Value-based agency compensation and incentives

IMPROVING THE EFFECTIVENESS & EFFICIENCY OF MARKETERS & THEIR AGENCIES

ANA FINANCIAL MANAGEMENT NYC

VALUE BASED COMPENSATION & INCENTIVES

March 2015


Today

Setting Incentives1 2 3

Case Studies

Four Things

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who arewe?

GLOBAL CONSULTING COMPANY SINCE 2002

70 PEOPLE, 11 OFFICES, 70+ MARKETS

EFFECTIVENESS – with efficiency

LONG TERM RELATIONSHIPS

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About R3

IMPROVING THE EFFECTIVENESS & EFFICIENCY OF MARKETERS & THEIR AGENCIES 4

Who do we work with?

55 Countries 7 years

40 Countries 5 years

15 Countries

75 Countries

8 years

12 Countries10 years

6 Countries

12 Countries

7 years

4 years

22 Countries5 years


What do we do?

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IMPROVING MARKETING EFFICIENCY &EFFECTIVENES

S

RETURN ON INVESTMENT

RETURN ON AGENCIESRETURN ON MEDIA

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SETTING INCENTIVES


Trends in Fee Compensation

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Incentives

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Evaluating Agencies

ADVERTISER ADVERTISING AGENCY


Impact of Incentives on Agency Performance

Source: ANA 2012, Global Agency Compensation Survey

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Creative Agencies

ADVERTISER ADVERTISING AGENCYSales (Sales Index)Market Share GrowthGrowth by Brand

Brand HealthEquity MeasuresAd AwarenessAd Recall

Pre Tests Link Results

Annual Evaluation Half Year Evaluations


Pop Quiz

What is the typical premium of Ratecard over Retainer?

A. We have to pay agencies? B. 0% C. 30%D. 80%

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Project vs. Retainer Rates

Recent examples from R3 Client-agency contract reviews

Proposed project staff rate as % of retainer rateClient A - Agency A 109-111%

Client B – Agency B 127-131%

Client C – Agency C 133-135%

Source: R313


Media Agencies


Advertising AwarenessAdvertising Recall


Media Efficiency AuditsMedia Effectiveness AuditsMedia Financial AuditsMedia Process Audits


Cost Based Metrics

METRIC WHAT DOES IT MEASURE VALUE Year-on-year cost increases/decreases

• Year-on-year change in real prices • Actual $ costs paid vs last year

• Most accurate benchmark • Critical to establish ‘cost unit’, e.g.

CPRP or % discount • Can only measure like for like

media

Costs vs external benchmark Compares costs paid to third party data pool

• Valuable indicative cost base• Pool relatively small but growing

fast Costs vs market rate Actual costs paid vs agency estimate

of average costs paid by other advertisers

• Agency favourite but almost impossible to verify

• Can give a useful general perspective

Costs vs inflation • Similar approach to market rate. • Compares year-on-year actual

costs vs theoretical inflation rate

• Baseline inflation usually taken from media vendor rate card changes or CCTV annual action results

• Useful but impossible to quantify

Costs vs internal agency benchmark

Compares actual costs to average rates paid by agency

• Valuable benchmark but agencies are very reluctant to share internal data

• Agency rates need to be verified by a third party

Savings vs rate card Rates paid vs rate card cost • Limited value - nobody pays rate card


Quality Based Metrics

METRIC WHAT DOES IT MEASURE VALUE

Campaign effectiveness

Agreed upfront consumer responses metrics in stipulated timeframe (e.g. 1 million video views on demand in 3 weeks, 10,000 participants, 1000 sign ups, etc.)

• Consumer responses provide valuable indications if a brand promotion or message is well-received

• Potential linkage to key business outcomes (e.g. sales, loyalty, etc.)

TV spot verification

• Spot matching scheduled vs actual on air spots•

Captures spots appearing as planned vs missing or out of zone spots. Also captures bonus spots

• Sets basic spot accuracy level vs benchmark

• Ensures missed spots are accurately compensated

GRP, Reach and Frequency verification

Benchmarks planned vs actual GRPs, Reach and Frequency (see definitions in Glossary)

• Sets accuracy level vs benchmark

Campaign strike rates

Measures number of campaigns achieving planned weight of GRPs, Reach and Frequency

Measures consistency of tactical planning and scheduling across brand portfolio

TV peak % Benchmarks % of actual GRPs appearing in pre-determined prime time segment

• Subjective measure of audience attention• Measured against benchmark• This concept can also be applied to print

positioning Position in break Rates paid vs rate card cost • Limited value - nobody pays rate card

Program selection % of GRPs delivered in top rating programUsually Top 10 highest rating shows used as benchmark

• Broad quality metric measuring use of ‘hot programming’

• Ensures reach goals achievedç• Can be applied to non-TV media


Media Transparency

“Why are media agency fees reducing while agency

profits are increasing?”


What % of US marketers pay for digital on fee basis?

A. What’s a fee basis? B. 28% C. 82%D. 102%

Pop Quiz #1

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ANA Compensation Study

Source: ANA 2012, Global Agency Compensation Survey

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Why is my Digital Agency so expensive?• Premiums paying by rate card?• Premiums paying project by project?• Fees for digital production: apples to oranges

vs. traditional agencies• Paying multiple agencies for similar services?• Lack of agency revenue transparency? Fees on

top of other agency revenue sources?

