How do you design a compensation plan that rewards agencies for great work while providing clients a good return on investment? Finding the right mix can be complicated because the Brand/Agency relationship is more than a simple task-related arrangement. As the Bedford Group, a respected agency research firm writes, “A client’s relationship with its communications firm is one of the most complex in the business environment and requires a substantial level of collaboration from both parties to make it effective and sustainable, especially in these trying times where patience is thinner, loyalty is weaker and understanding is more shallow.”
Who thought up Hourly Billing?
In the 1970s, when media costs were skyrocketing and commissions were buying a lot of champagne for agencies, clients started cutting commissions and demanding accountability. To cover revenue reductions agencies began billing by the hour, and sophisticated overhead formulas and time sheets became an essential part of life. As accountants and purchasing people became part of the agency selection process, marketing relationships seemed to be more about who negotiates the best deal rather than who can best drive business. My peers in the agency business have argued for years that the hourly based model hinders them from doing great work.
A broken system
Billing by the hour incentivizes inefficiency. It is in the agency’s interest to assign more headcount rather than less. And, it’s difficult to know if the hours estimated are what is needed to get the job done. Estimate too many hours and penalize the client. Two few hours penalize the agency.
But Richard Goldstein, a New York CPA, looks at it this way, “There are advantages for the agency: It’s easy, it can be a cost accounting tool, and it transfers risk to the client if the engagement goes over budget.