DAVE BEALS & GREG PAULL R3 WORLDWIDE
Myths, Challenges & Best Practice
in Digital/Social Agency Compensation
#overcharged?
THE FIVE BATTLEGROUNDS OF
DIGITAL INVESTMENT ©®TM
Digital vs Traditional
Ratecard vs Retainer
Fees vs Production
Make vs B...
THE SITUATION
Digital has never
been more important
THE SITUATION
58%
4
Clients unhappy with the
way their digital agency
charges them
CMO Council Study 2013
Agencies don’t see
client transformations
5
THE SITUATION
SOURCE : 2014 SoDa Report
6
THE SITUATION
Clients and Agencies
differ on what matters
SOURCE : 2014 SoDa Report
Marketing creativity
Product/Service...
7
THE 3 DIGITAL BLACK BOXES
FEES PRODUCTION MEDIA
Ratecards hours
Profit margins
vs traditional
Make or buy
Mark ups
Rebat...
DIGITAL vs TRADITIONAL
1
What % of US marketers pay for
digital on fee basis?
A. What’s a fee basis?
B. 28%
C. 82%
D. 102%
9
POP QUIZ #1
Not so “unique” after all – MACRO LEVEL
10
Not so “unique” after all – MICRO LEVEL
11
AGENCY
STAFF POSITION
SAMPLE DIGITAL
AGENCIES (US$ range)
SAMPLE TRADITIONAL
AG...
Not so“unique”
after all12
Basic compensation methods
and financials far more alike
than different, especially as:
Digital...
Understand the Talent Gap
13
Work harder to
identify, nuture,
reward
Massive squeeze from
multiple sources
CLIENTS
OTHER
A...
If your digital agency is perceived to be
more expensive than your traditional
agency, there are likely other factors :
oP...
Digital vs Traditional
Take-aways
No need to vary from your preferred
method of agency compensation
15
1
2
3
4 If your dig...
RATECARD vs RETAINER
2
17
What is the typical premium of
Ratecard over Retainer?
A. We have to pay agencies?
B. 0%
C. 30%
D. 100%
POP QUIZ #2
18
Project vs. Retainer
Rates
o Recent examples from R3 client-agency contract
reviews
Proposed Project Staff Rate as %
of...
So why not move to retainer?
• Difficult to plan ahead with
confidence
• Scope parameters and requirements
change rapidly ...
The Digital SOW
AREA EXPLANATION
TECHNOLOGY
Most digital channels – SEO, PPC, Social, Display, Mobile, Affiliates –
requir...
Pro’s of Digital Retainer
• Lock in desired agency talent
• Generally less expensive than
project by project fees
 Also, ...
Con’s of Digital Retainer
• Potentially less flexible –
changing digital landscape
makes it harder to plan
against highly ...
Retainer options for digital
• Retain “talent” vs. set agency scope/hours
 Combination of retainer (for key planning, con...
It’s “Launch and Live”
Not “Launch and Leave”
• Plan ahead for
the total digital
lifecycle of your
campaign
24
• Budget fo...
Ratecard vs Retainer
Take-aways
Rate card pricing often inflated
25
1
2
3
Rate cards generally do not commit to specific a...
Ratecard vs Retainer
Take-aways
Retainer requires thoughtful planning on
digital roles, responsibilities, core
competencie...
FEES vs PRODUCTION
3
28
What did Mondelez decide to do
in 2013?
A. Tweet “you can still procure in
the dark”
B. Hire a Social Media Head
C. Hir...
“Fee” or “Production”
Digital agency fees, in total, often
seem more expensive than
traditional agencies – however,
digita...
“Fee” or “Production”
Best way to evaluate agency cost
is the total investment in fees and
3rd
party production
30
TRADITI...
1. Ensure your digital agency budget has
addressed and accounted for any agency
in-house production,
2. No right or wrong ...
MAKE vs BUY
4
Make vs Buy
“Do we need to pay an agency to do this?”
33 A recent ANA study suggested that:
53% REPLACED agencies with som...
