A step-by-step outline for constructing a client compensation agreement based on outcomes instead of hours.

The foundation for developing a value-based agency-client relationship is to begin with a Value Audit. The ultimate goal of the Value Audit is to uncover and identify a brand’s chief value drivers, which can be viewed in a multidimensional framework of outcomes: 

Value Indicators
Transactional	Behavioral	Attitudinal
Value Influencers
Agency		Client

The following describes each of the elements of the Value Audit and outlines the basic steps in the process.

Identify stakeholders

The first step is to identify the key stakeholders in both organizations who will be involved in establishing the terms and measurements of a value-based relationship. Given the high-level nature of some success measures, it’s critical that the stakeholder group includes C-level executives from both the agency and the client.

Agency Stakeholders	Client Stakeholders
CEO	CEO
CFO	CFO
COO	COO
Account Director	CMO
Account Supervisor	Brand Managers
Account Executives	Additional key personnel with agency contact
Key function or department heads involved on business
Key additional team members involved on business

Understand the client’s profit profile

To begin the Value Audit process, engage the client stakeholders in a discussion of the following key questions:

1. How does your brand/company make money?
2. What is the profit model for the brand/company?
3. Who is the brand’s “best customer”; the one that likely produces most of your sales and virtually all of your profits?
4. Based on your profit model, which of our offerings do you most value?
5. What specific results do you hope our services will help you achieve?
6. How do you measure success today with your agency?
7. Ideally, how would you like to measure success?
8. If price wasn’t an issue, what role would you like us to play?

Identify Value Indicators

Types of Value Indicators

Transactional	Financial measurements, sales and market share data, etc.
Behavioral	Actions and behavior of target audiences
Attitudinal	Attitudes, knowledge, awareness of target audiences

Value Indicators can also be identified for each of the brand’s key audiences. The most obvious audience is customers, but Value Indicators can also apply to prospective customers, employees, opinion leaders, editors and reporters, or even channel partners.

	Current Customers	Prospective Customers	Employees	Shareholders	Channel Partners
Transactional
Behavioral
Attitudinal

The process of identifying and prioritizing Value Indicators is a combination of both art and science. The lack of data in many companies leads some executives to conclude that identifying the right metrics is difficult if not impossible. But the truth is most of the metrics that matter involve a heavy dose of judgment.

Key stakeholders at both the agency and the client can identify and rank the vital brand Value Indicators using a series of simple worksheets. The agency should help facilitate this process by providing a “menu” of possible indicators that are appropriate for the client’s brand and category, then:

1. Ask client stakeholders to select no more than seven Value Indicators in each of three areas: Transactional, Behavioral, and Attitudinal.
2. Then ask them to then rank these indicators in importance (forced ranking) within each of the three categories.

Note: Agency stakeholders should be asked to do the same thing so that they can be prepared to have an informed discussion with the client and perhaps challenge some of the client’s judgment and assumptions if necessary.

Armed with the completed worksheets, the agency then leads a discussion with key stakeholders from both sides to reach agreement on a few (ideally no more than three) key Value Indicators within each of the three sub-categories of Transactional, Behavioral, and Attitudinal.

Develop the outline for a Value Scorecard

You’re now at a point where you can begin to build a one-page Value Scorecard that includes the agreed-upon Value Indicators. This is the part that requires the client to spend some money, because to make the Value Scorecard concept work means getting a baseline measurment of the Value Indicators.

Data for the Transactional indicators will usually be readily available from company sources, but baseline measurements for most of the Behavioral and Attitudinal indicators will require some secondary or primary research.

Transactional Indicators	Company financial reports Sales reports Independent industry reports Web analytics Etc.
Behavioral Indicators	Customer databases Media databases and reporting services Web analytics Etc.
Attitudinal	Tracking studies Etc.

Example

Value Indicators	Benchmark
Transactional
Organic revenue growth	$750,000,000
Revenue market share	14%
Average price per unit	$269
Behavioral
Search engine rankings (organic)	11.00
Website unique visitors	2,900,000.00
Ever tried brand	23%
Attitudinal
Sees brand as "innovative" (scale 1-10)	7.90
Brand consideration (scale 1-10)	7.30
Willingness to recommend to a friend (scale 1-10)	5.60

Set goals and weighting for Value Indicators

Having determined the benchmark for each of the Value Indicators, the stakeholders then agree on a reasonable goal for each.

