainable business proposals – either from marketers or agencies – that invariably lead to a marketing goose egg.

STEPHAN ARGENT

Stephan Argent is Founder and Principal at Listenmore Inc offering confidential advisory to marketers looking for truly independent insight and advice they can’t find anywhere else. Read more like this on our blog Marketing Unscrewed / follow me @StephanArgent

Photo: KimManleyOrt
Twitter
Google+
LinkedIn