TrinityP3 Advertising Agency Remuneration methodology

marketing management consultants

TrinityP3 approach to sustainable��value based agency remuneration

TrinityP3 November, 2011

CONFIDENTIAL


Advertising is an art, remuneration a science •  “Advertising is fundamentally persuasion

and persuasion happens to be not a science, but an art.”

– Bill Bernbach

•  Agency remuneration should not be left to the imagination. It is a business decision and should be based on data and facts, not simply gut instinct.

•  Remuneration has the ability to: •  Improve quality of strategic and creative

outputs •  Create alignment between marketing

and all suppliers •  Reward and encourage desired

behavior

•  We use data and industry benchmarks to calculate agency remuneration to deliver your strategic needs and quality expectations.

Intuition is easier to manage with data and analysis to support it.


Are you getting value from your agency? •  The most common question we are asked

by marketers and procurement about their media, creative, digital and other agencies.

•  The answer depends on how you want to define value.

•  Many people simply look to the cost, based on the number of agency resources they retain.

•  But is it the right number of resources? Or too many? Or too few? Right quality? The right mix?

•  We prefer to measure value, based on either outputs (what the agency produced) or outcomes (what those outcomes contributed to achieving in financial terms).

Measuring quality and quantity is as important as cost in the assessment of value


Buying people? Or paying for what they create? •  The people in the agency produce the

thinking and the work that are the outputs of the agency.

•  But most remuneration models are focused on the hours the people spend (head hours & FTEs) and not what they produce.

•  This means the model encourages time use - but not productivity.

•  There is a direct correlation between the agency outputs and the resources required that are the basis of our benchmarks.

•  These resource benchmarks take into consideration strategic importance, complexity and category variations.

You may be paying for this team but is it the right team? With the right mix? The right expertise? Delivering the right outputs?


Head hour rates and title promotion •  Some people make the mistake of

benchmarking rates such as head hour rates and production hourly rates.

•  This simply tells you if the unit rate is high or low to market, but not if you are getting value.

•  If an agency halves the production rate per hour and charges 3 times as many hours for the same job it is effectively a 50% increase in cost.

•  Or if a staff member is promoted, without a commensurate increase in salary, then billed at the higher rate defined in the contract, the agency increases their margin on that resource.

•  Neither increases value, just price.

A ‘great deal’ is a great deal less value if you are not getting what you pay for and more importantly what you need.


Remuneration is better than compensation •  To compensate is defined as “to make good

for loss or damage done”.

•  To remunerate is defined as “to reward for effort or work done”.

•  Compensation therefore infers it is a focus on the cost of the work.

•  Remuneration is focused on the value of the outputs.

•  A distinction between cost and value is more productive than cost alone because:

•  It allows marketers to invest in the areas that drive returns

•  While still economising the costs of business.

Too many marketers are actually compensating their agency when they think they are renumerating them.


Linking agency remuneration to outputs •  Based on a specific scope of work TrinityP3

can calculate the agency resources required with great accuracy.

•  Resources calculated include: •  Account management •  Strategy •  Creative (to concept and production

supervision) •  Production (management only)

•  There are also production benchmarks for: •  Electronic (TV, Radio and Cinema) •  Print (Magazine, OOH, Press etc) •  Digital (Advertising, Websites, Social,

Apps etc).

•  Using local market resource costs we can then calculate the agency fee to the scope of work (Scope Calculator).

With the increasing number of communications channels you need to ensure it is increasing value and not multiplying cost


How do you define the scope of work? •  There are a number of approaches for

defining the scope of work from the granular to the more holistic.

•  The starting point is the marketing plan and being able to extract specifics on:

•  Budgets by campaign or activity •  Specific outputs required by brand,

campaign or activity

•  This can be used in a highly granular approach with specific outcomes defined, eg. new and adapted, media specific, volume and complexity.

•  It can also be used with a more holistic approach by defining the brands, campaigns and activities by strategic importance. eg. tiered activities, new brand launch verses refresh, investment levels, etc

Being able to clearly and accurately define the outputs and outcomes you need is the first step to ensuring value for

money.


And what if there is no scope of work?