Verbatims
SoDa 2014 Survey
34
 - “Paid search”
 - “Plan to move most things in-house over next three years”
 - “SEM”
 ...
Various digital services lend
themselves to in-house solution
•Those that involve regular, day-in, day-
out activities
•Si...
But, caution: some don’t:
 Those that require high level of creative
or technical expertise that would be
more cost-prohi...
Related to digital agency fee planning and
negotiation:
37
Crucial to clearly define and
align digital roles and
responsib...
Commercial Break
38
39
40
TRANSPARENCY vs OPAQUENESS
5
42
What did digital guru Joe Mohen
call RTB?
A. An airport in Honduras
B. The Reason To Believe
C. A Ready To Bake Cake
D....
43
FastBoys vs Madmen
44
Direct vs RTB
AREA DIRECT BUY RTB BUY
Targeting Websites Audiences
Supply Guaranteed Non-Guaranteed
Workflow Manual Progra...
RTB Revenue Streams
PROFESSIONA
L FEES and/or
commissions
46
TECHNICAL
FEES For access
to the agency’s
obvious
investment ...
Do Your Research
47
How Agencies are Aligning on RTB
GROUP RTB AGENCY ALIGNED TO
WPP Xaxis GroupM
Omnicom Accuen OMG
Publicis Vivaki AOD Vivak...
How Clients are Not Aligning on RTB
49
Digital Rebates
• Beyond RTB, there is so much competition for digital
revenue
 Adtech running at loss to IPO
 Clients b...
Digital Rebates Returned?
51
Source – ANA 2012 Rebate Study
ALL THE TIME
SOME OF THE
TIME
NO
ALL THE TIME
SOME OF THE
TIME...
Transparency vs Opaqueness
Take-aways
Have a conversation. Know the issues
52
1
2
3
4 Be clear on metrics
Understand your ...
BEST PRACTICE
5
IPG?
54
Peets and Razorfish
55
56
• “Pay for Performance” alone (PPP) is
often not sustainable for long term agency
relationships
 Incentivizes agencies...
Incentive Compensation
Best Practices57
Employ combination of
quantitative and qualitative
criteria
PERFORMANCE CRITERIA M...
Impact of Incentives
on Performance58
• Significant majority of those that use
performance incentives continue to
indicate...
 We don’t think that the toilet bowl has any unpleasant meaning. 
Human beings can live several days without food but toi...
Unilever
60
Samsung
61
Summary
62
Treat Digital Agencies the
same as traditional FEE BASED
Plan for Launch and Live ,
Not Launch and Leave
RETAIN...
63
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Overcharged an r3 presentation at ana afm 2014

  1. 1. DAVE BEALS & GREG PAULL R3 WORLDWIDE Myths, Challenges & Best Practice in Digital/Social Agency Compensation #overcharged?
  2. 2. THE FIVE BATTLEGROUNDS OF DIGITAL INVESTMENT ©®TM Digital vs Traditional Ratecard vs Retainer Fees vs Production Make vs Buy Transparency vs Opaqueness 2 1 2 3 4 5
  3. 3. THE SITUATION Digital has never been more important
  4. 4. THE SITUATION 58% 4 Clients unhappy with the way their digital agency charges them CMO Council Study 2013
  5. 5. Agencies don’t see client transformations 5 THE SITUATION SOURCE : 2014 SoDa Report
  6. 6. 6 THE SITUATION Clients and Agencies differ on what matters SOURCE : 2014 SoDa Report Marketing creativity Product/Service Innovation Expertise in emerging trends 1 2 3 4 5 6 7 Costumer-Centered Marketing Process/Project Management Market / Marketing research Measurement Analytics Capabilites CLIENTS AGENCIES Marketing creativity Expertise in emerging trends Costumer-Centered Marketing Product/Service Innovation Process/Project Management Market / Marketing research Measurement Analytics Capabilites
  7. 7. 7 THE 3 DIGITAL BLACK BOXES FEES PRODUCTION MEDIA Ratecards hours Profit margins vs traditional Make or buy Mark ups Rebates RTB Publisher roles
  8. 8. DIGITAL vs TRADITIONAL 1
  9. 9. What % of US marketers pay for digital on fee basis? A. What’s a fee basis? B. 28% C. 82% D. 102% 9 POP QUIZ #1
  10. 10. Not so “unique” after all – MACRO LEVEL 10
