By Tim Williams

Agency professionals are rightly concerned about whether they have the right set of business practices to guide them through today’s cross-functional multi-channel marketing environment. This becomes an even more burning issue when applied to the question of how agencies get paid for what they do.

Estimating mistakes

Now more than ever, agencies are struggling to keep their margins. Many agency managers believe that a big part of the problem is their agency’s tendency to chronically exceed estimated time on client relationships and assignments. So many agency organizations are feverishly trying to improve their estimating system while at the same time pressing their accounting departments for increasingly detailed analyses of how agency time is spent. They are on a quest to improve their time-based billing practices.

The problem isn’t just the practices; it’s the paradigm.

Paradigms drive practices

In the middle ages, the paradigm guiding medical practices was bloodletting – the belief that diseases were carried in the blood, and that you could rid the body of sickness by simply draining out the blood.

If that’s your paradigm, then your practices would be around becoming better at bloodletting. You would read books about how to improve your cutting techniques, constantly seek to improve your understanding of how much blood is enough, and send your people to seminars to learn about the latest in bloodletting techniques. You would be improving the practice of bloodletting, but it would all be based on the wrong paradigm.

Similarly, what agencies need to improve their profitability isn’t a better time keeping system, a better accounting package, or a better approach to estimating and billing their time. What’s needed is a new paradigm.

External value vs. internal costs

The correct paradigm for a professional knowledge firm like an agency is that you’re selling business results, not time. Clients don’t buy your efforts; they buy the outcomes the efforts produce. Your internal costs have nothing to do with the external value you create for your clients.

Based on this paradigm, agencies can apply the same creativity to compensation as they apply to their clients’ business. They can begin to develop practices that result in proactive pricing based on value rather than reactive estimating based on costs.

The old cost-based paradigm assumes agency professionals are hourly-wage laborers from the Industrial Age. The value-based paradigm considers agency professionals to be knowledge workers from the Information Age, capable of creating incredible wealth and value for their clients – irrespective of hours worked.

It’s no coincidence that the agencies that are making the biggest mark on our business are the ones that have changed their paradigm about how they get paid. Their compensation practices are different because their paradigm is different. It’s also no coincidence that they tend to be much more profitable that the average agency – sometimes by a factor of two or three.

Finally, consider this: you don’t have to wait for the entire industry to change its paradigm about agency compensation. You only have to change yours.

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For a more detailed overview of value-based compensation, download a recent article by Tim Williams and Ron Baker in the October 2007 issue of The Advertiser, published by the Association of National Advertisers.