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How to tackle the agency remuneration issue

How to tackle the agency remuneration issue
Tom Lewis, IPA Finance Director, explores the key question you should be asking in order for your agency to be fairly remunerated.

The advertising industry is facing an identity crisis: are we providers of professional services, like lawyers, or producers of creative works, like novelists?

This is a question posed by Simon Veksner, a Creative Director at DDB Sydney, in a recent post on his Scampblog, and for which the answer, he suggests, would inform our thoughts on how to be appropriately remunerated – fees vs royalties.

But despite posing the question, he admits to not having the answer and concludes that we are “neither, and a bit of both” – essentially filing the issue under “too difficult to solve”.

Given the answer of how to solve the agency remuneration issue would be the Holy Grail for finance and commercial directors of agencies everywhere, I therefore think it needs further investigation and have picked up where he so insightfully started off…

There are parts of what advertising does that looks like a factory – where it’s all about efficiency and quick processing. Time-based remuneration is best here.

But, there are other parts that create IP with a lifespan that can, at its best, be measured in years and decades. Time-based billing is not really appropriate here and can actually build in inefficiencies (“I have x hours to spend, so I’d better use all of them or I’ll get paid less”).

What is needed here is a remuneration model that looks at value, and rewards increases in value. The challenge is to define and measure value, to give it a currency, to empower CMOs to go into the boardroom with hard facts, not just soft measures.

Time-based models are appealing to CFOs, CEOs and CPOs (especially) because they are easy to measure and therefore to manage and incentivise. But this treats advertising as a discretionary cost to be turned on and turned off at will on the basis of company performance and the requirements of the stock market.

However, this is not conducive to effective brand building which – as demonstrated in The Long and Short of It – has multi-year timelines where effectiveness builds over longer periods than the 90-day world of the reporting calendar.

How an agency should be remunerated is not the question - it’s the key to the answer. The real question is “what business problem is the advertising seeking to address?” Once client and agency are aligned on this, the issue of appropriate remuneration structures falls into place.

Agreeing the business aims of the marketing requires alignment of the marketing strategy with the overall corporate goals and is therefore an issue to be addressed by CEOs, CFOs, CMOs and CPOs jointly on the client side.

Agency remuneration issues cannot be solved in isolation on either the client or the agency side – we need a cross-bench approach.

For this reason, the IPA is organising a Performance AdaptathonTM on July 8th with the involvement of agencies, clients and intermediaries to consider precisely these issues and work towards lasting solutions.

Tom Lewis is Finance Director at The IPA. Follow him on Twitter.

Last updated 29/05/2014

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