agency remuneration - Business Marketing Club

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INDUSTRY GUIDELINES:

AGENCY REMUNERATION

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1. Introduction – Aims and objectives This document is intended to assist clients and agencies in agreeing remuneration for their marketing activity. The remuneration system underpins the way the parties engage with each other. Remuneration is an important area that often permeates every discussion between the client and agency. Both parties must recognise the crucial role that they play in designing and agreeing a remuneration system that will remain relevant and effective and which helps support a lasting and productive relationship for both parties. When designed correctly the remuneration system allows the relationship to function smoothly and equitably, without dominating every conversation between the parties. This document begins by explaining the key features that should be inherent in a remuneration model. There are several different approaches to remunerating the agency for their work, however all effective systems share similar key attributes. The main types of remuneration are explained in Section 3. The process of agreeing fees for agency activity, and the topic of payment terms, are then briefly covered. 2. Key principles of an effective remuneration system The overriding requirement of any system is that it suits both parties in the agreement and therefore helps support an ongoing relationship by aligning interests. All effective remuneration systems contain certain characteristics: • • •

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Easy to understand and apply – the system must be simple to administer and adhere to. This allows more client and agency effort to be focused on doing effective work and creating value. Fair to both parties – the value created by the relationship should be shared equitably. This helps build trust. The client must be satisfied with the price they pay, while allowing the agency to make a reasonable profit. Ensures timely approval (i.e. before the agency is required to start work) – assurance of payment and the amount is crucial to the protection of both client and agency interests. Agreement of remuneration should not inhibit the speed at which projects can be turned around. A timing plan for future reviews is agreed – following a period of working together, the client and agency are likely to understand each other’s requirements better. It may therefore be possible to improve the system. Regular reviews of the overall relationship (whether they have a direct financial impact or not) are also essential. Items such as efficiency factors and inflation will also

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need to considered. It would be obstructive if parties frequently sought to revisit terms on an ad-hoc basis. The key elements must be clearly documented in order to avoid misinterpretation by others not directly involved in the negotiation and agreement of the remuneration system.

3. Common types of remuneration system Clients and agencies must be flexible (and sometimes creative) in designing the most mutually beneficial remuneration system. There are many different types to choose from. Some clients operate a hybrid of more than one model. The most common models include: (i) Resource-based fee Generally a multiple of the hourly rates of the roles and the estimated hours required by each role to deliver the work. Rates will tend to be agreed based on indicators such as the competitive landscape, other market conditions, and measures of value. The focus is on inputs. The resulting fee should be agreed in advance and fixed for the corresponding fixed scope of work. Retainers are treated in the same way as a pre-quoted job or SOW (scope of work), but they usually cover all aspects of agency relations over a period of time (often a year). They are usually paid monthly. Retainers should be constructed based on pre-agreed inputs and outputs using hourly rates (perhaps discounted for volume and continuity) and should be: • Reviewed regularly (quarterly) to protect both parties and ensure the agreed levels remain correct • Looked at across their whole life rather than in just one period i.e. one month may often be lower or higher than average as activity is likely to fluctuate over the duration of the retainer Advantages: Forces discipline in the up-front definition of the SOW. Encourages efficient working practices. Provides financial certainty to both client and agency on what will be paid. Disadvantages: The discussion of inputs can become detailed, time consuming and nonproductive. The fee paid is not directly linked to the performance of the agency.

(ii) Output/Menu pricing A ‘price list’ is applied against clearly defined outputs or deliverables. This method of pricing is particularly suited to activity that can be standardised or is tactical in nature. The greater the degree of variability of projects from this norm, the higher the potential risk (or conversely reward) to the client or agency for any particular piece of work Advantages: Pricing is simple and quick once the menu is agreed. Experts need only be involved in the formulation of the price list, rather than in pricing of every project.


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Disadvantages: Possible only after both parties have a very clear understanding of the type of work required. Can be viewed as relatively opaque by clients. Underlying assumptions must be clearly documented - any significant deviations from the standard will still requiring bespoke pricing.

(iii) Licencing The agency charges a fee for the use of an idea or piece of material (or computer code etc). The IP rights remain with the agency, however the client is permitted to exploit the idea on an agreed scale for a pre-determined period. The client may also pay a (relatively small) fee for the initial development of the idea or material. This type of remuneration is increasingly used for digital material Advantages: The client is able to view the idea or material prior to committing larger sums (aside from a potential small up-front fee). Allows scalability – where it is not known how widely the concept may be required (or the effectiveness) the fee can be negotiated incrementally as increased usage is required Disadvantages: The client does not own the IP and there may therefore be disputes over usage. Potentially also for disagreement around the proprietary rights of the original idea

(iv) Sales-determined fee This is broadly a similar mechanism to the (now outdated) commission model based on % of media spend, adjusted to encourage media neutrality. The agency fee will depend on level of client sales – increasing or decreasing from a pre-set base according to agreed factors tied to the change in sales level period on period. This method is most applicable where sales are the main measure of client success. Advantages: Agency compensation is directly tied to success of the client’s brand Disadvantages: Not widely used or well understood. Agency has limited control over fees and the link to activity is relatively weak. Relies on accurate data being available. Less useful in service companies

