The big dilemma: how to charge

Finding a way to assess payment that's fair to both parties has long been contentious

Advertising agencies typically bill in hours, a remuneration model that is criticised for being outdated and for encouraging agencies to work inefficiently. Despite the debate, the industry has made little progress in changing their remuneration model. The reason for this may well be that there is no one size fits all model when it comes to remuneration.

The original mark-up-based agency remuneration model was based on what was seen as fair remuneration for agency deliverables in relation to what was predominantly media and production spend.

However, as Jacques Burger, co-founder and group chief executive officer at M&C Saatchi Group South Africa explains, the decrease in traditional media spend and an increase in creative volume to support more cost-effective digital media platforms meant this model proved challenging in delivering fair remuneration. Clients often felt the model didn’t always accurately reflect the efforts of the agency, particularly in high media investments and low production periods.

This heralded the start of the hours-based model, described by Burger as a “relatively accurate model in terms of rewarding inputs, but often flawed in linking quality of inputs, and ultimately outputs, to remuneration.”

He adds that, “The model also feels strangely counter-agile in that the agency is rewarded more for spending hours on a task, than for doing it quicker. It presents a challenge to both agency and client in being able to measure and reward quality and impactful outputs.”

Vanessa Bosman, group MD at Just Design, says that if success is measured in business results, it makes no sense for agencies to bill in hours.

“We’re becoming the architects of our own demise. Relying on a time-based remuneration model not only reduces our skills base, diminishes our expertise and devalues our products and services, it also damages the client-agency relationship,” she says.

Instead of working together to create solutions that drive brand growth, Bosman says clients get involved in an unhealthy tug of war with their agencies who relentlessly try to maximise their time spent on a project while trying to shorten deadlines to save costs. No-one wins in this scenario.

“The death of the agency won’t be caused by the rapid advancement of AI but rather by agencies and their dogmatic loyalty to time-based remuneration,” she insists. “Agencies need to adapt and adopt. AI has merely accelerated this trajectory by performing the more time-consuming tasks such as image searching and top-line research, almost instantaneously. For many agencies, this could have a detrimental impact on their revenue, but ultimately, it is their willingness to embrace new and innovative approaches that will determine their success and survival.”

David Cohen, co-CEO of Grid Worldwide agrees that the current time-based remuneration model is not sustainable, particularly given that clients want things faster and for less. “It’s been proven time and again that the best creative also achieves the best business results which is why fair remuneration for value delivered is key to both business and agency success in the long term.”

The problem, explains Cohen, is that there is a disconnect between the way procurement departments view agency remuneration which typically see the creative product as a commodity, and the C-suite which understand that it is value-based and that brand value is reflected on the balance sheet.

“Every client wants to see a return on investment and turn cents into many more rands earned. As an industry we have to find a way to educate and connect these two sides of the business. Ultimately, the cheapest is not necessarily the most effective,” he says.

The challenges ?

Gareth Leck, co-founder and group CEO of Joe Public believes the biggest challenge getting in the way of changing the remuneration model is the insistence of procurement departments to use input-based remuneration models which are based on charging for the resources required to get the job done.

“Because of this, all the focus and energy in the remuneration negotiation is spent on fine-tuning what is fair and viable for both parties in terms of how much is charged for the required resources to service the account. On paper, one could argue this makes sense, but in practice the irony of this model is that it incentivises agencies to be less efficient, because – and apologies for stating the obvious – the longer it takes to get a job done, the more the agency makes.”

What is equally if not more concerning, says Leck, is the fact that that in almost all negotiations, quality measures of the output are not factored into the remuneration agreements.

Bosman believes there are four primary obstacles getting in the way of changing the remuneration model. The first is a lack of understanding on the client side coupled with a poor explanation from the agency of the creative process. “I would even go so far as to say that not much effort has gone into trying to educate clients which leads back to the issue of agency transparency around fees and time spent,” she says.

The second is poor communication and ability to demonstrate the value and worth of the creative product and in particular, the inability of agencies to clearly articulate the value that the creative adds towards brand growth and transformation to the client.

“This is often simply a case of creatives not communicating the value within the context of the brand or the client’s business objectives. But it can also point to skirting around the fact that the creative simply doesn’t deliver on any of those needs.”

The third is around challenges in measuring the efficacy of a creative solution and objectively measuring design in general. “The creative process doesn’t exist in isolation and naturally there are many external factors at play that are separate from the creative but will still affect the results of the project such as price, distribution and availability, for example.”