Digital Agencies

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Digital KPI’s

Digital Agencies


Core Metrics (Display)


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The 3 digital black boxes

FEES PRODUCTION

MEDIA

Ratecards hours

Profit margins

vs traditional

Make or buy

Mark ups

Rebates

RTB

Publisher roles

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Digital Rebates

• There is so much competition for digital revenue Adtech running at loss to IPO Clients budget slow to move Agencies have strong control

• Media Rebates – in EVERY country – are inevitable

Source - WFA

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Event Metrics Event Performance

Event Agencies





Social Metrics

Social Agencies


Social Media Metrics


Various digital services lend themselves to in-house solution• Those that involve regular, day-in,

day-out activities • Simple and high-volume production

tasks that don’t have high-level “creative” demands

Make vs Buy

Where are the shifts from agency to in-house taking place?• Website maintenance and basic

content management• Social media monitoring and content

management• Digital asset production/adaptation

(especially for basic OLA – banner ads, simple videos)

• Digital strategy

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Putting it together


MODEL EXAMPLES PROS CONSMultiple, Best in Class AgenciesClient hires multiple agency specialists across different disciplines (creative, media, digital, PR, multicultural, etc.)

Mondelez, J&J, Levi’s, Walmart,Samsung, many others

Considerable resource flexibility

Helps ensure “best in class” agencies

Increased client mgt time

Potential cost inefficiencies

Potential barrier to integration

Lead AgencyClient hires “lead agency” to provide overall brand direction; help client manage and coordinate other agency resources

P&G (BAL model), Huawai, some others

New approach

Tighter client-agency coordination; fewer points of contact to manage

Potentially greater integration

Lead agency can dominate to point where other agency voices drowned out

Lead agency “jack of all trades, master of none”?

Common AOR Models

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Common AOR Models

MODEL EXAMPLES PROS CONSHolding Company: Sibling Agency SolutionClient serviced through agency holding company; team of discipline specialists, usually with one agency in lead

Reckitt Benkeiser, Clorox, HSBC, Chrysler, BoA (the latter two abandoned after trying it)

• Single agency contract and point of accountability, but allows for multiple specialists

• Some degree of resource flex

• Potential greater integration

Some limitations for “best in class” options

Efficient on paper, not always in practice

Less flexibility with agency conflict management

Holding CompanyCustom AgencyHolding company creates custom agency for the client

ll (short-lived), Apple FordNestle (some markets)

• Potential for greatest degree of integration

• Built to client “specs”

• Client time, cost efficiency (fewer agency contacts)

• “Ivory tower” risk; agency a reflection of client vs. independent voice

• Agency talent recruit & retention issues: esp. for creative talent

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Common AOR Models

MODEL EXAMPLES PROS CONSFree AgentClient draws from multiple and varying agency resources as needed (few, if any, formal AOR or retainer assignments)

Intel, Sony

• Ultimate in flexibility; ensures constant breadth, variety of ideas

• For brands with cachet, agencies come calling to client

• Requires very centralized, well- staffed client team

• Can work against integration

• “Free agency” can turn into “free for all”

One Stop Shop (Single Agency)One agency hired to do everything; unlike the “custom agency”, this is an established agency that can handle multiple marketing/advertising functions

Common for smaller clients; particularly for local/regional or B2B marketers

Common in Japan , Korea , Brazil

• Potential for greatest degree of integration

• Client time, cost efficiency (fewer agency contacts, relationships to manage)

• Rare that one agency can do everything equally well

• “All or nothing”

• Potential for “ivory tower”

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2CASE STUDIES


Changing fees and processes to become truly output focused

Unilever

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100% Sales Outcome

80% bonus

100% Agency performance

20% bonus

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BONUS as % of FEE

BONUS KPIs

Lower focus on outcomeHigher agency acceptance

Higher focus on outcomeLower agency acceptance

‘TRADITIONAL’ ‘RADICAL”

Outcome Based Fees


A radical new working model to streamline and drive focus P&G


P&G Before BALWorking Process

EBD ADAGENCY

INTERACTIVEAGENCY

BBAGENCY

BTLAGENCY

BRAND AGENCY

BD LEADER

DIGITAL MGR

BB LEADER

BTL MANAGER

GLOBAL STRATEGIC COMM PLANNING

MEDIA

ADD

DESIGN MGR

Multiple competing messages

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The benefit of one

BRAND AGENCY LEADER

P&G DECISION MAKER

ONE BRIEF

ONE CHECK

One cohesive message

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A new global roster with digital and creativity at the center

Samsung


Samsung 2014Global Review

Network creative (2)

Boutique creative (4)

Digital (3)

Media (1)

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OBJECTIVE OUTCOME

Powered for CreativityFour of the world’s best creative boutiquesSupport from Cheil, LB

Powered for Digital Social-centric Customer-centricResults-centric

Samsung 2014Global Review

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SamsungEvaluations

• Global system • 2,000 Samsung

marketers • 250 agency relationships

• “Client on Agency”• “Agency on Client” • “Agency on Other

Agency”

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3FOUR THINGS TO DO

DIFFERENTLY


Change mindset on “Value Based” from theoretical to practical

1.


Let your agencies get rich…..2. or poor Based on Results


Measure and prove the value and cost improvement of integration

3.


Digital and Social needs to be at the center, not as an add on

4.


Best practice ideas

1. Change value mindset

2. Based on Results 3. Proving Integration 4. With Digital at the

Center


Thank You!CONTACT

GREG PAULL [email protected]

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Value-based agency compensation and incentives

Business

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