From Dan Bobear, EVP, Managing Director of Client Service

It all seems quite simple: Get the agencies in to do a pitch, make a selection, negotiate a contract and hourly rate, develop a scope of work, and you’re off to the races, right? As anyone who has been through this process knows it is much more complicated than that.

The negotiation of a successful contract requires experience, patience, and flexibility. Having been involved on both sides of this process for many years, it is clear to me that there is often a complete misunderstanding between the client and advertising agency as to what a quality relationship should be and what the real “product” is.

A common view is that an advertising agency produces creative work, selling materials, and other tangible work products. While these “nuts and bolts” activities are an important part of what an agency offers, they are very basic services that can be delivered by any quality agency.

The real product of an advertising agency should be quality thinking that leads to the creation of market-moving ideas. This is where the biggest disconnect often occurs between the client and advertising agency. In many cases, the pressure for short-term financial performance creates an atmosphere where “deliverables” trump thinking. The focus is often on creating a lot of attractive selling materials for the next sales meeting, and little time is put into what is really valuable: quality thinking. It is innovative ideas that drive a brand’s success in the marketplace, not how much “stuff” is created

The challenge is to create an environment where thinking and idea generation is valued more than the generation of tactics. This all starts with the negotiation of the contract and compensation model. Compensation models vary widely but generally fall into a continuum that ranges from a fixed-fee “project” basis to a full retainer. Under a fixed-fee project, a set price is negotiated around a list of deliverables that will be created during a set time period. The approach is very simple and works quite well when the scope of services and/or budget is very limited. Under these types of arrangements, it is generally difficult to “dedicate” a large number of agency staff to work on a single brand, as the scope of services and time frame are limited.

Every approach has its pros and cons, and there really is no “right” approach. What is important is that the compensation model incentivizes the creation of great ideas over the creation of “stuff.” If the compensation model encourages quality thinking and the formation of a strategic partnership, then it is a good model. Anything less isn’t doing the brand justice. If, instead of focusing on the perfect process or model, you can focus on a few guiding principles, you are much more likely to get to a good place.

In a nutshell: Make it fair, make it about the people, make time to think, and focus more on efficiency and less on the number of hours billed. To create an effective compensation model, it’s necessary to realize that the real agency “product” is ideas. The ideal compensation model will incentivize the creation of an environment that encourages quality thinking and the creation of market-moving ideas. While there are multiple pathways to get there, if marketers can help create this type of environment through their financial structuring, they’ll reap benefits for their brand for many years to come.