Getting Paid What You’re Worth

2007 AAAA Management Conference

Compensation Panel

April 19, 2007

Naples, Florida

Steve Koskela

Managing Director

• A New Focus……Finally

• Thought Leaders from Other Industries

• Leading Edge Agencies Challenging the Old Model

• Moving from Defense to Offense

• “Value” - A Most Overused and Misunderstood Term

• All Deals are Value-Based…It’s Simply a Question of What’s the Relevant Theory

History’s First Client Compensation Consultant

Where We Are• Current methodology rooted in Marxist

economics:

Labor Theory of Value is predicated on the assumption that the value of any product or service is no more or less than the amount of labor spent producing it.

• Fails to Explain How Assets with No Labor Added Can Have Substantial Value, eg. Land, Natural Resources.

Where We Are

• Why diamonds, not plain rocks, at Tiffanys?

• How do the labor theorists explain price of a Porsche, a bottle of Grey Goose vodka, a room at the Ritz-Carlton, tax returns prepared by Ernst &Young v. H&R Block, Yankees v. Pirates tickets??

Changing the Compensation Course

• Value is Subjective (a vastly different theory)

• The Worth of the Output v. Cost of the Inputs

• One Very Serviceable Definition….

Pricing for Value:

A method of pricing products (or services) in which companies first try to determine how much the products (or services) are worth to their customers. The goal is to avoid setting prices that are either too high for customers, or lower than they would be willing to pay if they knew what kind of benefits they could realize by using a product (or service).

A New Compensation Doctrine• Value is by definition a subjective notion -

presumption that the value of agency services is primarily defined by the cost of producing an end product or result should be rejected.

• Agencies should be paid for providing solutions and enhancing the wealth of its clients, rather than the doing of things measured by time.

A New Compensation Doctrine• Adherence to a labor cost and time selling

approach to compensation is a primary contributor to the continuing devaluation of agency services and perpetuates efforts to commoditize those services.

• Efforts to benchmark or standardize the internal cost structures of agencies should be rejected as an irrelevant exercise in determining the fair value of agency services and an unacceptable practice aimed at eliminating agency differentiation.

A New Compensation Doctrine

• Client consultants and procurement specialists can and should play a role in helping marketing and advertising professionals determine the value of agency services - but cost analysis isn’t the answer.

• Pricing is a specialized discipline. Agencies must give it priority in how they engage with clients and must look to develop the internal pricing expertise that other professional service providers (and most major advertisers) already have in place.

Benefits-Focused Compensation * The Basics*

• No singular approach

• More about navigating the sea change in business philosophy (outcomes v. costs and time)

• No need to overcomplicate, realize it’s subjective

Essentials of Benefits-Focused Pricing

• Consistent Focus on Goals, Outcomes, and Effectiveness rather than the cost of doing things.

• The Heart of the Plan: A Well-Defined, Specific and Measurable Scope of Benefits - A Necessarily Client Driven Exercise, Facilitated by the Agency

• With a Well-Defined Scope, Agency should be ready, able, and WILLING to establish a guaranteed fixed price (fee)

Essentials of Benefits-Focused Pricing

• Manage change using a classic Change Order process, placing a supplemental value on additional objectives to be pursued.

• Alternative IP ownership ground rules should be considered and may be necessary.

• The anticipated cost of labor as measured by anticipated investment of time is only one of a myriad of factors to be considered in setting a price.

Getting from Here to There• Embrace change in business philosophy

• Recognize it’s a revolution, not an evolution

• Remain confident that services are unique AND valuable

• Recognize that some of the best deals are those that are not done.

• More Doing, Less Talking - Let’s Get On With It