  11. 11. Not so “unique” after all – MICRO LEVEL 11 AGENCY STAFF POSITION SAMPLE DIGITAL AGENCIES (US$ range) SAMPLE TRADITIONAL AGENCIES (US$ range) Account Supervisor $125-175 $125-170 Sr. Account Planner $170-220 $185-240 Creative Director $250-325 $275-350 Copywriter $100-140 $105-160 Media Planner $95-125 $80-110 Comparing digital to traditional agencies • Hourly rates for similar positions not that different (and sometimes less expensive) • Overheads and margins not dramatically different either
  12. 12. Not so“unique” after all12 Basic compensation methods and financials far more alike than different, especially as: Digital agencies are having to show sound, internal cost management and accounting More marketers get comfortable with digital agency compensation More digital agencies are bought by the holding companies
  13. 13. Understand the Talent Gap 13 Work harder to identify, nuture, reward Massive squeeze from multiple sources CLIENTS OTHER AGENCIES AD-TECH GENERAL TECH =
  14. 14. If your digital agency is perceived to be more expensive than your traditional agency, there are likely other factors : oPremiums paying by rate card? oPremiums paying project by project? oFees for digital production: apples to oranges vs. traditional agencies oPaying multiple agencies for similar services? oLack of agency revenue transparency? Fees on top of other agency revenue sources? 14 Digital vs Traditional Why is my agency expensive?
  15. 15. Digital vs Traditional Take-aways No need to vary from your preferred method of agency compensation 15 1 2 3 4 If your digital agency is perceived to be more expensive than your traditional agency, there are likely other factors Don’t forget importance of incentives Work harder to reduce turnover
  16. 16. RATECARD vs RETAINER 2
  17. 17. 17 What is the typical premium of Ratecard over Retainer? A. We have to pay agencies? B. 0% C. 30% D. 100% POP QUIZ #2
  18. 18. 18 Project vs. Retainer Rates o Recent examples from R3 client-agency contract reviews Proposed Project Staff Rate as % of Retainer Rate Client A - Agency A 105-106% Client B – Agency B 107-111% Client C – Agency C 120-125%
  19. 19. So why not move to retainer? • Difficult to plan ahead with confidence • Scope parameters and requirements change rapidly in digital and social media • Confusion over who does what (and best) -- fear of locking in retainer services • Internal vs. external agency • Multiple agency resources 19
  20. 20. The Digital SOW AREA EXPLANATION TECHNOLOGY Most digital channels – SEO, PPC, Social, Display, Mobile, Affiliates – require the management of a technology platform TALENT Just as for traditional agencies, retained digital shops should work on a Direct+OH+Profit basis PROCESS Invest time to understand how it can impact your final fees DATA Know which data you have, what you need, who owns it , and what is costs to maintain 20
  21. 21. Pro’s of Digital Retainer • Lock in desired agency talent • Generally less expensive than project by project fees  Also, less administration • Greater budget certainty and financial transparency 21
  22. 22. Con’s of Digital Retainer • Potentially less flexible – changing digital landscape makes it harder to plan against highly variable and uncertain scope • Potential for corresponding over-commitment (or misalignment) on agency staff/fees 22
  23. 23. Retainer options for digital • Retain “talent” vs. set agency scope/hours  Combination of retainer (for key planning, concepting, design, account service talent) and project fees (for specialist staff against uncertain workload) 23 • Adjust retainer scope/fees on “rolling” basis (e.g., every quarter) • Use Scope Index to set workload/fee assumptions for various tasks
  24. 24. It’s “Launch and Live” Not “Launch and Leave” • Plan ahead for the total digital lifecycle of your campaign 24 • Budget for “evergreen” social the way you would for ongoing media flighting • Find and lock in the right talent
