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Creating Value - Issue 8


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The "Creating Value" series from Ignition Consulting Group explores how advertising agencies and other professional services firms can innovate in pricing and compensation.

The "Creating Value" series from Ignition Consulting Group explores how advertising agencies and other professional services firms can innovate in pricing and compensation.

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  • 1. Issue 8: 4Q 2008 creatingVALUE Disarming Procurement 4th Quarter 2008 Issue 8
  • 2.   Issue 8: 4Q 2008 1 2 u Page 2 Your Compensation Agreements as a Stock Portfolio u Page 6 How to Disarm Procurement u Page 10 New Business Success in a Web 2.0 World u Page 17 Creating Value By Establishing Practice Areas u Page 21 Parting Thoughts: Either Add Value or Stop Doing It Creating Value is a quarterly exploration of the ways marketing communications firms are transforming themselves to become more valuable and competitive in the new multi-channel, media-neutral marketing environment. In This Issue Published by Ignition Consulting Group, Inc. Copyright 2008, all rights reserved. By subscription only at creatingVALUE
  • 3. creatingVALUE Differentiating the Agency Brand   Issue 8: 4Q 2008 When creating an investment portfolio, no reasonable person would put all their money in just gold, just Certificates of Deposit, or just stocks (especially in today’s economic climate). In a marketing communications firm, your client compensation agreements are your most important financial asset. If they are all based on the same compensation system – just fees based on hours, for example – it means you’re not diversifying your portfolio. A healthy financial portfolio includes a mixture of high risk/ high return and low risk/low return. Your client compensation agreements can be viewed in much the same way. Professional financial portfolio managers are trained to optimize returns through a combination of different types and classes of investments. A professional knowledge firm can do the same with different types and classes of client compensation agreements. Creative pricing as a place to start The first step, of course, is to apply some creative thinking to how your firm can be compensated for the value it creates. Your Compensation Agreements As a Stock Portfolio Unfortunately, the default answer is simply to invoice the client for the hours you spend. (It’s more than a little ironic that firms that market themselves as creative thinkers apply virtually no creative thinking to how they price their services.) As agencies continue to struggle with the concept of charging for value instead of time, examples of value-based compensation are proliferating in business all around them. Let’s look at an example of pricing based on value from the world of digital marketing. Say that you have recommended to a client that instead of a mass media campaign for a new product, a downloadable desktop widget would be a more effective way to engage target audiences. This was the concept behind a campaign for Southwest Airlines created by GSD&M based on a desktop widget named“Ding” that alerts Southwest customers of hot deals to their favorite destinations (see Nike markets a desktop widget named“Miles”designed to help runners track their progress as part of the incredibly successful Nike Plus web-based campaign (see Now that your firm has recommended a similar widget, it’s time to price your work. The knee-jerk approach would be to have your production manager walk around the company asking everyone who is scheduled to touch this project to estimate their hours. The creative approach would be to ask the question,“How could we tie our compensation to the value we’re creating for our client?” One very good answer would be to agree to create this widget at no expense to the client, then simply charge $5 per download. You have now perfectly aligned the economic interests of both the agency and the client; the more downloads, the better for both parties.
