agency compensation where do things go from here? beals handout - 201… · global 2014, wfa...
TRANSCRIPT
JLB+PARTNERS
Agency CompensationWhere Do Things Go From Here?
Presented to Mirren CEO SummitNovember 7, 2017
Agenda
• Current State of Compensation– Recent Trends– Issues/Challenges– Implications for Agencies
• Future State of Compensation– Implications for Agencies
• “Pitch” Negotiations
• Q&A/Discussion
2
Current State
3
The Current State of Compensation
• Fees remain the primary method of compensation for all agency services around the globe
– Some market exceptions like Brazil and Japan
• Performance-based remuneration not taking off (yet)
– Most marketers have tried employing incentives as an element of their agency compensation plans, but their use declined in U.S. over past three years
– Beyond some notable attempts (e.g., Coca-Cola and P&G), new sales or performance-based methods of compensation not widely taking off
4
U.S., Global Compensation Methods• Fee-based methods continue to dominate
5
0%
10%
20%
30%
40%
50%
60%
70%
80%
Fees Commission Performance/Value/Other
U.S. 2017, ANA
Global 2014, WFA
Sources: ANA Trends in Agency Compensation Survey, 2017WFA, 2014 Remuneration Survey
Global Compensation Methods• Fee-based methods continue to dominate – increase in
project-based fees mirrors recent trend in U.S.
6
17.1 19.2 10.035.7
3.4
31.913.9 34.8
55.0
24.0
13.9 40.7 3.9
9.370.666.8
69.1
74.4
72.2
0
20
40
60
80
100
120
140
160
180
200
GLOBAL BRAZIL MEXICO UK CHINA
MARKETERS 2014 (BRAZIL), 2015 (MEXICO, UK) AND 2016 (CHINA). DATA IN %.
FEE / RETAINER����
COMMISSION ��
PROJECT BASED�����
MIXED MODELS��
DK/NA� /���
Source:
U.S. Compensation Trend• Use of fees has recently declined some in U.S.
– Rebound of commissions, mostly for media, programmatic– Continued exploration of value-based, other methods
7
7066
62 61
35
21
1016
3 512
3024
32 35
53
6874
63
7581
68
0 26 4
12 1116
21 2214
20
0%
15%
30%
45%
60%
75%
90%
1985 1988 1991 1994 1997 2000 2003 2006 2010 2013 2016
Total Commission Total Fee
Source: ANA Trends in Agency Compensation Survey, 2017
U.S. Compensation Trend• Fees the most common method across agency services
8
12%
22%
6%
24%
10%
9%
9%
13%
7%
12%
68%
51%
75%
51%
69%
76%
72%
79%
76%
67%
20%
27%
19%
25%
21%
15%
19%
8%
16%
22%
Total for All Agreements
Full-Service Advertising
Creative Advertising
Media Planning and/or …
Direct Marketing
Promotion/Event Marketing
Interactive/Internet/Digital
Multicultural Market …
Public Relations
Strategic/Branding
Total Commission Total Fees All Other Methods
Source: ANA Trends in Agency Compensation Survey, 2017
Performance Incentives• Use has recently declined in the U.S.
– More marketers suggesting they are not working– Difficulty in establishing, aligning on metrics – a desire for
simplicity in compensation agreements
9
13%19%
30%35%
38%
47% 46%
61%
48%
1991 1994 1997 2000 2003 2006 2010 2013 2016
Source: ANA Trends in Agency Compensation Survey, 2017
Performance Incentives
• 27% of ANA respondents indicate incentives are all “earn back” – a punitive agreement for agencies
10
42%
30%
27%
56%
36%
8%
65%
21%
6%
0% 20% 40% 60% 80% 100%
Bonus is all “upside,” above and beyond the agency’s base revenue
“Risk-reward” structure; some agency revenue at risk in exchange for upside reward
Bonus is all “earn back”; agency base revenue lowered and can be earned back through
performance
201020132016
Source: ANA Trends in Agency Compensation Survey, 2017
Performance Incentives
• Similar findings in latest ISBA report in UK– Dramatic decrease in “PBR” (pay by results) for creative
agencies: 43% of remuneration plans– And, for media planning: 13% of remuneration plans– Significant decline in PBR payout
11
Source: Campaign online, 8/22/2016 (Paying for Advertising report, ISBA/Arc)
Pay By Results Pay OutCreative Media
2012 2016 2012 201650+% of bonus earned 75% 25% 63% 50%No bonus earned 15% 60% 19% 31%
Performance Incentives
• And, also on decline in China
12
8.7
57.3 60.9
69.6
39.5 36.821.7
2012 2014 2016
� YES
� NO �
� DK/NA ��/���
14.72% 12.40% 11.50%AVERAGE BONUS % BASED ON
ANNUAL REMUNERATION����� ������ ¤
Source:
The Current State of Compensation
• Life at the client negotiating table won’t be getting any easier
• Marketers under intense cost pressures …– Global competition– Disruptive new technologies and competitors– The rise of “always on” social and one-to-one
communications with the corresponding need for always on and highly variable content
• … which, in turn, forces marketers to do more with less via their agencies (and most all of their other suppliers)
13
The Current State of Compensation
14
Marketer Agency
The Current State of Compensation
• The threat to agency bottom lines is increasingly less about “rate” negotiations and more about “service” negotiations
– Marketers can only push fees down so much with any given agency partner without sacrificing desired performance and work/service quality
• Marketers are increasingly:– Looking for opportunities to shrink and consolidate the
