Dear Commercial Acuman...

Dear Commercial Acuman...
How can I get my clients to recognise work value vs time spent?

This is where a lot of retail, FMCG, low-level DM and basic media buying operates. The key to profitability here is scale.

Further up the food chain, consultative work such as transformational advertising and branding/media strategy is more value-added but less scalable due to its bespoke nature.

These two conflicting extremes can be categorised as ‘Do For Me’ vs ‘Think For Me’.

If clients typically bring in-house what they do all the time and outsource what they only sometimes do, this means that ‘Do For Me’ work has to be priced cheaper for the client than if they were to bring it in house.

The challenge in respect of ‘Think For Me’ work is how to charge appropriately for value added. We all know that time spent does not equal value added, yet years of talking about value-based remuneration have failed to see it widely adopted in our industry.

The reason is that time-based billing has a huge status quo bias - everybody says it is flawed but we all cling to it because time, unlike value, is:

- not open-ended
- easily understood
- malleable

Moreover, the combination of a lack of true scale, a relatively small number of much-larger clients on short notice periods and monthly cash outflows for staff and rent mean that agencies' appetites for riskier forms of remuneration is inevitably limited.

It is only when an agency has good profit and cash flow visibility that it can afford to take a punt on its fees in return for some upside potential.

So where do we go from here? Our industry desperately needs two things - a currency for value and more business acumen.

Unlike costs (such as media prices) value is a relatively nebulous concept and difficult to measure. Without a fixed definition, it is also somewhat in the eye of the beholder; econometrics and ROMI have a part to play, but they are not (yet) industry standard, so there will always be room for debate and therefore negotiation.

Clients have invested vast sums creating armies of professional negotiators yet too many agencies still send untrained account handlers off unarmed into procurement discussions.

An ability to negotiate is one thing, but a professional negotiator also needs to be properly equipped; this us where a currency for value is needed. Professional football teaches us that the most talented players are not necessarily the most experienced, so years in the job should not be a guide to pricing.

Instead, the most talented people with a demonstrable track record of success should command the highest rate card prices - just as we look at goals scored, saved or assisted for footballers, so IPA Effectiveness Awards won or great campaigns created need to be our benchmark; a highly-awarded creative, suit or planner should command a higher rate card price to the client than a less awarded one, regardless of experience.

This does not completely get us away from the somewhat artificial assumption that time equals value, but it recognises recognises that, for a fixed amount of time, some people can add more value than others.

Once the business is able to monetise this extra added value and reinvest it in the providers of value, we will have started to move from a downward spiral of constant cost cutting to a virtuous circle of value investment.

Top FD tips

- Investment in good commercial skills (finance, negotiation and selling) for client staff is the starting point for better commercial performance

- It also needs to be supported by meaningful business KPIs, so finance needs to understand the business as much as the suits need to get commercial

- Better commercial performance allows the rewards for success to be reinvested in top performers

- This virtuous commercial circle can be summarised as "Performance is where Effectiveness and Talent meet"

- The IPA has free commercial training for all members to help with the initial "bootstrapping" phase of investing for growth

To find out more about how agencies can deliver and invest in building commercial success for their organisations and their client brands, attend the IPA Commercial Conference on Wed 8th July.

If you have any agency questions about enhancing your commercial performance, email the IPA’s Commercial Acuman at toml@ipa.co.uk. All questions will appear anonymously.

View more Commercial Acuman columns from our FD Tom Lewis.

Last updated 21/05/2015

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