  • 4. creatingVALUE   Issue 8: 4Q 2008 A different kind of portfolio An agency that engages in this kind of pricing would have a very different“compensation portfolio”from standard agencies. Look at the risk profile of these two approaches: Agency A Single Approach Compensation Portfolio Agency B Diversified Compensation Portfolio Client 1 Luxury automobile brand Fees based on hourly rates $50 per car sold Client 2 Mobile phone accessory brand Fees based on hourly rates Royalty on each unit sold Client 3 Retail brand Fees based on hourly rates Value-based fixed price Client 4 Cosmetics brand Fees based on hourly rates Licensing fees for use of“webisode”series created and owned by agency Client 5 Financial services brand Fees based on hourly rates Outcome-based fee determined by achievement of specific metrics of success Agency A will undoubtedly be operating under the illusion that if they“manage their hours”they will achieve their target profit of 15-20% on each client. Agency B, however, can expect much more variety in its margins, with the potential to achieve much more than the industry standard. Ignition’s experience with the few innovative firms who take this approach is that they achieve much higher profit margins, sometimes in the 30-40% range. Not on every client, of course, but on enough clients in their portfolio to earn the agency above-average returns. Should you be told how much profit you can make? This is a far cry from the time-based approach used by most agencies and dictated by most client procurement agents in which the client effectively dictates the profit that the agency is allowed to earn. Can you imagine buyers of Macs and iPhones dictating to Apple how much profit it can make? A major soft drink marketer once asked us“Should we care how much profit our agency makes?” Our answer was an unequivocal“No.”If you think about it, it’s really none of a buyer’s business how much profit a seller makes. Furthermore, in well-structured compensation agreements where the economic incentives of the parties are aligned, it’s really a non-issue. Change the focus from cost to value and clients will care a lot less about how much money the agency is making. Your Compensation Agreements as a Stock Portfolio
  • 5. creatingVALUE   Issue 8: 4Q 2008 How to Disarm Procurement The enlightenment of a procurement professional The head of procurement for a large international company recently told us that his department goes to great lengths to assure what he described as“compliance to a process”in selecting providers of products and services. He said this detailed selection process was created in order to assure that the company was getting not just the best price for a product or service; it exists to make sure the company is receiving what it is paying for. In other words, that the company is getting the desired value for the price. Consequently, procurement departments drag agencies through a series of detailed, invasive questions about their process, their cost structures, their competencies, their experience, their financial strength, etc. all with one central goal in mind: to make sure the agency is capable of delivering what it says it can deliver. When you think about it, the client organization really has no other way to evaluate or assure performance. As long as agencies continue to price their services based on costs (hours) instead of value, procurement professionals will always be looking for compliance to their process as a means of evaluating whether an agency really, truly is capable of delivering what it promises. One might interpret this as a lack of trust between parties, or worse, a lack of respect for the agency. But procurement is just trying to do the job it is charged with; ensuring that the company receives value for its money. Alignment is everything Now back to our experience with the procurement head. At one point in our conversation, he remarked that given the above, there really is no way for agencies to avoid or short-circuit his “compliance with the procurement process.” Client organizations are staffed with professional buyers in the form of procurement agents. Agencies attempt to do battle with these professional buyers using amateur sellers (amateur in the sense that most agency CFOs, new business executives, etc. have not really been trained in the art of pricing and negotiating in the same way procurement agents have). That alone puts agencies at a significant disadvantage when it comes to establishing compensation agreements. But there’s an even more fundamental problem; agency executives misjudge the essential role of procurement. Why do procurement departments exists? Choose from the following answers: a. To get the best price possible. b. To get the best value possible. It’s easy to assume that procurement people are interested only in saving money by getting products and services as cheaply as possible. No doubt their goal is to beat you down on price (just as your goal is to protect your price), but procurement exists as a function to secure value for the company.
