PBR lowdown

Increasingly more agency-client relationships are based on some form of payment by results (PBR), and while some shops have benefited from such an arrangement, observers say there is a risk of becoming too focused on short-term sales, which can negatively impact the brand in the long-term.

Increasingly more agency-client relationships are based on some form of payment by results (PBR), and while some shops have benefited from such an arrangement, observers say there is a risk of becoming too focused on short-term sales, which can negatively impact the brand in the long-term.

Last year both the client organization, the Association of Canadian Advertisers (ACA), and the agency group, the Institute of Communications and Advertising (ICA), released reports on PBR. They agreed that the main benefits are the alignment of goals between client and agency and greater accountability and efficiency on both sides. They also emphasize that PBR or incentive-based compensation agreements should only be put into place if agencies are asked to deliver on achievable goals.

The ICA found that, in 2000, only one-third of agency remuneration agreements were based on traditional commissions. In fact, 46% of relationships were fee-based; 39% commissions and 15% a mix of both.

‘The fact of the matter is the industry is moving away, not just from commission, but from projects that are commissionable,’ says Rupert Brendon, president and CEO of the ICA. ‘The largest agencies tell me that about half of their revenue is now coming out of non-commissioned (non-media) work and coming from direct marketing, public relations, sales promotions and all the other diversified services agencies provide. These are not commissionable so it’s really not surprising that a lot of their income is coming from fees.’

For those implementing PBR-type agreements, Brendon cautions that simply linking sales increases to incentive remuneration is too simplistic when other factors beyond advertising impact that result. Measures should go beyond short-term sales effects.

‘It’s more important to break the measures up into multiple measures, otherwise you can hang yourself on one particular thing – such as being out-of-stock or poor sales performance,’ says Brendon. ‘Business and advertising performance should include things such as brand image shifts and attitude towards the brand.’

Rick Wolfe, president of PostStone Corporation, a Toronto business research and strategic planning company, agrees with Brendon and adds that if objectives only measure sales, then ‘you can count on marketing communications veering away from the brand as the agency bends over backwards to make sure those sales objectives are met.’ He adds: ‘The agency’s value really deepens when they have a greater understanding of a client’s business. If you can’t develop a strong relationship with the agency because there’s something out of whack with your PBR system, the agency is never going to have the opportunity to develop that understanding.’

The selection of measurement is extremely difficult, points out Wolfe, who conducted research for and was co-author of the ACA’s PBR report, but he says the goals have to be achievable and the resulting agreement has to work well for both client and agency.

‘If it doesn’t work well for the agency, you’re going to find yourself changing agencies too frequently – and that is a great way to prevent good work.’

In addition, Wolfe says it has to be a very large relationship in order to make negotiation of full PBR worth the effort because at least one person on each side would be needed to manage the PBR issues.

Interestingly, however, several small and mid-size shops have embraced some type of incentive-based structure. In fact, Mario Amantea, president of Parallel Strategies of Calgary, believes performance-based relationships are much easier for smaller agencies to put into place.

‘The reason I think they’re happening more often, especially with small to mid-sized agencies more than multinationals, is we’re looking at building the business of a lot of the smaller clients. These clients have good products, good ideas and concepts but find it hard to raise capital for marketing.’

Amantea says the agency doesn’t just leap into these relationships but rather does due diligence as would any company making an investment in another.

‘We can’t get into scenarios where we can lose money,’ says Amantea. ‘The worst-case scenario is to break even. The best-case scenario [we] bill significantly more than we have ever billed in a traditional agency model. We are just starting to see the potential for bigger dividends.’

Since its debut in 1999, Vancouver-based Rethink has called its compensation system the Rethink Rebate. Palmer Jarvis DDB alums Chris Staples, Ian Grais and Tom Shepansky established their company on the philosophy that marketing is calculated risk taking – and they are willing to share that risk with clients.

That means that part of the fee Rethink has negotiated with each client is held back until an annual review of the business, at which point it is handed to them if they have delivered on the agreed-upon measures.

‘The one thing we’ve always tried to do as a partnership is deliver what we promise, so we kind of stuck our necks out,’ says Shepansky. ‘We heard from a lot of clients that it would have meaning.

