July 16, 2010 | Author: Tim Williams
Despite some recent reports about the small percentage of marketers who currently have a value-based compensation arrangement with their agencies, the move to a value-based approach will very soon become an imperative for agencies rather than an option. Paradigms always take time to shift (germ theory was developed by 1700, yet didn't take hold until the time of Joseph Lister in 1865) but when they do, entire industries shift with them. In the not-too-distant future, it will be as hard to imagine that agencies sold "time" as it is to imagine the pre-germ-theory world of medicine where surgeons didn't bother to wash their hands.
It wasn't until Joseph Lister aggresively promoted germ theory that medical practices finally started to change.
The fact is that billing by the hour is built on the wrong theory, and faulty theories are always exposed, refuted, and ultimately overturned. The labor theory of value, postulated by thinkers such as Karl Marx, states that value is created by and correlates directly with labor; the more work that goes into something the greater the value. While this might have been true for the assembly line workers of the industrial age, it certainly is not true for today's knowledge workers who live in a society where more than 70% of all wealth is created not by labor, but by intellectual capital.
Most agency executives still haven't come to terms with the fact that their compensation agreements with clients are built on the wrong theory of value. But the more they observe the fact that time expended bears no relationship to value created, the more they will begin to change their compensation practices.
July 7, 2010 | Author: Tim Williams
Agency strategic planners are key to outcome-based compensation agreements.
As I've written about many times before, the advertising business stands at the edge of an opportunity to realign the interests of agencies with the interests of marketers by fundamentally redefining the agency-client financial relationship. By moving from a time-based approach to a value-based approach, agencies will be in a vastly better position to provide "excellence" in everything from strategic planning to execution.
Planners are in a pivotal position to make this happen, because increasingly successful agency-client relationships will be defined by the agency's ability to identify, test, and measure brand success drivers. In other words, in order for marketers to pay agencies for value created instead of hours worked, planners will have to work with C-level clients to define the brand's leading indicators of success.
Ask marketers point blank what metrics they care about, and they will almost always give the same answer: sales. But sales is a lagging indicator – an after-the-fact measurement that looks in the rear view mirror. The more important question is what are the factors that predict the success of the brand; the leading indicators of success? In agencies, the planner is best suited to answer this question. Most leading indicators never appear on a financial statement, but they have predictive causation with profitability––that is, they will drive the numbers that ultimately appear on the financial statements. The correct leading indicators will predict the lagging indicators.
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Leading Indicators
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Lagging Indicators
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Diagnostic
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Predictive
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Backward-looking
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Forward-looking
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Once identified, a brand's leading indicators of success can form the basis of an outcome-based compensation agreement between the agency and the client. By paying their agency for outcomes achieved rather than hours worked, clients are assured the agency's best efforts and best thinking because the agency has all the right incentives. If the client wins, the agency wins, which incents the agency to devote their best talent, apply truly creative strategies, provide unasked-for ideas, and solve problems in unique ways. It redirects the dialogue away from efficiency (concerned with hours and costs) to effectiveness (concerned with achieving results).
Planners are central to making this all happen because they are in the best position to objectively identify the drivers of brand success – the foundation of effective outcome-based agreements.