  • 6. creatingVALUE   Issue 8: 4Q 2008 We replied,“Yes there is, and we can summarize it in one word: incentives.” We went on to explain our view that the reason procurement departments have such a detailed process for selecting agencies is because of the total lack of alignment of economic incentives between clients and agencies. In fact, in the current cost-based system, there is a real misalignment of incentives. In the world of hourly-based compensation, the agency has an incentive to spend more time, not less. “What if,”we asked,“the agencies you are evaluating proposed a form of compensation in which the economic incentives of both parties were in near-perfect alignment?” Our procurement friend was silent for a moment. “Then there would be no need for compliance to our detailed process,”he replied, somewhat surprised himself. In other words, that’s why the process exists. Why not just bypass the process and go directly to what it’s supposed to accomplish; alignment of incentives? What does it mean to align incentives? It means clearly defining desired outcomes. It means tying compensation to value created, not costs incurred. It means shared risk and shared reward. Change your mind, change your agency’s future If you want to disarm procurement, first make the mental leap from cost to value. Walk away completely from the notion that you’re selling time, hours, or costs. Then have the courage to propose a completely different approach to agency selection that will help procurement, marketing, and other stakeholders bypass the arduous process of trying to predict and assure agency performance by asking you for 32 pages of reassurance. Give them the assurance they need right up front by proposing compensation based on your ability to create the value they seek in the first place. How to Disarm Procurement
  • 7. creatingVALUE 10 11 Issue 8: 4Q 2008 No matter how you slice it, blind prospecting is not the answer Another disturbing trend is agencies hiring outside organizations to cold call on their behalf. Small entrepreneurial companies, often staffed with retired agency veterans, are offering to generate leads for agencies by calling lists of prospects supplied by the agency. Some use e-mail in place of telephone calls, but their promise is the same: we’ll perform the distasteful work of culling through hundreds of prospects until we find a few that are willing to talk to you. We have seen very few of these arrangements bare fruit, and for good reason: the business world just doesn’t work this way anymore. Moving from push to pull If you accept the fact that the consumer (and the prospective client) is now in control of how, when, and where they get information, your new business strategy must migrate from“push” to“pull.”(No doubt you preach this very same principle to your clients.) In the old“push”world, more mailings and more calls might produce more results. But in the new“pull”world, your energies must be directed away from“selling”toward“marketing.” How would you advise a client to market their brand in the world of Web 2.0? Apply that same thinking to your own brand. Instead of a business development person, you need a Chief Marketing Officer for the agency, or at the very least an Agency Marketing Manager. Compared to the old-school new business- getter, this is a very different job. Performing a Value Audit New Business Success in aWeb 2.0World From every corner of the world, agency executives are reporting the same trends in new business. It’s more challenging than ever to get the attention of a promising new business prospect. All of the factors that make it more difficult to get a consumer’s attention come into play in trying to get a prospect’s attention. People simply have more ways to shut out the information and communication they don’t want. Classic business development techniques, passed down through the ages from one successful sales person to another, simply don’t work the way they used to. On this list of time-worn techniques are things like sales letters, mailings, articles in the business section of the newspaper, and – at the top of the list – cold calling. Scores of agencies we know personally are actively recruiting for a new business development person, desperately hoping that the one right person with the one right set of skills will bring new success to their new business program. It probably won’t. old school new school
  • 8. creatingVALUE 12 13 Issue 8: 4Q 2008 Top 20 Responsibilities of the Agency Marketing Manager 1. Develops an annual agency marketing plan with specific goals, strategies, audiences, tactics and measurement. 2. Insures that the agency web site is constantly refreshed and updated with information, examples, case studies, biographies, etc. 3. Collects and maintains a current digital library of the agency’s best work samples. 4. Constantly updates and maintains both offline and online directory listings, including agency-specific directories, business directories, paid listing services, and those hosted by agency search consultancies. 5. Identifies and coordinates online advertising opportunities on appropriate websites, blogs, etc. 6. Orchestrates the development of proposals and new business presentations. 7. Recommends and develops ways for the agency to share its intellectual capital with current and prospective clients, such as agency-sponsored seminars, white papers, POV pieces, etc. 8.Working with appropriate public relations professionals, regularly identifies opportunities to publicize the agency (new clients, new people, new work, etc.). 