TrinityP3 Advertising Agency Remuneration methodology

TrinityP3 approach to sustainablevalue based agency remuneration TrinityP3 November, 2011 CONFIDENTIAL marketing management consultants

Advertising is an art, remuneration a science •  “Advertising is fundamentally persuasion and persuasion happens to be not a science, but an art.” – Bill Bernbach•  Agency remuneration should not be left to the imagination. It is a business decision and should be based on data and facts, not simply gut instinct.•  Remuneration has the ability to: •  Improve quality of strategic and creative outputs •  Create alignment between marketing and all suppliers •  Reward and encourage desired behavior Intuition is easier to manage with data and analysis to support it. •  We use data and industry benchmarks to calculate agency remuneration to deliver your strategic needs and quality expectations. marketing management consultants

Are you getting value from your agency? •  The most common question we are asked by marketers and procurement about their media, creative, digital and other agencies.•  The answer depends on how you want to define value.•  Many people simply look to the cost, based on the number of agency resources they retain.•  But is it the right number of resources? Or too many? Or too few? Right quality? The right mix?•  We prefer to measure value, based on either Measuring quality and quantity is as important as cost in the outputs (what the agency produced) or assessment of value outcomes (what those outcomes contributed to achieving in financial terms). marketing management consultants

Buying people? Or paying for what they create? •  The people in the agency produce the thinking and the work that are the outputs of the agency. •  But most remuneration models are focused on the hours the people spend (head hours & FTEs) and not what they produce. •  This means the model encourages time use - but not productivity. •  There is a direct correlation between the agency outputs and the resources required that are the basis of our benchmarks. •  These resource benchmarks take into You may be paying for this team but is it the right team? With consideration strategic importance, the right mix? The right expertise? Delivering the right outputs? complexity and category variations. marketing management consultants

Head hour rates and title promotion •  Some people make the mistake of benchmarking rates such as head hour rates and production hourly rates.•  This simply tells you if the unit rate is high or low to market, but not if you are getting value.•  If an agency halves the production rate per hour and charges 3 times as many hours for the same job it is effectively a 50% increase in cost.•  Or if a staff member is promoted, without a commensurate increase in salary, then billed at the higher rate defined in the contract, the A ‘great deal’ is a great deal less value if you are not getting agency increases their margin on that what you pay for and more importantly what you need. resource.•  Neither increases value, just price. marketing management consultants

Remuneration is better than compensation •  To compensate is defined as “to make good for loss or damage done”.•  To remunerate is defined as “to reward for effort or work done”.•  Compensation therefore infers it is a focus on the cost of the work.•  Remuneration is focused on the value of the outputs.•  A distinction between cost and value is more productive than cost alone because: •  It allows marketers to invest in the Too many marketers are actually compensating their agency areas that drive returns when they think they are renumerating them. •  While still economising the costs of business. marketing management consultants

Linking agency remuneration to outputs •  Based on a specific scope of work TrinityP3 can calculate the agency resources required with great accuracy.•  Resources calculated include: •  Account management •  Strategy •  Creative (to concept and production supervision) •  Production (management only)•  There are also production benchmarks for: •  Electronic (TV, Radio and Cinema) •  Print (Magazine, OOH, Press etc) •  Digital (Advertising, Websites, Social, Apps etc). With the increasing number of communications channels you need to ensure it is increasing value and not multiplying cost •  Using local market resource costs we can then calculate the agency fee to the scope of work (Scope Calculator). marketing management consultants

How do you define the scope of work? •  There are a number of approaches for defining the scope of work from the granular to the more holistic.•  The starting point is the marketing plan and being able to extract specifics on: •  Budgets by campaign or activity •  Specific outputs required by brand, campaign or activity•  This can be used in a highly granular approach with specific outcomes defined, eg. new and adapted, media specific, volume and complexity. Being able to clearly and accurately define the outputs and•  It can also be used with a more holistic outcomes you need is the first step to ensuring value for approach by defining the brands, campaigns money. and activities by strategic importance. eg. tiered activities, new brand launch verses refresh, investment levels, etc marketing management consultants

