Improving on Paying for Performance

Regardless of economic climate, cutting cost is always easier than getting more value from your spend. As businesses bow to inflationary pressures, a looming recession, fluctuating interest rates, and political instability, marketers must seize this opportunity to educate the rest of the organisation on cost versus value, and demonstrate marketing’s effectiveness and impact on business.

R3’s New Business League APAC data for 2022 highlights the difference in average value of accounts year-on-year, with creative decreasing 42% and media decreasing 51% from 2021. It’s clear that consolidation and contract reviews of service and operations vendors remain a priority for many marketers looking to reduce costs and drive efficiencies. Other areas include a realignment of marketing focus to meet any company-wide restructures, adjusting the media mix model, and evaluating talent mix.

So how can CMOs prove their value to stakeholders? The key here is increased accountability to business goals that can be measured — be it contributing to company-wide efficiency and optimisation or driving innovation. Your agency partners play a significant role in helping you and your team deliver that value, and it is now more critical than ever to ensure their remuneration model is aligned to your success.

What’s Happening Now

Moving towards paying for performance
Marketers are holding partners accountable via Performance Based Remuneration (PBR) that has a robust KPI framework with a balanced scorecard of hard, medium, and soft metrics; sales targets and market share; brand health; campaign effectiveness; and client-agency performance. In R3’s experience, PBR has proven successful in building trust, performance, and accountability for our clients on a sustainable basis, for both global and local businesses.

Focusing on outcome, rather than hours and quantum of spend
There has been greater movement away from the traditional labour-based fee or commission methods as marketing performance becomes increasingly measurable. Some marketers are negotiating deliverables-based (or output-based) fees as a “baby step” away from labour-based fees. Ultimately, the most empowering model would be totally outcome-based where the agency is fully empowered to do what is best for the business, with a significant upside. Albeit riskier than traditional labour-based model, it has potential to rebalance the client-agency power dynamic and build stronger, stickier partnerships.

Seeking greater clarity on issues of talent capability, retention, and offshoring
There are more conversations around how to best structure internal marketing teams, in-house agencies, and external suppliers, as well as how to manage processes, and how performance requires an understanding of overarching business needs, resource and capability, and marketing goals.

What’s the Challenge
  • Ensuring any performance-based remuneration or bonuses are compensated to the right people. Agency bonus structures don’t work because most people “fall in the middle,” and it is difficult to ensure that compensation goes to the right people.
  • Clients and agencies often have different ideas on what constitutes good performance due to a combination of unclear KPIs and different business mindsets. It is helpful for marketing procurement teams to understand the nature of their agency partner’s business so that they can better assess partners for business continuity and come to an agreement with their agency on reasonable and feasible performance KPIs.
  • Agencies do not understand the client approval process when trying to “sell” a new capability. They should first make the effort to understand the client’s internal structure and what’s needed to get something approved.

What to Do Next

  • Marketers need to be clear on what outcomes they want and decide which remuneration model works best for their desired outcomes. In R3’s experience, getting internal alignment on what matters is more challenging than it should be, yet this is totally necessary and requires strong leadership from the top.
  • Marketers need to obtain a clear picture of their financial and resource investments with agency partners. This can be done by understanding a brand’s place within a wider partner holding company and network partners. This could also include obtaining transparency on how agency-owned media is managed, and clarity on payment terms for agency fees and third-party suppliers.
  • Marketers must set clear KPIs that are mutually agreed by both client and agency. These should include brand, performance, talent, and business KPIs (i.e., ESG, DE&I). Agency performance against these KPIs should be monitored at a regular cadence and evaluation outcomes used to identify potential issues early.
By Shufen Goh, Co-founder & Principal, R3
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