Outcome-based agency remuneration is one of the hottest topics in the US right now and it’s on its way to our shores, argues Chilon Media Governance managing partner Simon Lawson. He has written this short guide to what it is, why it’s having a moment and what marketers should watch out for.
What is outcome-based agency remuneration?
Outcome-based agency remuneration is when you pay your agency based on an agreed outcome they deliver for you rather than using the conventional labour-based model of agency remuneration i.e. salaries + overheads + margin.
The most commonly referenced outcome is sales, but the outcome could be other things as well, like leads, downloads or lifts in brand health metrics.
The concept isn’t entirely new. It’s not uncommon for an agency to put a smallish portion of their fee at risk subject to a sales target and agency-adjacent businesses like the affiliate finder.com have been operating on an outcome basis for years.
What is new is the idea that all of an agency’s fee might soon be tied to outcomes. That would indeed be a very significant shift.
Why it’s having a moment now?
It’s having a moment because the traditional labour-based agency business model is under increasing pressure from AI.
As AI creates efficiencies in service delivery for agencies, more marketers are asking to see those savings passed on to them. The problem for legacy agencies is that if they pass these savings on, their business model starts to evaporate.
Legacy agencies don’t want their business model to evaporate.
The publicly listed advertising holding companies, particularly Omnicom and WPP, are dealing with the issue by telling Wall St that outcome-based remuneration is a big part of their answer to this existential challenge.
What the holding company leaders are saying
New WPP global CEO Cindy Rose told investors in February: “A commercial model that is more closely linked to client outcomes will enable us, over time, to move away from time and materials.”
In a similar vein, Omnicom’s global CEO John Wren told investors in July last year: “Going forward, we’ll increasingly move toward outcome-based compensation, however defined.”
Publicis are less bullish on the subject, with global CFO Loris Nold recently indicating that performance-based remuneration currently only represents “roughly 10% of our total remuneration” and it’s “still very early days.”
Outcome-based remuneration has obvious appeal to marketers. It’s easy to understand how outcome-based remuneration could be of appeal to marketers: The idea of only paying if you get the outcome you desire seems very tempting, but is there a catch?
Risk #1 – Transparency
It’s not necessarily a catch, but marketers should know there is a strong connection between outcome-based remuneration and transparency.
The agency view is if a client is paying based on an outcome, they no longer need to know the exact cost of the inputs that go into achieving that outcome including variables like labour cost, overhead and even the cost of the media itself. A lack of transparency may also have negative implications for the quality of MMM findings given their reliance on granular cost data.
For marketers concerned about transparency, and research suggests this is most marketers, this is a clear watch out for them.
In fact, the US peak body for agencies, known as the 4As, presented to an audience of marketers and marketing procurement professionals at the recent ANA Advertising Financial Management Conference on the subject of transparency.
Their presentation, entitled The Transparency Trap, argued that pitch consultants and marketers are placing too much emphasis on cost transparency in agency arrangements and that this is shifting attention away from the outcomes and strategic value that agencies deliver. You can download the paper they presented here.
The Transparency Trap presentation is remarkable in that this is the first time that I can recall an agency peak body actively arguing against transparency. Whether you agree with their position or not, it’s a signal worth paying attention to; it will be interesting to see if a similar argument is soon made by the peak agency bodies in Australia.
Risk #2 – Contagion
On the face of it, a fully outcome-based remuneration model may seem enticing to a marketer, but the risk of the outcome failing to eventuate will not just negatively affect the agency, it’ll also represent a significant problem for the marketer.
If something seems too good to be true, it generally is.
The reality is there are many factors outside of an agency’s control that contribute to whether an agreed outcome can be achieved: Factors like price, product quality, competitive landscape and economic conditions.
If an agency is appointed based on an unrealistic outcome-based offer and that outcome fails to materialise, then not only will the agency suffer, so too will the marketers who agreed to what may look like an imprudent deal in retrospect.
In many ways, the current approach of encouraging agencies to have some skin in the game by putting a small portion of their fee at risk seems like the more sensible choice.
What Australian marketers should know
While the concept of outcome-based remuneration remains more of a concept than a standard practice today, it is something to start looking out for.
What is becoming more prevalent in this market is what some are calling ‘guaranteed outcomes’ buys. This is where a specific buy is centred around a ‘guaranteed outcome’ agreed between agency and client.
While there is limited information about these types of buys in the public domain, one agency group’s website does talk about ‘guaranteed customer results with 100% risk assumption by the agency’.
It is not uncommon for agencies to use the concept of risk to justify enhanced margins and/or a lack of transparency.
These buy types may deliver genuine value, but marketers should only enter into them with due caution, and they should remain mindful of what they may be trading away in return for these guaranteed outcomes, which may include visibility as to the cost and quality of the media placements bought as part of these buys.
Things to look out for:
· Watered-down outcome metrics like reach or impressions instead of business outcomes like sales
· Guaranteed outcomes bundled video buys where the mix of lower quality inventory may be higher than you expect
· Guaranteed outcomes influencer buys where it’s unclear how much is actually going to the influencers
A good action for marketers reading this would be to check with their teams to see if they’re doing any of these types of buys, and if they are, to pressure test the rationale and any transparency loss.
In conclusion
Outcome-based agency remuneration is a concept that has obvious appeal to agencies looking for a sustainable business model moving forward and for marketers looking for more certainty as to the business outcomes of their media investments. Done appropriately, it could work well for both parties.
Like with anything new, it’s important to investigate it fully and to really understand how it works before making any commitments. Agencies deserve to be fairly rewarded for the value they produce and the right remuneration model, properly structured, should serve both marketers and agencies.
The marketers who come out ahead will be those who understand the detail of what’s being proposed, the trade-offs they’re being asked to make, and what governance controls they need to have in place to effectively manage their participation.