number of their roster agencies– Retaining services from “non-agencies”, or taking in-house– Moving to project engagements vs. annual retainers
15
The Current State of Compensation• Increase in “when required” vs. “annual”
compensation negotiations reflects:– Move to more project-based vs. annual retainer
agreements– Rapidly changing media and agency landscape –
marketers bringing new services on ad hoc, and increasingly reluctant to get locked into annual retainers
16
Frequency of Negotiation 2010 2013 2016When Required 23% 26% 40%Annually 61% 72% 53%
Source: ANA Trends in Agency Compensation Survey, 2017
Supply-Demand• The supply-demand dynamic has not been in the agency
industry’s favor– Agency “supply” far outpaces demand globally and locally– Somewhere in vicinity of 100,000 agencies of all types in large
markets like U.S. and China – and plenty of options in most every country and major city around the globe
17
AgencySupply
AgencyDemand
Supply-Demand• Agencies must now contend with multiple other service
providers– Proliferation of specialists: social media, content, production, etc.– Tech firms and consultants offering advertising services– Direct-with-media contracts for media placement, content
services– Third party marketing tech services for programmatic media, etc.– Clients taking services in-house: particularly for on-going digital
and social content and management
18
2008 2013In-House Agency Penetration (U.S.)
42% 58%
Source: 2013 ANA In-House Agency Survey
Supply-Demand
19
Ad ServicesSupply
Ad ServicesDemand
Agencies• Ad, digital, PR, DR, Social Media,
etc.
Consulting firms acquiring agencies
Tech Firms• Google, Facebook, etc.
Content, Asset Mgt. Specialists• Hogarth, Tag, Redworks, etc.
Third party marketing tech,programmatic services
Direct-from-media content services
In-house agencies
Good-Fast-Cheap• For years, the expectation was for 2 of 3• Today’s expectations: all 3!
20
Good Fast Good Fast
X Cheap X
Cheap
THEN NOW
Implications For Agencies
It is not all doomand
gloom!
21
Implications For Agencies
Things to Optimistically Consider:
1. Agency roster consolidation a threat, but also an opportunity – Marketers starting to increasingly invest more with fewer, better agency partners– May require some proactive agency investment in the
relationship to help cement a seat at the table– Effective leadership and synchronization of multiple
agency services more important than ever (for sister agencies of holding companies or partner agencies of independents)
22
Implications For Agencies
Things to Optimistically Consider:
2. Procurement focus is starting to shift from cost-cutting to value-add focus – only so much more blood to squeeze out of the compensation stone– Work to establish a relationship with procurement, both
with your existing clients and new prospects– The good procurement execs want to learn more about
what you do, and where you can add value
23
Implications For Agencies
Things to Optimistically Consider:
3. Post-”tech disruption”, companies re-discovering that marketing and advertising can be a competitive difference-maker– Opportunity to help your Client CMOs demonstrate and
sell the value of marketing communications to their organizations
24
Implications For Small / Independent Agencies
Things to Optimistically Consider:
1. Leverage your size and/or independence– Greater flexibility to financially invest in your client
relationships vs. publicly-held agencies: e.g., ownership and senior staff commitments to your clients; taking on project vs. retainer
– Experience as a ”one stop shop” for your smaller and mid-size clients …
– … But, with greater flexibility to bring the right service partners to the table (when needed)
25
Implications For Small / Independent Agencies
Things to Optimistically Consider:
2. Smaller marketers more likely to engage fewer agency partners (or other ad services companies)– Many do not have the staffing and bandwidth to
manage multiple agency relationships– They are more likely to be open to a smaller,
independent agency that can ”do it all”, either in-house or in partnership with other agencies
– More likely to rely on their agency to hire and manage third party services providers
26
Implications For Digital Agencies
Things to Optimistically Consider:
1. Increasingly, “traditional” marketers comfortable with “digital” having lead seat at the table– “Digital” vs. “Traditional” rapidly blending together –
within a few years, nobody will be segmenting agencies with these definitions
– You do need to invest in good strategic and account leadership – and continue to improve your operations (the traditional ad agencies are generally still perceived as better in these areas)
27
Implications For Digital Agencies
Things to Optimistically Consider:
2. Opportunity to leverage in-house digital design and production capabilities– A potential efficiency advantage vs. more traditional use
of third party production resources– Be clear with your clients on what are “fee” vs.
