Creating An Agency-Client Prenup That Works

Freud famously said it was more difficult to talk about money than sex. In the client–agency relationship the difficulty often boils down to just money.

The problem often lies in trying to create an arrangement where the generation of ideas is valued (on both sides) as much as (if not more than) the generation of tactics. And the best place to start is negotiating a compensation model (compensation models vary widely, but generally fall into a continuum that ranges from a fixed-fee project basis to a full retainer).

When developing a compensation model, determining the value of hours and tactics may seem easy, but how do you estimate the cost of ideas?

What if you ask: How do I structure a compensation model that not only encourages great ideas for my brand, but also fosters them? The agency would do well to suggest these four guiding principles:

Make it fair Negotiating the lowest hourly rate for agency services, or elaborate rebate schemes designed to drive down costs, may seem like a no-brainer, but will it get you what you really want for your brand? Labor costs are the single largest expense at an advertising agency. The agency's product is the people who work together as a team to generate ideas. The key to an agency's profitability is proper management of fixed costs (including labor) and staff utilization (hours worked and billed). Therefore, in very simple terms, profitability is largely driven by labor costs and the number of hours worked by employees. Assuming the agency wants to be profitable, driving down rates isn't necessarily the best thing for your brand. Unnaturally low rates can create a situation where it is more likely for the agency's brand team to have overworked junior staff servicing your brand rather than experienced marketing and advertising professionals with relevant experience and good instincts.

Choose talent Meet and get to know the staff during the agency selection process. Learn about their experience. Look to see if the right chemistry exists between client and agency teams. Ensure the contract includes a staffing plan. The plan should include relevant staff information: experience, how much time (percentage) will be spent working on your business. Under the ideal structure, certain key staff will be dedicated to your business so they can become product experts and know brands as well as your brand team. Once the right team is in place, it is essential to let them know they are not "taking orders," but are critical members of the team and stewards for the brand. Keeping up morale is as important for the agency team as it is for your brand team.

Pay for thinking Many believe that including time for strategic management in the agency's scope of work is like paying for people to stand around a water cooler talking about last night's game. In truth, senior talent at the agency need to be paid to strategize about your brand. It's not just about what the next sales ad will look like. That said, don't hand over a blank check. Hold regular meetings with senior agency management—strategic summits, brainstorms, and workshops—to ensure the collective team is on track and driving the brand's success in the marketplace.

Focus less on number of hours billed, and more on efficiency Often more attention is on the number of hours billed than on the quality of work. The latter almost always leads to higher-quality work at a lower cost. Focus more on how the work is moving between client and agency. For instance, from the agency perspective, it is important that the right people with the right experience are creating and reviewing the work. Conversely, clients need to focus on how well they are managing feedback and work changes, as well as the efficiency of their legal and regulatory review process. Focusing on the way the work is created and moving between client and agency is the best way to create the greatest value in the relationship.

Dan Bobear is executive vice president and managing director of client service at Palio, an inVentiv Health Company. He can be reached at dbobear@palio.com