•  Occasionally there is no scope of work or

even a reliable marketing plan because: •  The category is highly reactive •  Marketing requirement decisions reside

elsewhere in the organisation •  There is a high degree of budget

uncertainty

•  In these cases a retainer would lock you into an agreement with no way of ensuring you are getting value.

•  Assuming a year-on-year benchmark, we are able to use the Scope Calculator to take the agency outputs and accurately calculate the resources required, compared to the previous year.

•  This is our Scope Monitor - the basis of the TBWA Scope Manager.

If you can’t predict what you will need, then at least have a way of measuring and tracking what you buy.


How efficient is your agency relationship? •  Benchmarking your agency remuneration

not only demonstrates the value, it can also demonstrate the efficiency.

•  By benchmarking the level of resources used to deliver your scope of work against the benchmark-requirements you can see the efficiency of the relationship.

•  The benchmarking is by discipline including account management, strategy, creative and production.

•  High levels of creative can be indicative of inefficient briefing and / or complex approvals process leading to excessive iterations of work.

•  We can also benchmark the mix of resources by seniority.

Measuring the resources you use to produce the outputs you need is the most accurate, fact based way of measuring

efficiency.


Hollywood is the same as Bollywood •  To make a feature film in the US or India

takes the same number of resources – Cinematographer, Producer, Director, Crew, etc

•  The variables impacting cost are the individual costs of resources and cost of living.

•  Countries with low salaries and low cost of living will often use more resources than required, simply because they are affordable, but not because they are essential.

•  The resource benchmarks apply for the same outputs no matter which market. The important factor is ensuring clear definition of the outputs.

Across the more than 20 markets we have benchmarked the resources required is incredibly consistent, only the salary

costs change.


The best sources of data are the suppliers •  Time and again we find that most

organisations do not have the data required to benchmark or determine value.

•  Most marketing departments collect spend data only, on the companies financial system, meaning you know how much is spent but cannot quantify what was bought.

•  The best sources of this data is the agencies for:

•  Resources used •  Rates charged •  Cost of business overheads •  Outputs defined

•  We have developed data templates across the various disciplines to assist agencies collect and provide this data

You may know how much you spent, ��but your agency knows accurately what you bought.


There are some things we will not ask for •  There is some data we do not ask for and for

which the agency is not obliged to provide, including:

•  Individual salary data •  Agency profitability

•  Many marketers and their procurement people think the best approach is an open book.

•  Privacy laws means that in many jurisdictions this information is not available, (unless you are a senior executive of a publicly listed company).

•  Sarbanes-Oxley Compliance means that many entities owned by US listed companies cannot provide this type of information (including most of the network agencies).

Your agency is responsible for delivering the services you require, you should not be responsible telling them how to

manage their business.


The failure of performance based fees •  The problem with performance based

remuneration is it has become a big stick and a tiny carrot for the agencies.

•  The agency sacrificing most of their profit (10% - 15%) for the chance to earn back a bonus (15% - 20%) does not act as an incentive. (Would you do this with your salary?)

•  Bonuses work when they act as an incentive, not a disincentive. The upside should be substantial (30% - 50% profit on revenue or more).

•  And while the metrics can include relationship performance (soft) and marketing (medium) metrics, the bulk should be financial performance (hard).

Positive change occurs faster with incentives, not penalties.


Linking agency profit to financial performance •  The default purpose of marketing is to drive

margin and revenue and therefore profit.

•  The investment in marketing is to drive financial value in the short term (sales) to long term (brand equity).

•  Marketing is typically measured on financial metrics such as market share, revenue and sales.

•  As a highly visible contributor to brand strategy and communications, lead agencies should share these metrics.

•  This provides alignment to objectives for the marketing team and their strategic suppliers.

To achieve the ultimate in alignment of effort having all parties focused on achieving the same objectives is a

positive start.


Find out how we can make ��your agency remuneration ��

work for you TrinityP3 Pty Ltd

Sydney +612 8399 0922

Melbourne +613 9682 6800

Hong Kong +852 3589 3095

Singapore +65 6884 9149

[email protected]

www.trinityp3.com

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TrinityP3 Advertising Agency Remuneration methodology