9. Spearheads entries in industry competitions and award shows (not just within advertising and marketing, but in client-specific industries and categories, and general business competitions). 10. Seeks out and coordinates speaking opportunities for the CEO and other agency executives. 11. Oversees an online search optimization program for the agency, including the identification of keywords and phrases to be used in paid search. 12. Identifies, buys and manages URLs for landing pages that can be used by the agency. 13. Actively monitors online mentions and reputation of the agency and responds appropriately on the agency’s behalf.. 14. Regularly reads and posts to appropriate blogs and publications. Fosters relationships with relevant bloggers and online publishers. 15. Authors or coordinates letters to the editor for selected offline and online publications. 16. Builds and maintains a permission-based list of prospects and influencers and sends appropriate periodic e-mailings and mailings. 17. Develops and maintains agency profile pages on Facebook, Wikipedia, Linked In, Adweek’s“At the Roundtable,”and other appropriate social networks. 18. Maximizes the agency’s online presence by proactively posting agency materials, videos, photos, podcasts, etc. on sites such as YouTube, iTunes, Flickr, SlideShare, Screencast, etc. Where possible, create agency channels on these sites, as is possible on YouTube and Screencast. 19. Creates a positive presence for the agency on website that are influential in attracting and recruiting top talent, such as Talent Zoo, 20. Measures and refines the agency’s online presences using analytics tools such as Google Analytics, Alexa, Technolorati, etc. and monitors the success of the agency’s social media program through the use of third-party applications such as BuzzMetrics, BuzzLogic, etc. New Business Success in a Web 2.0 World
  • 9. creatingVALUE 14 15 Issue 8: 4Q 2008 Beyond the website As you can discern, the primary job of this person is to earn a prominent place for your agency brand in the online conversation about marketing, advertising, branding, and business in general. It’s one thing to have an effective website; it’s quite another to have an effective web presence. Research shows that less than 50% of your organic ranking on search engines comes from what you do on your website. Most of your ranking is determined by the other things you do (or don’t do) online. In the world of Web 2.0, it’s critical to identify keywords that you want associated with your agency brand. A well-positioned agency will have an advantage here, because the more specific the keywords, the more you’ll attract the exact kind of prospect you’re looking for. Keywords are used not only in search engine marketing (Google, Yahoo, etc.) but on social networks such as LinkedIn and Facebook. The idea is to select the keywords carefully, then place them as many times as you can throughout your agency profiles. Presentation vs. participation The old approach to agency marketing is about presentation; the new approach is about participation. Participation in so-called social media – even among business professionals – is much greater than most agency people imagine. This dimension of online activity is growing at a faster rate than any other; some forecasts show growth of 150% in just the next few years. In the Web 2.0 world, instead of fretting about the number of cold calls you’re making, here are the things you should really be concerned with: What happens when we type the name of our agency into a major search engine like Google? Where is our agency brand ranked when searching specific keywords we want to be associated with? What happens when we search for our brand name in Technorati (blog search)?    New Business Success in a Web 2.0 World
  • 10. creatingVALUE 16 17 Issue 8: 4Q 2008 Chances are, your firm has a body of knowledge that you haven’t yet turned into a strategic asset. Here’s how. Much of the value created by professional service firms like law firms, accounting firms, and consultancies stems from their ability to package their expertise in practice areas. The most successful law firms don’t employ legal generalists, but rather legal specialists with deep knowledge in areas like corporate law, tax law, intellectual property law, etc. Consultancies by definition are specialists in particular industries or market segments, from restaurants to aviation. And although medicine has its generalists – the family doctors – most physicians are specialized in areas ranging from sports medicine to neurosurgery. Why then, do most agency professionals insist on being generalists? In our experience, it’s because they cling to the notion that they get more job satisfaction through variety; by being able to work on a steel company brand one day and an ice cream brand the next. But by being only moderately expert in a lot of different categories, they are truly expert in none of them. How do we compare to other firms in terms of online popularity – website visits, mentions, references, etc.? When our agency is listed in search engine returns, have we taken the opportunity to make sure we communicate our positioning (vs. letting the search engine just list the first sentence of our website copy?) Are we listed on Wikipedia, which is fast becoming the leading repository of information in the world? Have we offered to create Wikipedia entries for our major clients, wherein we could reference our association with them through the work we’ve done on behalf of their brand (see Burger King’s Wikipedia entry at www.wikipedia/burgerking and note how many times Crispin Porter + Bogusky is referenced). Are we easy to find online? Not just on search engines, but on social networks like LinkedIn and Facebook? Are we easy to contact and communicate with online, or does our website hide the e-mail addresses of agency principles with an“”type address? Is our agency and its people part of the online conversation about advertising and marketing? Are we published, quoted, referenced, and linked to? Is our website optimized for Web 2.0 with areas for feedback, comments, questions, participation, opinion, etc., or is it a static online brochure? (See for a good example) Do we have a permission-based e-mail list – prospects and influencers who actually want to hear from you, are interested in communicating with you, and who trust you to send information that is useful and interesting?         CreatingValue By Establishing Practice Areas