The fourth and final obstacle, in Bosman’s opinion, is around procurement policies and enforced rate cards. “To reduce the issue to an extreme example: time-based billing is akin to paying the same price for a McDonalds burger and piece of wagu steak, based exclusively on the time they take to prepare. To add insult to injury, sticking to hourly rates has opened the door for cost-consultants and procurement to not only dictate ‘appropriate’ and acceptable agency rates, but also the amount of appropriate time each deliverable should take. With limited budgets comes limited amounts of work, but we sit with an overflow of agencies and freelancers. Very few of us have the luxury of being able to turn down that work – especially if the client happens to be a much-admired global multinational where fixed rate cards are the norm.”

True brand growth and transformation, she argues, comes from innovating creative thinking, not cost cutting. “Clients should be asking their agencies for better work – not more work.”

In Cohen’s opinion, a one size fits all approach is not appropriate because each client and agency relationship has its own dynamics.

“A percentage of cost that is placed and risk with an upside is a good motivator on both sides if there are very clear targets linked to what the agency delivers and an equitable and fair way to evaluate what’s delivered. An output-based model versus cost per resource model can work if there are agreed ways of working and a very clear brief and scope per stage,” he says, revealing that Grid has experimented with a profit share in business. For this to work, however, requires a very simple measurable model to be adopted.

Solving the remuneration debate, maintains Cohen, relies on a solid relationship with mutual respect and open two-way communication between agency and client. It’s about a true partnership spirit where if the client does well, so will the agency.

His advice to agencies is to understand what keeps their clients up at night and their world. “Understand their moonshot; that one thing that the whole business can rally behind that is true to what they do. To ensure the relationship is more than a mere transaction, have a shared ambition and genuinely push every project to be greater than the brief suggests.”

There is no point swimming against the tide, he adds. Agencies need to pivot to more value adding services and automate everything that can be automated. To remain sustainable, agencies need to do the things that clients and AI can’t do themselves.

Burger maintains that if agencies want to be more valued by clients - and if their ambition is to elevate from supplier to partner - a value-based remuneration model based on key success metrics becomes an important element – not just of fair remuneration, but of mutually beneficial, long-term relationships.

“Measuring the success of agency outputs can be tricky in terms of causality – linking communication outputs to, for example, sales, especially in the longer term as a result of brand equity built – and finding the right measures and weighting often becomes so complex that both partners end up abandoning this ideal in favour of a more traditional approach, which is a pity,” says Burger.

He adds that the ongoing monitoring, adjusting and optimising of this more dynamic remuneration model requires time and focus. “Exacerbating the challenge is that in order to measure communications effectively, you also need to review various client deliverables such as the marketing strategy, which not all organisations are comfortable with doing.”

Leck agrees that agency fees should be based on outputs, not inputs, and the greater the quality of the output, the more the agency should be paid. “This would be a win for everyone because everybody would be correctly incentivised and motivated to produce great output that grows the entire ecosystem through the power of creativity.”

Just Design has already implemented a different approach to remuneration. Instead of justifying costs by number of hours it demonstrates measurable results for its designs during the creative process. Once launched, it can then verify the final product’s in-market performance for its clients and invoices based on outcome, irrespective of the number of reverts or the hours captured in timesheets.

Bosman is the first to admit, however, that an efficacy-based cost model can only work if the agency achieves results each time. “With subjectivity embedded in most design decisions, the results can be out of your control. Our new process eliminates client-agency bias by letting the consumer drive the design direction”.

Shifting to performance or outcomes-based billing turns the agency-client relationship from supplier to partner again, as both parties are invested in the product’s success, she says. It also provides the creative team with the freedom to devote time to innovative solutions and problem solving without being bound by the number of hours costed for, while client service no longer needs to spend the bulk of their time on the tedious admin tasks related to time tracking.

In Burger’s opinion, agencies need to build a culture that embraces learning rather than punishing failure. “We need to establish radical collaboration between agency and client teams, back a success strategy focused on balancing short-term wins with longer term ambitions and ultimately be open to adjusting and optimising what we measure and how we measure, as we go. As long as we build remuneration principles off mutual respect and interest, whatever model you end up designing will underpin what is ultimately most important: a long-term, happy, powerful and mutually beneficial relationship between client and agency.”