How Should Agencies and Their Clients Define Value?

The ongoing failure of agencies to charge for work completed instead of hours worked -- which is now greatly exacerbated by AI tools that produce solutions in nano-seconds -- is fueling a continuing decline in agency profit margins. At the heart of this problem is a severe misalignment of economic incentives: what the agency wants more of — hours — is precisely what clients want less of.

This perpetual tug-of-war leads to persistent mistrust in the agency-client relationship. Brand marketers are never quite sure their agency has their best interests at heart, and agencies are constantly defending the expenditure of time spent by their account teams. Even casual observers would conclude this is the wrong conversation.

Business results and agency revenues are both declining

As agencies and clients devote their time and energy to managing this fatally flawed approach to compensation, Rome is burning. Brand growth has been stagnant for more than two decades. And instead of devoting their energies to driving true business results, agencies are heads-down filling quotidien scopes of work pre-defined by their clients.

Underlying this dynamic is the fact that neither agencies nor their clients have stopped to decide what constitutes a “valuable” relationship in the first place. A recent article in AdAge reports that only 5% of clients and 10% of agencies have an established definition of value for client-agency relationships. Both parties admit to having different priorities when evaluating partnerships. Unsurprisingly, clients are more likely to look at hard measurement factors such as campaign performance, while agencies look toward soft measures like “freedom to do great work.”

The agencies who field client satisfaction surveys often ask a question like “To what extent does the agency provide fair value for the fees charged?” While that’s a useful diagnostic, it doesn’t go nearly far enough in peeling back the multiple layers of what constitutes value. Over the years, our firm has developed a more detailed list of queries designed to help agencies and brand marketers understand what represents “fair value.”

Questions to define value

We ask brand marketers to assign a rating to the following questions, where 1 represents “Strongly Disagree” and 10 represents “Strongly Agree.”

QUALITATIVE MEASURES

1. Our agency has a solutions mindset. Instead of just filling scopes of work, they are dedicated to helping us solve important business and marketing problems.
2. Our agency takes a proactive approach to our business. We are often presented with ideas and recommendations we didn’t ask for.
3. Instead of providing a take-it-or-leave it price, our agency provides us with several different pricing options.
4. When the scope of a project is well defined, our agency follows the practice of quoting a fixed price and honoring that price unless there are notable deviations from the original scope.
5. Generally speaking, our agency is able to satisfactorily answer questions about fees and pricing.
6. Our agency does a good job of overseeing and managing the costs of third-party providers.
7. Our agency provides clear and accurate billing.
8. The reporting we receive from our agency helps us understand the actual work and results delivered, not just the hours that were spent.
9. When given reasonable time to complete a project, our agency does a good job of forecasting and managing resources.
10. Our agency avoids unnecessary rework by proactively seeking clear input and direction.
11. Our agency team is willing to take responsibility for their work and will absorb the cost of rework when it’s clear they are at fault.
12. At the start of major projects, our agency does a good job of working with us to define the metrics of success.
13. Our agency has streamlined and simplified the pricing and billing for common production services.
14. Our agency offers output or deliverables-based pricing in place of hourly billing.
15. Our agency takes the initiative to conduct “after-action reviews” following major campaigns that engage us in a discussion about what went right, what went wrong, and how we can improve results the next time.
16. Our agency has internal processes and incentive structures that put the emphasis on productivity and effectiveness, not utilization and “busyness.”
17. The people on our agency team take their commitments seriously, exerting their best efforts to meet deadlines and deliver work when promised.
18. Our agency seems vested in our success, and, when appropriate, is willing to share in both the risks and the rewards.

QUANTITATIVE MEASURES

Transactional

Our agency is helping to make a significant impact on transactional KPIs, such as:

• Volume growth
• Organic revenue growth
• Incremental sales
• Same-store sales
• Market share
• Market penetration
• Cost per sale
• Stock price
• Cost per lead
• Number of new customers
• Customer retention rate
• Share of wallet
• And other appropriate transactional success metrics

Behavioral

Our agency is helping to make a significant impact on behavioral KPIs, such as:

• Repeat purchase
• Ever tried brand
• Purchase frequency
• Inquiries
• Online registrations
• Click-throughs
• Website unique visitors
• Online search volume
• Online endorsements
• Customer referrals
• And other appropriate behavioral success metrics

Attitudinal

Our agency is helping to make a significant impact on attitudinal KPIs, such as:

• Brand awareness
• Brand knowledge
• Brand fame
• Brand preference
• Intent to purchase
• Brand likeability
• Willingness to recommend
• And other appropriate attitudinal success metrics

What predicts success?

Given the billions of dollars invested in marketing, cultivating a better understanding of what constitutes value seems like an obvious imperative. And defining value is obviously best done on the front end of the relationship. As part of their initial discovery process, all good agencies ask the question, “What is the objective of this assignment.” Unfortunately, most clients are surprisingly unprepared with a good answer. According to the Association of National Advertisers, almost three-quarters of brand marketers will identify “sales” as the main objective of a marketing campaign. That’s not a very useful answer.

It’s a given that every organization wants to increase sales and grow its revenues. The main problem is this answer lacks precision. There are scores of success metrics related to revenue growth. “Sales” is only a tip-of-the-iceberg way to define marketing and business objectives. It would be much more useful to know what predicts sales. Sales is a lagging indicator, along with other measurements like market share and stock price. While lagging indicators have their place, they are essentially historical metrics. We can only view them in the rearview mirror.

Defining the measures and metrics that matter

Given that most marketers default to the obvious lagging indicators when identifying their objectives, it’s the job of their agency to help them drill down to the metrics that matter; to engage in a process of helping brands understand the cause-and-effect relationship between their leading and lagging indicators.

We advocate for the idea of a “success workshop” early in the relationship, which is designed to elicit multidimensional answers to questions like:

1. What is your company’s profit model? How does your brand/company make money?
2. How do you know when your brand is succeeding?
3. How do you know when your brand is failing?
4. What do you consider to be the critical success factors that are business-related? Marketing-related? Customer-related? Channel-related? Employee-related?
5. What do you not measure about your business that you would like to measure – and why?
6. If money weren’t an issue, what role would you want us to play in your business?

As professional service firms like advertising agencies migrate away from the flawed time-based billing model toward pricing structures based on outputs and outcomes instead of inputs, it’s essential to devote more time and energy to defining value. Essentially this means trading a cost focus for a value focus. Instead of jumping straight to Scope of Work, clients and their agency partners must first define the “Scope of Value.”

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Tim Williams?leads Ignition Consulting Group, an international consultancy that advises?professional service firms in the areas of business strategy and revenue models.?Tim is the author of several books, including "Positioning for Professionals: How Professional Knowledge Firms Can Differentiate Their Way to Success."

X: @TimWilliamsICG