Compensation models have put agencies and their clients between a rock and a hard place. MDC Global president Julia Hammond explains what must change and why.
The Covid-19 pandemic exposed significant cracks in how the industry operates, putting the topic of agency compensation models front and center again for marketers and agencies. Per recent reports, global brands currently have more than $5 billion dollars of ad spend up for review in Q1 alone – all looking for agency consolidation, improved efficiency and cost savings.
This should be no surprise: according to a recent Harris Poll study, agencies weren’t quick enough to pivot during the pandemic and did not bring the type of proactive strategic thinking their clients needed. And while clients desperately worked to reinvent themselves, agencies too looked inward, choosing to consolidate struggling agency brands, reduce overhead and slash costs in anticipation of clients cutting fees. Perhaps this missed the point.
We all know you can’t cut your way to greatness, but when agency compensation models condition us to sell time and materials, we are not incentivized to invest or reinvest in the talent, tools and technology that make our services more valuable.
We're incentivized only to be cheaper, and as a result, agencies end up retaining inferior talent instead of more expensive (but more effective) great talent. Great talent know they can leave and make more money somewhere else. It’s that simple.
We are long overdue for a change to the compensation model. And there couldn’t be a better time than now to shift our partnerships to be contingent on performance.
True reinvention of the industry will come from the agencies and holding companies that reorient their models toward delivering tangible value to client business and tying compensation to business outcomes. This means organizing our teams and talent to have a measured impact on business and rallying around a collective ambition to achieve greater results. Let’s agree on the value of an agency’s impact on business outcomes and build a model that is reflective of what the agency achieved, not how many hours and FTEs it took to achieve it. Squeezing down rates and auditing hours assumes that all talent is worth the same value. But we all know that paying more for best-in-class talent that can proactively connect creative output to desired business outcomes beats paying for a larger team of average talent to get the job done faster.
Outcome-based compensation models create a culture of accountability, so they’re better for clients and for agencies. New commercial models must leverage automation to evolve our business. How do we scope time and materials when it might be more efficient to use products instead of people? Time and materials incentivize agencies to resist innovation and the ’future of work,’ prioritizing talent over technology when we need to blend talent with technology.
The opportunities are clear and the time is now. Post-pandemic, we’ll be entering a world that that demands more from less: more content, more personalization, more diverse thinking – with a smaller budget. Agencies and clients must reframe the way they think about value versus cost. There’s a clear path forward for innovation that changes how we work for the better, but it requires that the industry admit it has a problem with the current model.
Modernize the model. Our industry lags in how we leverage technology to automate aspects of marketing. Agencies have an opportunity to lead in this space by investing in both talent and technology, rather than one over the other. While automation can help us work more efficiently, we can drive added value by also prioritizing the attraction and retention of the very best talent in the marketplace. Agencies that have already invested in automation and centralized content delivery systems report significant cost savings for clients — who also benefit from reduced time spent reviewing, commenting, and approving work.
Embrace the sprint. Time and materials and traditional agency retainers are great; they create stability for agencies and enable leaders to plan effectively. But retained relationships have led to the commoditization of our business model. Our rationalization of fees involves asks “how many people and how much time?” instead of “how have my services provided value?”
Retained models create a culture of fear (can’t lose the business!) and therefore innovation paralysis. On the other hand, using creative springs, or project-based models, allows us to form teams with consistent “retained” talent that are priced and measured by the quality and outcome of each sprint. The conversation about fees in a sprint model becomes one of value and incentive for performance, not just cost of time.
Place a premium on diversity. Diverse teams create better outcomes, which lead to increased profitability; over the past five years, the likelihood that diverse companies will out-earn their industry peers has grown, per a study conducted by the Harvard Business Review. From a procurement perspective, how do you compare the rate card of a homogenous talent base to that of a culture-rich, diverse collective of specialists? You can’t price compare. The price/value is extraordinarily different when you compare the outcomes.
Agencies, holding companies, and clients who are brave enough to reimagine our industry, reject old ways of working, embrace technology, and value diverse talent and capabilities are the companies who will win. They’ll take calculated risks to generate greater impact. And they’ll focus their diverse agency teams relentlessly on achieving goals. Until we move the industry forward to outcome-based compensation, we’ll continue to suffer from transactional, commoditized relationships. Changing compensation structures isn’t the outcome of a brand new world, it’s the crucial catalyst to accelerate our industry forward.
Julia Hammond is president of MDC Global. Kelly Phillips, senior director of MDC Global also contributed to this piece.