  • 11. creatingVALUE 18 19 Issue 8: 4Q 2008 Clients value expertise Recent surveys among the client community show that marketers deeply value expertise in their business and category. A Millward- Brown study on the subject of agency new business reports: Most important agency search criteria at the credentials stage: 1. Actual knowledge of the industry, understanding our business Most important agency search criteria at the developing relationship stage: 1. Actual knowledge about our industry. What is the effect of this lack of specialization in agencies? A commoditized view of agency services. By not claiming and developing strong areas of expertise, agencies are abdicating the opportunity to be hired for what they know rather than what they can do; for their heads rather than their hands. As every economist knows, brainpower is more highly valued than manpower. The architects of buildings are always paid more than the people who build them. Agencies can greatly increase both their real and perceived value by identifying practices areas in which they can be experts. RiechesBaird, a successful firm in Southern California, is positioned as a brand development firm for B2B companies. But they take their positioning a step further with five well-developed practice areas: Energy, Health, Building Products, Technology, and Industrial. The result of this approach is a business development effort characterized more by referrals and references than typical“push” efforts, because the firm has developed a reputation in its chosen areas of focus. Fullhouse, an agency based in Milwaukee, delivers interactive marketing programs for clients like MillerCoors, Kimberly-Clark, and Johnson Controls by organizing into four practice areas: Food & Beverage, Manufacturing, Professional Services, and Consumer Packaged Goods. By assigning all of their associates to a particular practice area, Fullhouse brings to the table not only digital expertise, but vertical market expertise as well. Cincinnati’s Northlich – a successful agency brand for over 60 years – has institutionalized its expert knowledge in the form of four “villages,”each dedicated to an area in which the agency has considerable knowledge and experience. But what makes the agency’s approach to developing intellectual capital really interesting is its focus on areas it calls“cultural storms” – selected mega-trends that will have a major impact on how some brands are marketed. At present, the agency is marshalling its resources behind three of these“cultural storms”: Frugality 2.0 Obesity Sustainability    Creating Value by Establishing Practice Areas
  • 12. creatingVALUE 20 Issue 8: 4Q 2008 Creating Value is edited for senior professionals in the marketing communications business. All content is copyrighted by Ignition Consulting Group, Inc. and may not be reproduced or retransmitted without express permission. Creating Value is available by paid subscription only, and is distributed as a downloadable PDF. To subscribe, visit Creating Value is published by Ignition Consulting Group, Inc., a consultancy devoted to helping marketing organizations create and capture more value. For more information about Ignition, visit, e-mail, or call 801.582.7297. - - - Photo Page 2: tao_zhyn, Creative Commons, Flickr Photo Page 6: phunkstarr, Creative Commons, Flickr Photo Page 9: misteraitch, Creative Commons, Flickr Photo Page 10: macinate, Creative Commons, Flickr Photo Page 10: elliottcable, Creative Commons, Flickr Parting Thoughts Either Add Value or Stop Doing It Agencies can only capture more value (earn more) by first creating more value. In the exceptional book,“The Innovator’s Solution,” business experts Clay Christensen and Michael Raynor argue that “When customers cannot differentiate products from each other on any dimension that they can value, then price is often the customer’s basis of choice.” When marketing communications firms offer essentially the same services in the same way to the same kinds of clients, they are succumbing to the very thing they are hired by brand marketers to prevent: commoditization of their brand. So here’s a prescription to avoid the commoditization trap. If you offer a service that looks and feels undifferentiated, choose from one of these three options: Add value to the commoditized service and charge more than other agencies Find a more efficient way to deliver the service and charge less than other agencies Stop doing it The only wrong choice is to continue to offer an average service at an average price. You must move one way or the other along the pricing continuum. This may sound more like an argument for a packaged goods brand than an agency brand, but you need either a high-cost strategy or a low-cost strategy, because an equal cost strategy is no strategy at all. 1� 2� 3� Creating Value by Establishing Practice Areas