Advertising Agency Compensation in a ROI Driven World

As financial pressures affecting the general business environment continue to intensify, negotiating profitable service agreements has become increasingly challenging for professional service firms.  There seems to be unprecedented client pressure on service firm fees and rates.  Added to that, corporate procurement departments are taking on greater responsibilities in managing agency relationships.  This involvement creates new negotiation and communication challenges for professional service providers. What was (or seemed to be) the last bastion of corporate governance—marketing spend—has now become the “hotbed” of negotiating rituals and guidelines never before seen between marketers and their agencies.  In contract discussions with hundreds of clients and an annual survey The Bedford Group conducts, we have encountered a high degree of skepticism about the validity of agency charges and good faith negotiations.  It is not surprising that marketers and agencies are frustrated with the compensation process. And yet, once the veil is lifted on how agencies make money and how much money they need to make in order to keep their enterprise profitable and dynamic, even the most intransigent of Sourcing executives are moved to reconsider the vice that they are about to put around an agency compensation package, and thus the creative output that may likely suffer as a result of that vice. Years ago, one of the giants in the advertising industry said “The value of a great idea is that it can transform a company.”  Remember that quote as you negotiate a contract for a bare bones agency team.   Another phrase which bears mentioning is “you can’t six-sigma the creative process.”  Creativity is hard to quantify and any good agency compensation agreement will balance marketing cost controls with creative excellence.  The outcome of any agency contract negotiation should be a win for both the client and agency. So what is the solution for agency cost optimization without impeding the value of the relationship?  Our approach is a simple bi-partisan process for creating dialogue and mutual agreement among the parties:
  1. Agree on the key goals and objectives of the relationship up front
    1. What are the marketer’s business goals?  What are the agency expectations, e.g. category growth, market share, attitudinal shifts, compliance?
    2. If necessary, set up a separate operating unit to manage this relationship (we call it “Inter-Firm”).   This unit should have its own management team with representatives from both sides to track mechanisms and manage an un-biased review process.
  2. Develop a very tight Scope of Work
    1. Match resources with the amount of work to be done i.e. strategic planning, research, creative development and execution of anticipated campaigns, media planning and buying; the list goes on. Determine in advance who will be responsible for what activity and what the work flow process will be.
    2. In a new relationship the exact degree of services to be utilized may be impossible to nail in the first year.  Allow enough room for offensive or defensive marketing tactics that may change as a result of market swings.
  3. Create a compensation model that is easy to understand and administer
    1. Commissions on marketing expenditures, fixed fees, cost-plus and labor-based arrangements are only a few of the methodologies that work effectively when both client/agency interests are aligned.
    2. What are the agency’s goals and objectives—how will/can they achieve a fair profit?  What might be an upside potential for outstanding work?  Do the parties agree in sharing rewards and risks?
  4. Compensation details
    1. Depending on what agency compensation model you select, make sure there is agreement on all facts such as definitions of costs, labor hours used, multipliers, incentive criteria, terms and so on. An experienced independent third party can help identify gaps in expectations and definitions.
It is possible for professional service firms and their clients to turn advertising agency compensation negotiations into a key strategic advantage.  This can be done by building a process which:
  1. Utilizes senior staff within the company and brings agency compensation experts (such as The Bedford Group) into the negotiations.
  2. Prepares a proactive “rules of engagement” playbook.
  3. Approaches discussions from both sides of the agreement.
  4. Educates each other about their own internal procedures and standards.
  5. Learns from other industries that have successfully navigated agency contract negotiations.
Over time, business goals, priorities, scope and expenditures will change.  Marketer and agency will need to incorporate these evolutionary changes into their future dialog to maintain a strong, vibrant client agency relationship. About The Bedford Group The Bedford Group is an Atlanta based Marketing Management Consulting firm that has been in operation since 1986. It has built its reputation on marketing organization supportagency search and relationship management and strategic marketing consulting.  Unlike traditional advertising consultants, The Bedford Group looks beyond traditional marketing disciplines to solve complex, enterprise-wide issues for efficient resource management and improving marketing ROI. For more information about our services, please contact Kerry Kielb at 404.237.4565 or