Big Picture: The shape and colour of money

Rachael Micallef
By Rachael Micallef | 23 March 2016

This first appeared in the AdNews print magazine. You can read it all below but if you want it as soon as it goes to press, you better subscribe here.

New channels, technology and objectives have meant advertising has fundamentally changed – and remuneration has changed with it. There's no such thing as a free lunch and Rachael Micallef takes a look at the ways agencies are evolving to make sure they get their money's worth too.

People are funny about money – there is no greater truism – but nowhere is the money discussion more fraught with controversy than the humble agency retainer. Once the lifeblood of advertising, anecdotal evidence suggests its dominance is under threat, as clients are increasingly looking at other ways to make dollars work harder.

Chief among trends is the move to project models, something Trinity P3 founder and global CEO Darren Woolley has seen first hand in the creative and content market. He says that since 2007 his business has been calculating project fees globally for clients and that the last 12 to 24 months has seen a real up-tick in interest.

As to why marketers are looking to uproot payment structures, Woolley says it stems from accountability – of which there is little in a retainer-based world.

“There is a constant fear in most marketer’s minds that they’re paying more than they should on a retainer basis, even though most retainers operate almost as a smorgasbord,” Woolley says.

“Project work is more accountable in that it’s directly linking the work an agency does to a fee. Accountability is everything in marketing.”

Despite this, time-based remuneration structures are still the most common. M&C Saatchi general manager Mim Haysom says for agencies, creating a fairer way to be remunerated can be a difficult conversation to have – especially when most agencies are hunting new business.

“Inertia is a powerful thing. Changing age-old structures is never easy,” Haysom says.

“In saying that, this model is simple and it works so we shouldn’t throw the baby out with the bathwater. But there’s absolutely room for other models.”

However with that, comes the problem of resourcing without a reliable income stream.

The project push

The Hallway’s Sydney studio can, at any one time, be filled with creatives, strategists, technologist, illustrators and animators – but the catch, is not all of them are actually staff at the agency.

As Jules Hall, CEO and founder of the agency explains, The Hallway has a contra deal in place with specialists in peripheral services: they get space to work on projects and in turn, The Hallway has access to their expertise if and when it needs them.

But it’s not just a novel business answer to Airbnb; The Hallway is preparing itself to better work in a project-based world.

“There has always been a mixture of retainer work and project work,” Hall says. “But the catalyst is that the percentage of work that is project-based is increasing.”

The Works creative partner Paul Swann says project work is definitely increasing, but he’s seen more of a move to a hybrid model – which sees a portion of remuneration retained but the agencies are part of a roster which allows you to pitch for work.

“It’s good because we’ve got a good line of sight and vision on a scope of work, which allows us to have that fixed team and dedicated resourcing - which is good for both parties,” Swann says.

“But at the same time there is a an opportunity to do projects, and it keeps everyone in that agency group kind of hungry.”

Swann says in order to better service project work the agency has moved to an “inherently leaner and more efficient” model, which sees the use of technology where possible, and using a freelancer network to flex up and down as key.

The agency works with Optus which recently appointed a roster of six agencies in just this situation. While it offers the client flexibility, unless it’s well managed it could easily turn into a knife fight with agencies dragged into a content stream of resource draining pitches.

Hall says that while retainers aren’t necessary for the industry to move forward, commitment from clients is.

“When you don’t have a commitment every single job becomes a pitch and the biggest loser in that scenario is the client,” Hall says.

“Agencies aren’t able to commit to a team and so the client loses that accumulation of knowledge – which is inefficient – and they get poorer quality of advice because there is less money to reinvest into people.”

New Republique CEO Nima Yassini agrees. His agency has been publicly been moving away from a retainer focus for years. He says it still has “calender clients” who they work with continually but who aren’t tied into a contract. Yassini says there also tends to be a performance element in the contracts, creating a hybrid that allows the best of both words.