  25. 25. Ratecard vs Retainer Take-aways Rate card pricing often inflated 25 1 2 3 Rate cards generally do not commit to specific agency talent – potential for less expensive/ freelance resource to be used Retainer helps avoid overpaying for same agency staff across multiple project SOW’s
  26. 26. Ratecard vs Retainer Take-aways Retainer requires thoughtful planning on digital roles, responsibilities, core competencies •Clearly define and align on internal vs. agency roles •Provide oversight of all digital activity and resourcing (vs. reviewing in silos) 26 4
  27. 27. FEES vs PRODUCTION 3
  28. 28. 28 What did Mondelez decide to do in 2013? A. Tweet “you can still procure in the dark” B. Hire a Social Media Head C. Hire 20 internal twitter writers D. Add 20m fake twitter followers POP QUIZ #3
  29. 29. “Fee” or “Production” Digital agency fees, in total, often seem more expensive than traditional agencies – however, digital agencies often do much of the production in-house vs. third parties 29 TRADITIONAL AGENCY DIGITAL AGENCY ACTIVITY FEE 3RD PARTY PRODUCTION FEE 3RD PARTY PRODUCTION Planning $100,000 $0 $95,000 $0 Video Concepts $125,000 $0 $127,500 $0 Video Execution $50,000 $250,000 $200,000 $0 TOTAL $275,000 $250,000 $422,500 $0
  30. 30. “Fee” or “Production” Best way to evaluate agency cost is the total investment in fees and 3rd party production 30 TRADITIONAL AGENCY DIGITAL AGENCY ACTIVITY FEE 3RD PARTY PRODUCTION FEE 3RD PARTY PRODUCTION Planning $100,000 $0 $95,000 $0 Video Concepts $125,000 $0 $127,500 $0 Video Execution $50,000 $250,000 $200,000 $0 TOTAL $275,000 $250,000 $422,500 $0 $525,000
  31. 31. 1. Ensure your digital agency budget has addressed and accounted for any agency in-house production, 2. No right or wrong way to define, budget or account for it – as long as there is internal and agency alignment 3. And, applying traditional “fee vs. spend” metrics to digital agency activities is wrong  look at your total investment in agency fees and production, regardless of whether production is done in-house by agency and/or through third party suppliers 31 Fees vs Production Take-aways
  32. 32. MAKE vs BUY 4
  33. 33. Make vs Buy “Do we need to pay an agency to do this?” 33 A recent ANA study suggested that: 53% REPLACED agencies with some in-house services of ANA members This is certainly being felt in the digital space, and issues with digital agency compensation are increasingly being joined by the question of
  34. 34. Verbatims SoDa 2014 Survey 34  - “Paid search”  - “Plan to move most things in-house over next three years”  - “SEM”  - “Social media”  - “We handle all digital services in house, aside from our SEO efforts”  - “Website, search and social”  - “Everything!”  - “We only outsource eCommerce and mobile  - “Content creation and video production”  - “All functions are now in-house”
  35. 35. 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 35 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
  36. 36. But, caution: some don’t:  Those that require high level of creative or technical expertise that would be more cost-prohibitive than hiring an agency • Creative talent, digital or traditional, would prefer not getting locked into working with just one marketer – this has big cost/value implications for the marketer over the long-term 36 Make vs Buy Various digital services lend themselves to in-house solution
  37. 37. Related to digital agency fee planning and negotiation: 37 Crucial to clearly define and align digital roles and responsibilities – between agencies (if more than one), and between client and agency Multiple internal stakeholders need to be considered  Yes, marketing and PR (if a separate department from marketing)  But also internal IT  Achieve clarity on agency roles within the client’s digital “ecosystem” – and match the agency staffing and fees accordingly Make vs Buy Take-aways
  38. 38. Commercial Break 38
  39. 39. 39
  40. 40. 40
  41. 41. TRANSPARENCY vs OPAQUENESS 5