In addition, based on the assumption that not all Value Indicators are equally important, each indicator should be assigned a weighting (adding up to 100% for all Value Indicators).

Example

Value Indicators	Benchmark	Goal	Weighting
Transactional
Organic revenue growth	$750,000,000	$950,000,000	5%
Revenue market share	14%	17%	5%
Average price per unit	$269	$299	5%
Behavioral
Search engine rankings (organic)	11.00	2.00	10%
Website unique visitors	2,900,000.00	5,000,000.00	10%
Ever tried brand	23%	35%	10%
Attitudinal
Sees brand as "innovative" (scale 1-10)	7.90	8.75	20%
Brand consideration (scale 1-10)	7.30	8.50	20%
Willingness to recommend to a friend (scale 1-10)	5.60	6.50	15%
100%

As part of this discussion, the parties will also agree on a reasonable time period for measuring and evaluating changes in the Value Indicators.

Optional: Identify Value Influencers

If desired, this process may also include and evaluation of the skills and behaviors that are viewed as the most important in creating value in the relationship. These are called Value Influencers, and they can apply both to the agency and the client.

Value Influencers can be completely customized to each relationship, but studies conducted by Ignition on behalf of major trade organizations have identified a number of recurring desired behaviors, including:

Examples of Agency Value Influencers	Examples of Client Value Influencers
Working with client in collaborative way	Providing time to allow agency to do its best work
Assigning agency’s top people to work on business	Identifying desired outcomes
Developing fresh, unexpected creative ideas	Giving timely and constructive feedback
Providing relevant insight about brand’s customers	Facilitating good communication
Developing clear, well-supported strategies	Providing access to information and people
Executing programs that generate brand buzz	Having well-organized approval system
Providing expert online marketing solutions	Minimizing revisions and rework
Developing big multi-channel ideas	Involving senior decision makers
Providing non-traditional marketing solutions	Breaking down internal silos
Integrating agency teams and functions	Providing clear, complete direction to agency
Providing proactive ideas that transcend advertising	Understanding brand’s key success drivers
Adopting systems that result in smooth workflow	Creating environment of mutual respect

Value Influencers can be selected using the same two-step worksheet process described for Value Indicators. The client will select the Value Influencers that they believe are important for the agency to deliver, and the agency will do the same for the client. Each party will also be asked to indicate a goal for each of these factors.

In the case of an established agency-client relationship, another worksheet can be used to ask each party to rate the current performance of the other on these factors. This will serve as the benchmark.

Populate the complete Value Scorecard

Armed with clear Value Indicators and Value Influencers, including benchmarks and goals, the next step is to summarize these measures on the Value Scorecard.

Example

Value Indicators	Benchmark	Goal	Weighting
Transactional
Organic revenue growth	$750,000,000	$950,000,000	5%
Revenue market share	14%	17%	5%
Average price per unit	$269	$299	5%
Behavioral
Search engine rankings (organic)	11.00	2.00	10%
Website unique visitors	2,900,000.00	5,000,000.00	10%
Ever tried brand	23%	35%	10%
Attitudinal
Sees brand as "innovative" (scale 1-10)	7.90	8.75	20%
Brand consideration (scale 1-10)	7.30	8.50	20%
Willingness to recommend to a friend (scale 1-10)	5.60	6.50	15%
			100%
Value Influencers	Benchmark	Goal	Weighting
Agency
Works collaboratively with client	6.50	8.00	20%
Develops programs that results in brand buzz	7.25	8.75	40%
Recommends solutions that work in multiple channels	8.00	9.00	40%
			100%
Client
Gives agency time to do its best work	6.25	8.00	50%
Articulates expectations and desired outcomes for assignments	7.50	8.75	25%
Minimizes revisions and rework	8.25	9.00	25%
			100%

This completes the Value Audit process. Armed with the Value Scorecard, the agency is now in a position to set a value-based price and move forward with the program. The following describes these last steps in the overall process.

