pay for performance?.

By Posted in - Innovation & Marketing & Technology on May 17th, 2005
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My friend Amy from JWT’s Mature Market Group sent me a great article from the May 16 issue of Ad Age. “If you want big ideas from your agency, tie pay to performance.” (page 34, author: Jonah Bloom)

With all of the ways to track the performance of your advertising, I was not surprised to read this article. If the media can follow a pay for performance model, then agencies that create ideas that are then executed through media should be thinking about their pricing structures as well. While it may freak some people out, the fact that Jonah finished his article by saying “that kind of compensation system would turn agencies into what marketers need them to be: growth consultants” makes me feel like this is something that the “idea community” should embrace.

He makes some good points, saying that the current system of agencies creating estimates based on the amount of hours it takes to complete a project makes the agency more of a vendor than a partner. Agencies that become relegated to the “vendor” category often feel like their creativity has been marginalized. I’ve never thought of any of the agencies I’ve worked at as a vendor, but I’ve seen agencies position themselves that way to win business… and I’ve also been in situations where the only way to get approval on a project was to reduce our creative time in the estimate and hope to make our money on the delivery side.

In that model, everyone suffers. If a marketer only paid the agency for the successful advertising, everyone would win… agencies that are not truly creative would not survive (maybe that’s why everyone’s scared of this), we could all take more risks with our work and express some of our more creative ideas. Think about it, clients don’t often choose the “edgy” campaign. They can’t, because even when it feels like the better idea they’ve got too much on the line to take a risk – and they opt for the “safer campaign.” So the agency ends up being held responsible for putting out the “safe” campaign with a big price-tag on it (a recipe for disaster)… and guess what happens when the safe campaign doesn’t drive up sales, or generate more leads? As Bloom said “Imagine if the CMO, instead of telling his board that they are investing millions in the possibility of an uptick in a fluffy metric such as unaided recall or likability, told them that the focus is to increase market cap or sales, and that the agency would forgo payment in the case of failure.”

According to Mr. Bloom’s article, some U.S. agencies are following this model now and the AAAA and ANA have seen proposals to “transition from the current standards they recommend for fee compensation to a new structure of genuine partnerships.”

Sounds like a great idea to me. I’d be willing to put my ideas on the line against my competition and not my rate card, any day of the week. If my ideas don’t work, I’d better find another business. But that’s why I got in this business, because I believe in my ideas. Now this isn’t saying that you don’t pay the agency anything at all. Of course there’s an investment that should be shared equally when it comes to developing an idea and putting in all of the work to executing the idea. But I believe that if the agency shouldered more of the responsibility for the time it takes to develop the ideas, then the agency would produce more inspired work.

In this new “attention economy” the consumer is the client – they decide when and what messages they will tune into. It’s changing the way information is delivered, which in turn changes how and where advertising is used, so no reason the way it’s created and paid for shouldn’t follow suit.

According to Bloom, the proposal made by Andy Berlin to the 4A’s also gives the agency ongoing rights to the work, rather than that intellectual property being owned by the client. Funny, but I think that within the agency community, even though the .PSDs, the radio spots and video footage may belong to the client, the idea has always belonged to the agency. “Think Different” will be Chiat Day’s idea forever, no matter who has the CD with all of the files on it. That being said, they put a spin on it by adding that perhaps the agency could be paid by some type of “royalty agreement” for the ongoing support work it takes to keep the idea alive.

Definitely interesting stuff, especially for an idea-guy like me.

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