“It’s an evolving model,” Yassini says. “It’s not one or the other, its a hybrid that allows us to get what we need and allows clients to get what they need as well.”

big pic lunch money

Dangling the performance carrot

UM’s former CEO Mat Baxter said last year when he announced that his agency was transitioning to performance based remuneration for all clients that if an agency isn’t willing to have skin in the game and put something on the line to join a client on the journey, it probably isn’t all that good at what it does.

“When you’ve got money on the line it’s an amazing agent for creating focus,” he said strongly advocating incentive and performance based remuneration. He also added that it was already delivering better returns.

However, in Woolley’s experience while a lot of marketers “have tried it, few do it”.

Tech-driven creative shop Affinity is one agency which has made incentive-based models work with a number of clients, but CEO Luke Brown says it’s because the agency does data and business intelligence as well as creative work.

“Our focus on data means we’re really able to dig into the result and look at what is working and how it’s working and why it’s working,” Brown says.

“Some of our clients say they love us having skin in the game because we’re more focused on delivering actual business solutions for them and meeting a real business problem rather than just creating ads.”

Brown says it also helps both sides justify big projects. In one example, he says Affinity created a project for a client, which wasn’t willing to take an upfront risk on it but the model allowed the agency to risk its remuneration on the product being a success. In the end, the agency was paid more and the client’s business increased five fold.

“It is also now one of our most intensive and I think will be one of our most enduring relationships,” Brown says.

Yassini says performance modelling helps the entire advertising industry by levelling the playing field, and bringing the discussion back to value, as opposed to cost.

“As an industry we’ve become a commoditised service where price is now driven by market not by the company that provides it,” Yassini says.

“Agencies should be pushing the conversation about performance based, and we can start to actually level the playing field. Because the client is trying to minimise their exposure to cost and the agency is needs to recoup money for the work they’ve been doing for free.”

Brown says while it isn’t the right approach for all clients, more multinationals are starting to have the conversation as the evidence begins to stack up.

“Larger companies now have greater expectations, they want more from their agencies and they want to see step changes in their businesses and this is a great approach of getting that step change,” Brown says.

Similarly, Queensland-based independent agency Rumble is just two years old and is building its model not on the time-based remuneration of old, but a shared-success model. Managing partner Remy Brassac notes that the type of payment varies by client and can range from equity share and licensing arrangements to a shared-success model.

He says it can also often be a difficult conversation, given clients aren’t used to these types of arrangement but the outcomes are usually much greater.

“We prefer it namely because we want to be valued for what we do,” Brassac says. “To do that, we need to basically back ourselves and demonstrate to clients that we’re very confident that we make a difference to their business, and we would like a stake of that business.”

The tricky business of IP and ownership

As media channels fragment, agency work has expanded so much so that some of it doesn’t fall under the typical idea of ‘advertising’. Instead it is products that complement but don’t form part of a client’s core business. It also means that most of the pay structures that exist don’t neatly fit this type of work.

It can also lead to a complex web of 'who owns what' if the right contracts aren't put in place up front and often the agency loses out.

Woolley says often, contracts contain clauses ensuring that all agency work is owned by a client, and that often, agencies aren't commercially savvy enough to have an agreement allowing them to retain intellectual property (IP) of a product
up front.

Colenso BBDO in New Zealand is one of the few agencies that creates enough product work for clients to have a particular clause written in to all new client contracts that allows it to profit-share in a product created with a client, but also allows them to retain IP.

M&C Saatchi is one agency that has put its product innovation agenda into practice with the launch of speciality arm Tricky Jigsaw. It was responsible for the Optus Clever Buoy. There is still much confusion and speculation in market about who actually owns what in this case, and down the track it's likely to offer some lessons in how to approach IP ownership at the start of any potential projects. M&C Saatchi swerved the question directly, but M&C's Haysom says when it comes to product creation, more agencies are moving towards profit share or joint venture-type arrangements.

“Traditional models don’t address IP challenges that are increasingly coming to the fore in today’s world,” Haysom says.

"They don’t put a premium on ideas and aren’t flexible enough to encompass the many ways ideas can be brought to life for the benefit of clients’ bottom lines."

"If an agency is able to drive a program that converts an idea into an revenue stream, they’ve demonstrated enough to justify a decent cut of the proceeds."

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