Since agencies did away with commissions in the early 1990’s, they’ve been locked in debate with clients over what constitutes a “fair fee.”
As buyers of agency services, clients want maximum value for the minimum price. Agencies, which sell those services, attempt to balance both at once. This is how any fair negotiation works, since our ancestors traded obsidian for flint.
But it’s undeniable that agency fees are declining as the volume of service clients expect rises. Afraid of losing business, agencies have been trained to deliver whatever the client demands. While at some level this dynamic is inherent in the DNA of the agency-client relationship, it’s a problem for those who believe in the power of creativity in business.
It also leads to another kind of pay gap.
Top U.S. agencies will agree to compensation of 9% less than the first asking price on average, and ultimately deliver about 16% more than initially scoped, according to a survey of 10 agency CFO’s representing annual revenues of over $750 million, conducted from 2016 to 2019. This represents a compensation gap of almost 17% between the agency asking price and fee paid.
It’s not sustainable for either side, but there are a few ways to turn this pay gap into a source of great opportunity — if clients and agencies are able to embrace new ways of trading.
1. Embrace the MSA
A master service Agreement sets the tone for the relationship. When it’s built on a foundation of reciprocal growth, it can also represent a significant and often ignored opportunity.
MSAs, for example, can promote joint-venture opportunities. If the contract allows for revenue sharing on out-of-scope work, the agency can be more creative and generate potential income for both parties while driving better business results for the client — often beyond advertising.
2. Arrange guaranteed minimum tenures
Unlike standard agency scope of work arrangements that can be canceled 90 days, minimum tenure agreements can’t be canceled once executed. That offers more certainty and support, which allows creative agencies to operate with more freedom and bravery, hire with certainty and plan accordingly.
In such an agreement, an agency, for example, will agree to do a project for a set fee, rather than a higher straight-line fee with a 60-day termination. Agencies can become incredibly reliant on such relationships, and protect them with great venom.
3. Make room for innovation budgets
Innovation budgets promote diversity in the work, create freedom for experimentation and deliver value by allowing agencies to embrace out-of-scope ideas.
Imagine an agency fee of $1 million that includes a $50,000 in innovation budget, to be spent at the agency’s discretion in support of client business goals. With a budget set aside to develop out-of-the-box ideas, innovation is ever expanding. Agencies can prototype and test an idea to hit on something unexpected that works.
4. Expand your portfolio
Giving agencies the opportunity to expand their work across a client’s portfolio is both efficient and motivating — especially when it falls under a more significant retainer.
Even if it’s just a short-term project, these arrangements are often a vehicle for agencies to absorb capacity and price for repeat scope when the situation allows.
5. Pay based on outcomes
Outcome-based compensation can not only fill the pay gap, but can allow clients to attribute growth to the agency’s work.
According to Ignition Consulting Group founder Tim Williams, “Marketers would cease to care how many people are assigned to their business if the agency compensation was based on the quality of the outputs and outcomes instead of the quantity of the inputs. Both parties would care about the same thing: deliverables and results, not time and materials."
One thing that every good deal has, no matter the detail, is wishing of each other well on both sides. And that’s the easy part.
John Minty is CFO at TBWA\Chiat\Day LA