Set a Value-Based Price and Value Reserve

The agency’s compensation will be based on its ability to achieve the desired outcomes articulated as Value Indicators and Value Influencers. Based on the perceived value of these outcomes to the client, the agency will set a value-based price for its work. (See Addendum: Factors to Consider When Setting a Value-Based Price).

In order to make this a true value-based agreement, the agency must agree to share in both the rewards and the risks – a potential upside and a potential downside. One effective way to do this is to set aside a portion of its total fee as a “Value Reserve.” Theoretically, this can range anywhere from 1% to 100%. However, the higher the risk, the higher the reward in terms of how the Value Reserve is reconciled at the end of the period.

Calculating the Value Score

At the end of the agreed-upon period, the agency calculates the total Value Score, which consists of the combined measures and their respective weightings. The Value Score is a single “metric of metrics” that serves as the basis for adjustment in the agency’s final compensation.

Example

Value Indicators	Benchmark	Goal	Actual	% Of Goal	Weighting	Value Score
Transactional
Organic revenue growth	$750,000,000	$950,000,000	$837,000,000	88%	5%	4%
Revenue market share	14%	17%	16%	94%	5%	5%
Average price per unit	$269	$299	$285	95%	5%	5%
Behavioral
Search engine rankings (organic)	11.00	2.00	3.00	150%	10%	15%
Website unique visitors	2,900,000.00	5,000,000.00	4,700,000.00	94%	10%	9%
Ever tried brand	23%	35%	34%	97%	10%	10%
Attitudinal
Sees brand as "innovative" (scale 1-10)	7.90	8.75	8.50	97%	20%	19%
Brand consideration (scale 1-10)	7.30	8.50	8.00	94%	20%	19%
Willingness to recommend to a friend (scale 1-10)	5.60	6.50	6.25	96%	15%	14%
					100%	101%
Value Influencers	Benchmark	Goal	Actual	% of Goal	Weighting	Value Score
Agency
Works collaboratively with client	6.50	8.00	7.75	97%	20%	19%
Develops programs that results in brand buzz	7.25	8.75	8.00	91%	40%	37%
Recommends solutions that work in multiple channels	8.00	9.00	8.55	94%	40%	38%
					100%	94%
Client
Gives agency time to do its best work	6.25	8.00	7.00	88%	50%	44%
Articulates desired outcomes for assignments	7.50	8.75	7.75	89%	25%	22%
Minimizes revisions and rework	8.25	9.00	8.50	94%	25%	24%
					100%	90%
Value Score Calculation
	Weighting	Value Score	Value Score (Weighted)
Value Indicators	90%	101%	91%
Value Influencers – Agency	5%	94%	5%
Value Influencers – Client	5%	90%	-4%
			91%

Reconciling the Value Reserve

Based on the Value Score, the Value Reserve is then reconciled. This results in either additional compensation to the agency or a rebate from the agency to the client. The more risk the agency is willing to assume, the greater the potential reward.

This chart shows how a 10% Value Reserve might be reconciled at the end of an agreed-upon period. The percentages can be set in any way agreed to by both parties, and will vary based on the amount of risk taken by the agency. A larger Value Reserve – say 25% -- would mean larger potential returns to the agency.

	Value Score	Percent of Value Reserve retained by the agency at end of period
	Above 100%	145%
	95 - 100%	140%
	90 - 94%	135%
	85 – 89%	130%
	80 – 84%	125%
	75 – 79%	120%
	70 – 74%	115%
	65 – 69%	110%
	60 – 64%	105%
Positive	55 – 59%	100%
Neutral	50 – 54%	95%
Negative	45 – 49%	90%
	40 – 44%	85%
	35 – 39%	80%
	30 – 34%	75%
	25 – 29%	70%
	20 – 24%	65%
	15 – 19%	60%
	10 – 14%	55%
	Below 10%	50%

Related content:

• 12 ways to capture more value in 2010 »
• A Declaration of Value »
• A quick way to understand value creation »
• Brand Success Indicators »
• Changing agency compensation by changing the dialog »