“production” dollars (otherwise you risk being perceived as too expensive)
– Stay abreast of recent ANA Production Transparency report
28
Implications For All Agencies
Where to focus?
• With all the options available to marketers, the need to focus on what you do best is more important than ever -- don’t get trapped into promising services you are not good at, tempting as it might be
• Certain services will become relatively more “commoditized” and hard to win on a low cost basis: e.g., 24/7 content execution, data services
• But, creativity, difference-making insights, and effective campaign orchestration/leadership unlikely to ever become commodities
29
Future State
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The Future State of Compensation• Despite recent trends, the primary method of
agency compensation will ultimately move to “pay for performance”
– Increasing sophistication of real-time marketing performance measurement, and ability to attribute to specific activities/agency contributions
– Increase in addressable, measurable media (in all channels)
– The client CEO and CFO will increasingly demand it – as will the CMO to help keep their job!
31
The Future State of Compensation• Despite recent trends, the primary method of
agency remuneration will ultimately move to “pay for performance”
– Procurement can only reduce agency costs so much – they need to start showing how they can improve value for their company’s top line brand and sales growth
– Agencies tiring of debilitating negotiations around FTE and fee reductions, and will increasingly see pay for performance as a better path to improved revenue and profitability
– New competitors will likely start pricing more along these lines, even if existing agencies do not
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The Barriers to Performance-Based?• Why are we not seeing a greater shift to
performance-based already?
– Difficulty in achieving internal client alignment on the definition of “success” and how any individual agency’s contributions are tied to it
– Difficulty getting to client-agency alignment on contributions and metrics to measure
– Marketer resistance to change: agency hours and rates are a simple common denominator to negotiate and track
– Agency resistance to change: the fiscal uncertainty around fully, or even significantly, tying remuneration to performance
33
Implications For Agencies
1. Steer your client compensation dialogue to “performance”– Even if the methods and metrics are not in place to
execute an effective pay for performance plan, get the seeds planted with your clients and prospects – try to get them focused on the value of what you are delivering, not what you are costing
– And, where the right methods and metrics are available, take a run at a pay for performance approach
• You can walk before you run: test it out hypothetically under your current compensation agreement
• Set it up as a percent of your remuneration (an incentive) vs. putting all of your revenue and the client’s fee budget in play – then determine if you can dial it up further
34
Implications For Agencies
2. Get smarter on performance tools/analytics– Even if a big investment in data/analytics is not right for
your agency, at least invest in executive talent or partners that can bring the right knowledge and experience to the table for you
– Most larger marketers will have their own data group, or specialist data/analytics agency anyway, but you will want to be able to have an effective dialogue with them about how to track the performance of your contributions, and the corresponding, fair remuneration
35
Implications For Agencies
3. You will have to accept risk with reward – but also need to insist on reward– The better performance incentive plans are currently set
up in risk-reward fashion – the agency earns more for exceeding performance goals, less for under-achieving them
– Many marketers can be convinced to pay you more for stellar results, but you cannot then expect profitable compensation for underperformance
– You should strongly push back on clients or prospects who expect you to start in the hole, and “earn back” fair compensation – walk away if they insist (and if you can afford to)
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“Pitch” Negotiations
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Pitch Negotiations
The most common agency mistakes are at the start• Failure to have a firm stance on what you will accept in terms
of compensation method or amount• Willingness to accept poor client or consultant briefing on
scope and budget parameters• Failure to ask about the requirements and client expectations
at the start of the review; e.g.:– Method of compensation– How will proposals be solicited– What type of “rate” and/or cost and profit detail will be
required
38
Pitch Negotiations
Considerations in preparing proposals• Address the client request – nothing makes it easier for a
client to reject an agency than to not answer their questions• But, if you have a better idea, put that forth too (“give them
what they want, give them what they need”)• If procurement is involved, don’t assume it is all about lowest
cost – try to make a case for your cost/value• What can you offer as a “value add”?• Try to make it simple and easy for client to digest• If cost transparency is requested, then be transparent (or
don’t pursue)
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Pitch NegotiationsConsiderations in negotiations• Have your negotiating plan and strategies worked out in advance
(most clients, especially procurement executives, will). Know where you are willing to give or not.
• Consider alternatives to the client demands: e.g., can you offer some added service in exchange for not reducing the fee?
• Again, try to steer the discussions to cost-value and performance. The smart marketing and procurement execs will engage on this.
• Know your details and assumptions: if you can’t explain your staffing and remuneration details, you risk having the client assume you are guessing or hiding something
• Determine the point at which you are willing to walk away – if you impressed the client in the pitch, they will be reluctant to dismiss you over price (and if they aren’t, you don’t want to work for them)
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Questions/Discussion
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