Pay for Performance. Bring it on if you dare

Over the years I’ve been a big proponent of pay for performance when it comes to engaging clients as a marketing firm. What could be better? Clients love the concept because both parties have skin in the game and we get paid according to how effective our work is. The assumption is that we’ll do better work, go the extra mile and deeply care about the client’s success. Everybody’s happy.

However, the reality is not so simple. There are a number of issues that raise their ugly heads every time I’ve attempted to implement such a compensation strategy.

Issue #1: Most clients and agencies don’t really understand how pay for performance (PFP) works.
Most expect the firm to work for free and then be paid only if the work delivers some predefined performance – usually revenue. If the goal is met, the client will then pay the firms normal rate. Why it doesn’t work: The problem here is that no company can stay in business working for free. The other issue is that there needs to be compensation for risk – above and beyond what a firm would earn if they weren’t taking on the risk of the client (plus their own company’s risk).

The solution: The service provider agrees to a specific scope of work at a rate that covers it’s overhead plus out of pocket expenses. This would give the client a significantly lower rate for the work. If the agreed upon metrics and milestones are met, the agency would receive their usual profit margin PLUS a bonus to cover the risk incurred. This is not unlike what an investor requires. In effect, the agency is investing in the client’s business (taking on the client’s risk) and should be compensated above and beyond it’s usual “no-risk” rates. The greater the risk, the higher the compensation.

Unfortunately, clients don’t like this idea even though they are still coming out way ahead and have significantly reduced their risk. The choice is to simply pay the agency and shoulder the risk that the effort may or may not work or transfer the risk and pay a premium.

Issue #2: Metrics and goals not within marketing’s control
Most clients demand that an agency gets paid when they get paid. In other words, if an increase in revenue can be tracked directly to the agencies work, the agency gets paid. The problem here is that there are a myriad of variables that effect the realization of revenue. For example, the sales team is less than effective, the product isn’t good, lousy customer service prevents repeat buyers, market conditions change, supply chain problems, etc.

The solution: The client and agency need to agree on metrics that are measurable and tied to agency performance overall. Often, “leads” are the preferred metric. However, there are often arguments over lead quality, suitability and viability. Another challenge is tracking leads to specific activities – did the lead come from an ad? A press release? The web site? The reality is that an integrated marketing program should be measured as a whole and with a few exceptions (Pay Per Click) cannot be tracked to individual tactics.

Issue #3: Handing over the keys to marketing to the agency
More often than not, clients pick and choose what they want the agency to do allowing only certain activities to be performed by the agency. For example, the agency may insist on doing research to ensure a positive outcome (what everybody wants) but the client doesn’t think it’s worthwhile. Or the agency may build a campaign with certain response mechanisms that the client later changes. From planning to research and implementation, the agency works on a piecemeal basis with little control over the work.

The solution: The client must follow the agencies process and recommendations – including budget. The agency must also be allowed to work long enough for the strategy to work – even if the first six months don’t produce results. If the agency is going to take on risk, the client must do what the agency says. If the client doesn’t trust the agency to work in its best interest, they shouldn’t engage them in the first place. Effective marketing and promotion almost always takes more effort, money and time than any client prefers.

Again, this issue is usually a deal killer for the client. They typically refuse to allow the agency to do what it knows works. The result is a less than effective effort and everybody loses. Issue #4: Disclosure Tracking financial performance (or other metrics) takes time, money and effort. Many clients are uncomfortable sharing financial information or doing costly research to confirm that the agencies work is having a measurable impact. PFP also requires extra legal fees to create and enforce the agreements – thus raising costs even more.

The solution: There needs to be transparency and trust for a PFP arrangement to work. The process of disclosure and confirmation should be spelled out in the client/agency agreement at the beginning.

The above issues are only the tip of the iceberg when it comes to PFP. Any marketing firm or agency that’s any good welcomes a fair PFP agreement because we know our work is effective. In my experience, it is usually the client who ultimately decides that PFP won’t work.

Please post your comments on this topic. I welcome disagreement from my peers and from client organizations. How can we bring agency compensation into the 21st century?

Acceleration – Are You Ready?

Another Video Moment

Do the right thing. Even if it’s a nightmare.

Why do consultants (marketing and otherwise) have such a negative reputation in the business world? Like any profession, you have highly skilled people and you have others who are not as skilled. No surprise there. But skills alone still don’t make a trusted adviser (the gold standard every consultant wants to achieve). Part of the problem comes down to people who simply oversell their qualifications but don’t have the skill to back it up. For clients, this smoke screen is difficult to penetrate but this is probably the primary driver of low satisfaction among clients. Ultimately, their experience with the consultant (or firm) is sub par which, in turn, reinforces the negative connotation of the profession.

However, there is another factor that generally flies below the radar – even good, highly skilled consultants fall into this trap. And the result is not good for anyone. The trap is “Let’s do what is easy instead of what is right for the client.”

I’ve become a fan of incendiary chef Gordon Ramsey. Not because of his obnoxious show “Hells Kitchen” (I hate that show) but because of his other show “Kitchen Nightmares”. Essentially, Ramsey is a consultant who offers tough, straight talk to turn around failing restaurants – typically due to the ownership and/or management who are not doing what is in the best interest of the business. He pulls no punches and cuts through the often sizable egos of his clients. Through all the f-bombs and brutal truth, you can see that Ramsey genuinely cares about the success of the business.

For example, I have worked with companies who were willing to spend money having consultants and outside partners do various marketing activities. Doesn’t seem like a problem, does it? The problem is that the activities were the whim of the president and not necessarily the activities that would actually fuel the company’s growth and success. Most were the marketing equivalent of busy work. There is no plan, no goals and the whims change direction constantly. Many initiatives that started are never completed. Not exactly a recipe for success.

Why would otherwise self respecting consultants go along with this? Because it is easier to take the money and go along with the flow. After all, that’s why we are in business, right? To go to the bank. However, this is not why the client hires outside expertise. They expect results. They may seem satisfied with the furious activity but at the end of the fiscal year, this satisfaction quickly evaporates because money was spent and goals were not met.

It’s difficult to push against this flow. In fact, you may even lose the business to other folks who don’t really care about the client’s best interests. The money is tempting. Nobody likes to tell a valued client that they are on the wrong path. There are many reasons to sit silent and play the easy game. But I believe that those of us in the business of helping our clients solve problems and create growth opportunities have a sovereign duty to always do what is right for the client – whether they like it or not.

Sure, it’s not easy. Of course they may not like it at the time. It may even require them to spend more money (Ouch!). But the fact is, they didn’t hire you to be a “yes man”. They hired you to solve their problems. Don’t be a wimp – do the right thing no matter what. And keep the swearing to a minimum.