‘It can’t just be, ‘we’ll get another couple of points of margin if we’re great.’ Clients say, ‘forget that, who said you deserved more than 17% margin anyway?”

Rethink has negotiated performance-based remuneration agreements with its seven retainer-based clients and is putting its first project-based agreement in place for a large new assignment.

So far, Shepansky says, the agency has received 100% of its fees.

‘We’ve tried to keep it simple and flexible [so we can] adjust according to the kind of client, the kind of category and the kind of measurement tools that may or may not be in place. It’s certainly not one-size fits all.’

Shepansky says part of the measurement of results is subjective but the other part is a combination of ad awareness, market share, sales growth and customer count growth.

‘If there isn’t some sort of return, don’t you at some point question the investment? That’s where we stand.’

Zig of Toronto also has some simple PBR agreements in place with a few of its clients. Andy Macaulay, agency partner, says these types of relationships publicly align the client and agency agendas and encourage a feeling of partnership.

In addition, he says, it is a tangible demonstration that an agency really believes that what it does is going to grow its client’s business.

‘I believe there should be incentive-based compensation in virtually every relationship. We have it with our staff, why wouldn’t we have it in our relationships with our clients?’

Macaulay says PBR is a great concept that has its pragmatic difficulties; that’s why he tends to favour discussions on incentive-based compensation instead, which tend to be less intricate versions of reward for results.

‘Some clients have said they did not want to do [PBR] for various reasons. It’s a lot of work. The default position is always, we’ll put a portion of our profit at risk based on you achieving your business goals. That’s blunt PBR but it does suggest a level of alignment between client and agency.

‘We have that in place in a couple of cases. More sophisticated schemes require a lot more work both in terms of the up-front agreement, the agenda and mechanisms in terms of the ongoing measurement of it.’

Some agencies have taken the leap and ventured into the more sophisticated accountability systems, including Sharpe Blackmore Euro RSCG, which has been developing its process for several years. The Toronto-based agency has taken accountability and proof of performance to a much higher level than most agencies with Metricom Accountability Metrics (MAM).

Simply put, their system correlates the relationship between advertising and sales performance, but Wendy Robertson, a strategic consultant with Sharpe Blackmore, calls it semi-customized, return-on-investment-based data analytics. She explains that it is grounded in marketing performance rather than payment by results and is a slightly more progressive system built around being paid relative to the agency’s ability to contribute to the client’s business.

Sharpe Blackmore is working on this basis with a number of its clients including Sprint Canada, which it picked up in May. The agency suggests that all its clients should be moving toward MAM although it’s not something that can be adopted all at once.

Over a period of seven to eight years, Robertson says Sharpe Blackmore has built its own database of experience and normative data that provides information used in all client business. The strict application of the accountability metrics calls for the client to also develop its own database with which to forecast how its particular offers, products and brands will behave in different scenarios.

Indicators of success are audited on a weekly, bi-weekly or monthly basis, depending on the client.

‘In terms of having a performance contract,’ says Robertson, ‘it’s not so much what is paid but that there’s an opportunity for increased rewards and compensation. When you achieve something that you both agree is beyond a normal result, that extra compensation gets paid back to staff in the form of bonuses. Therefore [it] becomes a very embracing idea of performance-based marketing.’

However, the complexity of PBR relationships remains a deterrent for some clients and agencies. Mark Weisbarth, president of Due North Communications in Toronto, says his agency would be open to incentive-based compensation, but while he has had several discussions with clients about it early in relationships, nothing develops beyond that.

‘It’s a great idea and it should happen, but first you have to implement a program and then monitor it. It’s hard to isolate the factors that are driven by the agency’s work. Unless you’re a very large organization with really good data that’s easily shared and accessible, it is hard to execute.’

Weisbarth says the best measure of an agency’s contribution would be ad-tracking studies because they are the best way to isolate what an agency is really contributing.

‘I’m not trying to belittle the sales component of it – because ultimately you’ve got to ring the cash register – but there are a lot of factors that can conspire to submarine a good campaign and others that can elevate a mediocre campaign. What we do is important but certainly not the only factor that drives success for the bottom line.’