(v) Payment by results (PBR) Generally used alongside another core pricing methodology – PBR is not an alternative to acceptable base remuneration for the provision of core contracted services. Intended to align client and agency interests by incentivising the agency to exceed pre-agreed targets or KPIs. For closest alignment, the KPIs should be the same as those that the clients themselves are incentivised against. Most commonly the metrics are split between qualitative results (evaluation, usually 360º) and quantitative (performance versus measurable targets, such as market share, brand awareness, or sales). A 50/50 split is often recommended. Results must be measurable, transparent and achievable. It is essential that the client budgets for the potential payment. Advantages: Focuses and aligns efforts on driving measurable results. Mutually beneficial – the agency is rewarded for excellent work that directly benefits the client’s business. Strengthens the overall relationship for longer term engagement.


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Disadvantages: Requires detailed knowledge of the client business before effective KPIs can be agreed – rarely suitable for new relationships. Can be difficult to identify metrics where agency activity is the main influence.

3. Agreement of fees Once the client and agency have agreed on the type of remuneration system to be implemented (including possibly a hybrid model), the parties need to discuss the scope in further detail. Both parties need to be aligned on the type, quantity and timing of work being requested. Aside from the fact that the selected remuneration system is likely to require a close linkage between scope and fee, this up-front discussion will help prevent issues and misunderstanding once the project(s) gets underway. 3.1 Future projects Future activity and projects are rarely known with perfect information. Assumptions must therefore be made and documented when scoping the work. Other areas to be considered and documented at the scoping and fee agreement stage are: the agency’s understanding of the brief and wider business issue, the project goals and corresponding measures of effectiveness, a detailed specification of the deliverables, clarity on what activity is out of scope, the timings, any other related costs, and ultimately sign-off on the SOW and fee by both parties. It makes sense to also agree the conditions under which a change control process should be followed in case the requirements or any other material factors change significantly versus current expectations. 3.2 Budget flexibility ‘Take it or leave it’ budget discussions should be avoided. Prioritisation of the activity to meet the budget is a more effective way of achieving efficient practices and effective work. Underpayment of the agency will place pressure on the agency’s ability to service that client’s business and may jeopardise the quality or timing of the project. Underpayment may also lead to issues such as slow replacement of resource, or lack of access to senior staff. Conversely, if the agency is not able to articulate clearly the fee being charged for a clear set of deliverables there will naturally be a loss in the client’s trust. The client can sometimes interpret this lack of clarity as the agency hiding something or seeking to make unusually high profits at that client’s expense. Neither party will benefit in the longer term under such conditions.


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4. Payment terms Payment terms are the conditions under which a sale is completed. This includes the timing of when payment must be made along with any related discounts or conditions. It is essential that the client and agency agree terms prior to commencing work. This will help both parties to manage their cash flow (“the lifeblood of any company”) and ensure that they can continue operations by having the capacity to pay their costs and those of any suppliers as they fall due. Payment terms are generally interpreted as the maximum time between an invoice being raised and it being paid. There are various things that the agency can do to help speed up the payment process, including ensuring that the invoice is addressed to the correct person, contains the requisite detail, and that the client is expecting the invoice (due to prior agreement). Agencies favour 30-day terms due to the majority of their costs – salaries and rent – being payable monthly. It is in client’s interests to try to agree longer terms. It is therefore essential that the term is agreed and documented by the parties in advance, along with any further considerations such as early payment discounts or interest due on late payments. 4.1 Pass-through costs The treatment of pass-through costs must be agreed during scope and fee discussions, before activity commences. A budget for pass-through costs should be agreed at this initial stage. Any subsequent changes must be communicated and agreed in advance, in a similar way to any changes in scope or fees. There should be a clear differentiation between ‘pure’ pass-through costs (such as travel) and other areas of costs where the agency may be providing value enhancing services, for example in the sourcing or screening of a supplier. Pure pass-through costs should not be marked-up (i.e. no agency fee will be added to the base cost) whereas the client and agency may agree a fair level of mark-up on other types of pass-through costs in which the agency is providing a further service. Where the Agency is responsible for pass-through costs they should expect to achieve ‘cash neutrality’. This means that they receive the corresponding money from the client in time to pay the supplier(s). The agency should have no interest in holding the client’s money for any longer than is necessary to pay suppliers on a timely basis. Due to many suppliers requiring payment up-front there frequently occurs a need to be able to expedite payment for 3rd Party Cost coverage.


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About BMC Industry Guidelines Industry Guidelines have been created by the Business Marketing Collective to help formalise best practice around key issues in business-to-business marketing, and improve consistency of both understanding and delivery. Each set of guidelines have been produced by a group of expert B2B practitioners and endorsed by the Executive Council of the BMC. BMC Industry Guidelines are available to download for free from the BMC website – www.businessmarketingcollective.com.

Acknowledgements We are grateful to the following practitioners gave up their time to produce these guidelines: •

Nick Midworth, OgilvyOne DNX

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