Why cost cutting doesn't always lead to efficiency

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Contracts don't make engagements productive, trust does, write the global CFO of Possible and the head of brand marketing at Farmers Insurance.

Under vice-grip pressure to deliver more for less, agencies have lately accelerated their efforts to build efficiency into their processes. The conversation centers primarily on ways to reduce rates: automation, procurement, production audits, and lower-cost compensation models.

It’s in the news, too. The performance-based component in the 2016 McDonald’s/Omnicom deal made it one of the most controversial transactions in memory. Since then, discussing compensation pros and cons has become an industry sport: cost-plus (rewards inefficiency!); commission (encourages agencies to maximize media); and retainer (predictable … but what about scope creep?).

On one hand, we see value in this exercise. We are a CFO and head of brand marketing—so of course we rigorously analyze and implement tactics like these.

But this hyper-focus on rates is self-defeating. When clients squeeze agencies on rates, far from saving resources, it initiates a cycle of inefficiency. The agency’s ability to maintain the margins necessary to hire, retain, and invest in the best talent is compromised. As a result, the agency taps less experienced people for the account—or scales back the team.

This shows in the work—and in interminable rounds of revisions. In time, the client looks elsewhere.

Cost cutting, in other words, just got costly.

We believe in the value of putting rates aside for a moment (they’ll be there when we return) to consider efficiency from a different angle. As we see it, efficiency is more than a tactical matter. It’s a relational one. And the quality of the work hangs in the balance.

Pick any inefficient engagement from your experience. We’ll bet the story goes like this: the brief is unclear; the scope ill-defined. The client changes course mid-stream. As a consequence, the agency misses the mark; trust vaporizes. 

As the client asks for round 22 on a rough cut of a TV spot, no one is happy. No one makes money. Good talent soon says "thanks, but no thanks," fleeing the scene. And we can guarantee: round 23 will be no closer to meeting this client’s needs.

It’s terrible to think how often this happens. But make no mistake—this hypothetical engagement would have run off the rails whether the contract dials were set to retainer or flat fee.

Contracts don’t codify trust. You wouldn’t say a couple’s pre-nup makes the relationship go right. So why do we expect a rate structure to make an engagement productive?  

By contrast, consider the engagements people fight to be on. Client and agency put in upfront time to understand what makes the other tick. A palpable excitement sets in. When the team presents, the room buzzes; the work is right from the start. Client and agency feel they’re part of something big. The experience is electric.

An engagement that starts this way will likely thrive over the long term. The client, confident that the agency has its best interest at heart, remains transparent about its objectives.

As such, the briefs are clear—and senior talent stays put. For one, the agency can maintain the best team. Moreover, the team is motivated to be there. This perfect storm of factors—namely, motivated talent and mutual respect—translates into an efficient process for devising great creative.  

As it happens, trust is profitable for agencies, cost-effective for clients, and good for the creative.

Not incidentally, this concept of relational efficiency also applies to the performance-based compensation model, held up by some as a panacea. For clients, the appeal is that the structure incents agencies to deliver against business objectives and offers protection against risk.

We like the possibility of this "skin in the game" approach. But unless client and agency have trust, it can be difficult to define metrics fairly. That places disproportionate risk on the agency, in part because advertising is only one factor affecting KPIs like sales or market share.

In a successful performance-based model, each party commits to radical candor: they’re honest about past failures—and which KPIs the work realistically can or can’t influence. The client understands that putting too much risk on an agency’s shoulders is no kind of protection at all. And the parties can strike a balance between risk and reward. 

The challenge in all this is that it’s impossible to quantify relationships. You can’t crunch numbers on trust. Rates are easier to measure by comparison. And because CMOs—more than ever—need to connect marketing spend to ROI, it stands to reason the industry wants to focus on numbers.

Our point: it doesn’t have to be one or the other. It doesn’t have to be rates or relationship, contracts or Kumbaya. We believe that, when client and agency align as partners to protect not just their separate interests but the integrity of the relationship, compensation falls into place. And the result is high-quality work—delivered efficiently.