  42. 42. 42 What did digital guru Joe Mohen call RTB? A. An airport in Honduras B. The Reason To Believe C. A Ready To Bake Cake D. …...something else ….. POP QUIZ #3
  43. 43. 43
  44. 44. FastBoys vs Madmen 44
  45. 45. Direct vs RTB AREA DIRECT BUY RTB BUY Targeting Websites Audiences Supply Guaranteed Non-Guaranteed Workflow Manual Programmatic Pricing CPM eCPM Best Suited For Premium, Quality, Content Rich Mass, Reach, Non Time Specific 45
  46. 46. RTB Revenue Streams PROFESSIONA L FEES and/or commissions 46 TECHNICAL FEES For access to the agency’s obvious investment in technology INCREMENTAL MEDIA FEES Many RTB’s buy inventory and then onsell to others including their clients
  47. 47. Do Your Research 47
  48. 48. How Agencies are Aligning on RTB GROUP RTB AGENCY ALIGNED TO WPP Xaxis GroupM Omnicom Accuen OMG Publicis Vivaki AOD Vivaki Interpublic Cadreon Mediabrands Dentsu Amnet Dentsu Aegis Network Havas Affiperf Havas Media MDC Varick NA Independent Accordant NA Independent The Trade Desk NA Independent Run NA Independent Digilant NA 48
  49. 49. How Clients are Not Aligning on RTB 49
  50. 50. Digital Rebates • Beyond RTB, 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 50
  51. 51. Digital Rebates Returned? 51 Source – ANA 2012 Rebate Study ALL THE TIME SOME OF THE TIME NO ALL THE TIME SOME OF THE TIME NO
  52. 52. Transparency vs Opaqueness Take-aways Have a conversation. Know the issues 52 1 2 3 4 Be clear on metrics Understand your own agency’s business model Test and Learn – mutual learning center 5 Be clear on conflicts 6 Invest in a Financial Audit to ensure transparency
  53. 53. BEST PRACTICE 5
  54. 54. IPG? 54
  55. 55. Peets and Razorfish 55
  56. 56. 56 • “Pay for Performance” alone (PPP) is often not sustainable for long term agency relationships  Incentivizes agencies to make the wrong decision  Encourages short term thinking • Suddenly the model that was going to align the agency has the opposite effect “Pay for Performance” (PPP) vs Pay for Performance (Incentives)
  57. 57. Incentive Compensation Best Practices57 Employ combination of quantitative and qualitative criteria PERFORMANCE CRITERIA METRICS RATIONALE AGENCY Qualitative Totally within agency’s control Tightly customized to client needs ADVERTISING Quantitative E.g.: tracking of awareness, brand perceptions, copy testing, cost/lead, buying efficiency, etc. Ties to desired marketing performance that is primarily affected by agency’s work ADVERTISER Quantitative E.g.: sales increase vs. target, share of market, etc. Although influenced by many factors outside of agency control, aligns client and agency on a “shared agenda”
  58. 58. Impact of Incentives on Performance58 • Significant majority of those that use performance incentives continue to indicate they are working. • But, uptick in those who claim the result was no change or poorer performance.
  59. 59.  We don’t think that the toilet bowl has any unpleasant meaning.  Human beings can live several days without food but toilet bowl even one day, otherwise the world must turn into the mess. The deep culture of toilet bowl is a criterion of the civilization. Equanimity and imperturbability being able to stand pressure with enthusiasm are the toilet bowl’s characters. The combination of responsibility, sacrifice and readiness is the spirit of toilet bowl. The Toilet Bowl can release the pressure and make you comfortable. The beauty of toilet is willing to clean itself and fresh forever! So! for our client, unconditional offerings is Meikao’s spirit
  60. 60. Unilever 60
  61. 61. Samsung 61
  62. 62. Summary 62 Treat Digital Agencies the same as traditional FEE BASED Plan for Launch and Live , Not Launch and Leave RETAIN TALENT Invest time to understand fees vs production PLAN AHEAD Set the right KPI’s and incentives MONEY TALKS
  63. 63. 63
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