This tweet made me stop and think this morning: "Hourly billing is unethical and dumb. The quicker you can help, the more you're worth." Credit goes to Alan Weiss of Contrarian Consulting.
It's all about business results
Alan voices a principle I've espoused at our agency over the past four years. During that time we negotiated global contracts with large clients, merged with a sister company to create the first channel-neutral, through-the-line agency on a single P&L, and packaged our capabilities in dozens of new business pitches, many of them successful.The proposition we make to clients and prospects is about results, or Return On Ideas. The number of hours we spend developing a campaign means little if the client's business isn't moving forward.
No -- it's all about timesheets
Yet we and almost every other agency agree to labor-based compensation agreements. To put it more bluntly, we charge by the hour, not by the idea or by the result.
Here's my version of how ad agencies got to this point.
(1) For most of the 20th Century, clients paid agencies a 15% commission on the media they placed. The agency P&L could support a high level of client service.
(2) In the 1980s and 1990s, competing agencies accepted lower commissions -- same model, but at drastically reduced prices. The agency P&L didn't allow the same level of service.
(3) Eventually, clients wanted to know what they were paying for and agencies wanted to ensure they made a profit, so the parties agreed to hourly fees that fixed the agency's staffing levels -- and fixed the agency's profit margin.
Agencies got lazy about two things
Throughout the above history, agencies worked hard and created good ideas, but got lazy about two important things.
One is appreciating the value of our ideas. Many advertisers succeed or fail based on what their agencies provide. A really good idea can lead to global or national prominence, #1 market share and a strong balance sheet. Yet many of us show up for work just hoping to get the ads out on time and on budget.
The other is estimating the value of our ideas. It's probably not hard to appreciate the value of our ideas, but what's that worth to a client? Here is why Alan Weiss' tweet this morning is so important. If you drive the client's business forward, shouldn't you be paid more than a fixed hourly rate?
Your results are worth more than your time
If you are compensated in any way based on the results you bring to your client, congratulations. This is a big step toward providing value rather than just providing advertising. Otherwise you may want to rethink your compensation agreement.
Steve, I love the thought of being compensated for the idea not the time but how do we determine the value? How do you figure out the worth of an idea?
ReplyDeleteI am so serious, what formula do you suggest for determining the value of an idea?
You charge based on the value the idea can deliver. Ad agencies, legal firms, accounting firms, architects leave tens of millions on the table each year they will never recover. Read Value Based Fees!
ReplyDeleteAlan Weiss
http://www.contrarianconsulting.com
Agencies have backed themselves into a corner with compensation models that undercut the undercuts the previous undercutting cut.
ReplyDeleteIf I had a clue about how to address this conundrum, I'd start my own agency. That's why I'd rather go work on the client side!!
I agree. The entire Agency compensation model is backwards. Check out this perspective on an intellectual property based model from our CFO. http://bit.ly/cF0P18
ReplyDeletePam, thanks for sharing that link! I read the post and recommend it to everyone. Great thoughts and a good read. Thanks again!
ReplyDeleteSomeone just sent me a link to another post that quotes the one Pam recommended. Here it is:
ReplyDeletehttp://www.ignitiongroup.com/propulsion/how-to-make-a-good-idea-worth-more-than-a-bad-idea/
I am a vendor to ad agencies a photographer to be exact, why do you think you are the ones providing amazing results to your clients, when you're the ones cutting all the creative fees to the vendors, basically using getty images for ideas (at least for shoots) and staying in a 5 star hotels while the crew is working 15 hour days and you are upset that I don't have a receipt to cover the 1/2 caf. mochiato your assistant had to have.
ReplyDeleteDear Anonymous: Whoa! You sound unhappy.
ReplyDeleteOne point I can address is the use of stock images for ideas or layouts. It's a legal problem with more gravity than fancy coffee and five-star hotels. For the record, one of our clients is Hampton Inns and I'm perfectly happy staying there and drinking their coffee.
Hi Steve, I'm perfectly happy, I'm not mad about it. It's life, and the food chain, I'm the first one offering to get whatever fancy's the AD, CD, client and their assistants and I do it with a smile.... I just think it's funny that agencies think they actually earn their keep.
ReplyDeleteIn the most creative businesses, including photography, you should be charging for the Use of the 'thing' you provide.
ReplyDeleteLittle use = Little value.
Greater use = Greater value.
So your aim is to produce & provide 'things' that are of Great Value to others - in terms of Usage.
In photography, that 'thing' is your 'images' for others to Use - not your time and your expenses, for others to Use.
Think about it:
When a Client phones you, they are not wanting to employ you or hire you - they are simply asking you to produce some images and then provide them with those images, so as they can Use them.
So you will need to finance the shoot up-front and produce the images first - which means they are your images and you therefore own the copyright of those images.
So after you have produced the images, you will then simply be providing your client with your images for them the Use.
So the fee is for the Use of your images - and should therefore be based on that - and that should be clearly stated.
Media use, Period of use & Territory of use - being the 3 key things - that will ultimately determine the fee.
So the 'Licence fee' is for the Use of your images - and nothing else.
Which means your production costs are your costs - not their costs - unless you are agreeing to 'work for hire'.
So if you want to stay in a 5 Star hotel, rather than a cheap B&B, that should be up to you.
Hi btw.. I did a job for Hampton Inn and the client and agency did not stay in the Hampton Inn as matter of fact we didnt' either, although I think they are a good chain.... and I understand what Ashley's saying but I don't think that model is valid anymore, I know it is but for the most part I don't see that working. It's more like the agency says I have this much for all rights and that's the negotiation... I'm not huge by any means. But it's the truth... at least in my world and for the record the worst client is National Geo....
ReplyDelete