Getting remuneration strategy right means following eight key recommendations. Stuart Pocock, Co-founder & Managing Partner at The Observatory International, explains the part that procurement can play.
Building a successful remuneration strategy requires thought and a clear approach. Based on our recent research with ISBA and the World Federation of Advertisers, we’ve identified eight areas that make the difference between an effective approach and one that fails.
First, work closely with your counterparts. Everyone talks about procurement and marketing working closely together but you have to actually do it. That means becoming a team with clear responsibilities and guardrails to ensure absolute clarity of purpose.
Secondly, create a clear, detailed Scope of Work – or be flexible in your approach. A lack of detail in the scope will set agency alarm bells ringing. While it may not be easy to get detailed scopes from hard-pressed marketers it is the essential start point in any negotiation that isn’t going to run in to trouble at a later date. Where you don’t have clarity on requirement or where legacy scopes of work are no longer appropriate, work collaboratively with your internal teams and with the agency to create line-by-line solutions and associated costs.
Thirdly, you need to budget appropriately. All businesses are looking for more from less but you can take that approach too far. Advertisers have sometimes sought to get their agency to do incredible work without the required remuneration. Be prepared to discuss what the agency can do for the monies after satisfying yourself that their rates are realistic, and then push back to marketing to manage expectations.
Fourthly, you need to give guidance. While there can be commercial sensitivity to revealing full budgets to agencies, it’s important to provide some guidance – and an indication of media spend and production budgets. This approach will at least set parameters and avoid the agency suggesting un-affordable work and the need for round after round of debilitating negotiation.
Fifth, you need to understand fee composition. There is no reason why an agency shouldn’t disclose the breakdown of their fees, unless they have a particular methodology in play. You need to understand billable hours, hourly rates, percentage of personnel allocation, direct costs, overhead and desired profit margin to formulate a full picture. Each component part will inevitably vary dependent on location and agency type. For example, a full-service agency in a large metropolitan area will have higher overheads than one based in the regions.
Sixth, ensure you have credible data. Benchmarking agency rates can be complex and time consuming. Sometimes it’s possible to compare based on your own data but when a new category of agency or new territory arrives, advertisers can have no comparisons to work to. Third-party data will need interrogation to establish its age, the pool from which it’s taken (to ensure like-for-like agency comparison) and whether the rates are ‘market price’/un-negotiated or negotiated. If it’s the latter, you will need to know what type of client – big businesses have the power to negotiate considerably harder than small ones.
Seventh, be fair and balanced in your dealings. Dealing with professional services means buying intangible assets and people. Long after negotiations have ended, your marketing counterparts will need a motivated business partner. You and the agencies are looking for the same outcome, so while it’s appropriate to ensure good value don’t be overly aggressive to simply push costs down. Performance-based remuneration that’s fair on the agency and not just a way of reducing agency income should be an essential part of your plan.
Eighth, be open-minded. Inevitably you will have a remuneration strategy in mind before you engage but that doesn’t mean you can’t consider new approaches that agencies may suggest. Some may not offer the deep transparency that you are looking for – but providing the end figures are right and tied to a robust MSA, this can save time and delight all stakeholders. Beware of following trends without fully examining whether those approaches are beneficial to your business.
By bearing in mind some or, ideally, all of these core principles, you can be sure that you’ll be heading towards better outcomes and greater confidence in your agency fee negotiation. For more information or advice please contact us at The Observatory International. In them meantime you might like to take a look at our Agency Compensation services here