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.