And what if there is no scope of work? •  Occasionally there is no scope of work or even a reliable marketing plan because: •  The category is highly reactive •  Marketing requirement decisions reside elsewhere in the organisation •  There is a high degree of budget uncertainty•  In these cases a retainer would lock you into an agreement with no way of ensuring you are getting value.•  Assuming a year-on-year benchmark, we are able to use the Scope Calculator to take the agency outputs and accurately calculate the resources required, compared to the If you can’t predict what you will need, then at least have a previous year. way of measuring and tracking what you buy. •  This is our Scope Monitor - the basis of the TBWA Scope Manager. marketing management consultants

How efﬁcient is your agency relationship? •  Benchmarking your agency remuneration not only demonstrates the value, it can also demonstrate the efficiency.•  By benchmarking the level of resources used to deliver your scope of work against the benchmark-requirements you can see the efficiency of the relationship.•  The benchmarking is by discipline including account management, strategy, creative and production.•  High levels of creative can be indicative of inefficient briefing and / or complex Measuring the resources you use to produce the outputs you need is the most accurate, fact based way of measuring approvals process leading to excessive efﬁciency. iterations of work.•  We can also benchmark the mix of resources by seniority. marketing management consultants

Hollywood is the same as Bollywood •  To make a feature film in the US or India takes the same number of resources – Cinematographer, Producer, Director, Crew, etc•  The variables impacting cost are the individual costs of resources and cost of living.•  Countries with low salaries and low cost of living will often use more resources than required, simply because they are affordable, but not because they are essential.•  The resource benchmarks apply for the same outputs no matter which market. The Across the more than 20 markets we have benchmarked the important factor is ensuring clear definition resources required is incredibly consistent, only the salary costs change. of the outputs. marketing management consultants

The best sources of data are the suppliers •  Time and again we find that most organisations do not have the data required to benchmark or determine value.•  Most marketing departments collect spend data only, on the companies financial system, meaning you know how much is spent but cannot quantify what was bought.•  The best sources of this data is the agencies for: •  Resources used •  Rates charged •  Cost of business overheads •  Outputs defined•  We have developed data templates across the various disciplines to assist agencies collect and provide this data You may know how much you spent, but your agency knows accurately what you bought. marketing management consultants

There are some things we will not ask for •  There is some data we do not ask for and for which the agency is not obliged to provide, including: •  Individual salary data •  Agency profitability•  Many marketers and their procurement people think the best approach is an open book.•  Privacy laws means that in many jurisdictions this information is not available, (unless you are a senior executive of a publicly listed company).•  Sarbanes-Oxley Compliance means that many entities owned by US listed companies cannot provide this type of information Your agency is responsible for delivering the services you (including most of the network agencies). require, you should not be responsible telling them how to manage their business. marketing management consultants

The failure of performance based fees •  The problem with performance based remuneration is it has become a big stick and a tiny carrot for the agencies.•  The agency sacrificing most of their profit (10% - 15%) for the chance to earn back a bonus (15% - 20%) does not act as an incentive. (Would you do this with your salary?)•  Bonuses work when they act as an incentive, not a disincentive. The upside should be substantial (30% - 50% profit on revenue or more).•  And while the metrics can include relationship performance (soft) and marketing (medium) metrics, the bulk should Positive change occurs faster with incentives, not penalties. be financial performance (hard). marketing management consultants

Linking agency proﬁt to ﬁnancial performance •  The default purpose of marketing is to drive margin and revenue and therefore profit. •  The investment in marketing is to drive financial value in the short term (sales) to long term (brand equity). •  Marketing is typically measured on financial metrics such as market share, revenue and sales. •  As a highly visible contributor to brand strategy and communications, lead agencies should share these metrics. •  This provides alignment to objectives for the marketing team and their strategic suppliers. To achieve the ultimate in alignment of effort having all parties focused on achieving the same objectives is a positive start. marketing management consultants

Find out how we can make your agency remuneration work for you TrinityP3 Pty Ltd Sydney +612 8399 0922 Melbourne +613 9682 6800 Hong Kong +852 3589 3095 Singapore +65 6884 9149 people@trinityp3.com www.trinityp3.comTrinityP3’s liability is limited as per our standard terms and condition as approved by the client prior to the project commencing marketing management consultants

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TrinityP3 Advertising Agency Remuneration methodology

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