Addressing ROI and Transparency in Agency Compensation Management
Agency compensation models are changing based on pressure from organizations to simplify compensation management. Nonetheless, the agency ecosystem is becoming more complex, as organizations require more specialized services to achieve ROI. Here's what procurement can do to manage their agency relationships.
Any procurement professional, CMO, or agency executive will tell you that organizations across industries are demanding a better ROI from their marketing procurement strategies. This has put pressure on the entire marketing procurement apparatus, as well as on agencies themselves.
But organizations have reason to be wary when acquiring agency services. Historically, agency compensation models have left some organizations struggling to understand how each dollar spent correlates with the value produced. Labor-based fees and hourly-based fees, long standard in the marketing and advertising industry, can lack the transparency procurement needs to reconcile their organization's marketing spend.
Additionally, internal marketing expense budgets have been steadily declining. According to Gartner, the percentage of company revenue spent on marketing has gone from 12.1% in 2016 to 11.2% in 2018.
With pressure mounting from the C-suite to do more with less, and with marketing budgets being reallocated to marketing technology and other investments, it's up to procurement professionals to make the most of each dollar.
Here's what procurement professionals need to know about agency compensation and what they can do to manage it in shifting marketing environment.
The Evolution of Agency Compensation Models
Agencies have good reason to request compensation based on time and labor. Like any contractor, these models are the most reliable ways to ensure they get paid.
According to AdAge, about 60% of agency-client compensation arrangements were labor-based in 2018. Meanwhile, about 25% of agreements were based on fixed fees, and another 15% were hybrid agreements based on commissions on media, production, and/or sales.
However, The Association of National Advertisers (ANA) noted in 2017 that the use of labor-based fees and performance incentives by marketers is decreasing. This is likely the direct result of advertisers attempting to simplify their compensation practices.
According to an ANA press release about their report, Trends in Agency Compensation: How Marketers Are Simplifying Agency Management and Seeking Transparency, "The study found that the drop in labor-based fees was the first such decline since 2006. Although it remains the most-used method, it is losing momentum."
The use of incentives is also on the decline, as "respondents indicated incentives do not improve agency performance. Structuring and managing effective incentive plans is complicated, time-consuming, and often ineffective."
Additionally, the use of commissions for media services increased by 12%.
Most notably, however, the value compensation model has gained popularity. Although few are employing this model (7%), it was virtually non-existent in previous years. This indicates more organizations are interested in tying agency compensation to performance metrics or value-generation, and some agencies seem to be willing to use the model as well.
Reexamining and Negotiating Contract Agreements
Although many organizations are choosing to move the creative side of their marketing in-house, agencies are still an essential resource for strategy and accepting top-tier talent.
A 2019 press release from the ANA about their Managing In-House Agency Creative Content and Legal Concerns report revealed that 63% of organizations surveyed were concerned about keeping in-house agency talent energized. Forty-four percent were concerned about attracting top-tier talent in the first place.
Demand for marketing agency services is still steady. Those tasked with procuring marketing services must do everything they can to secure more transparent agency compensation models. Preferably, compensation should be value-oriented, but other aspects of contract negotiations must also take precedence, including:
- Contract Length
- Campaign and Production Schedules
- Objectives and Milestones
- Terms and Times of Payment
- Privacy and Confidentiality Agreements
Final Thoughts
To achieve transparency and to optimize spend, more marketers and CMOs must engage in agency contract negotiations. This may require educating them about procurement, so they have a frame of reference when conducting negations with agencies.
"The ANA has been urging marketers to become increasingly involved and engaged in agency contract and digital media supply chain management. A key way to accomplish that goal is to be keenly aware of how media transparency issues are minimized within the framework of the client/agency contract," said ANA CEO Bob Liodice. "Now, our latest compensation research indicates that marketers are taking up that challenge by aggressively addressing transparency concerns and streamlining and simplifying agency compensation practices."
Today, organizations are partnering with multiple agencies at a time, each for a specific marketing effort or for consulting purposes. As the marketing procurement world becomes more complex, it will be interesting to see how agency compensation changes and how organizations adapt to manage their agency relationships.