On Thursday I was in Singapore to give a keynote speech on The Future of Professional Services for clients and prospects of Epicor, a mid-tier enterprise software firm that has developed a substantial global market for its professional services software suite.
One of anecdotes I told was about how Keith Reinhard, now Chairman Emeritus of advertising giant DDB Worldwide, has been a consistent innovator in advertising and professional services. Below is the case study on DDB Worldwide which is in Chapter 11 (on value-based pricing) of my book Developing Knowledge-Based Client Relationships, followed by an excerpt from Chapter 6 (which can be downloaded in full from here) on Keith’s ideas on relationship agreements.
The image below refers to the delightful story at the end of the case study. This range of flavored drinking water for cats was created by DDB and is licensed to provide an ongoing revenue stream.
Case study: DDB Worldwide
Advertising network DDB Worldwide, with 206 offices in 96 countries, was named “Most Awarded Agency Network in the World” for 2004, on the basis of the creative awards received by its operations worldwide. Chairman Keith Reinhard has long been an innovator in promoting the “Agency of the Future,” and has been an active proponent of pay-for-results approaches to fees for much of his career.
In 1991, DDB Worldwide began by offering to guarantee results on its advertising campaigns under certain conditions. This first initiative did not work as well as had been hoped, partially because while the CEOs of client organizations were enthusiastic about the concept, the brand managers preferred to have control over the relationship, and were sometimes reluctant to share information. The agency then shifted from offering a guarantee, to making part of its compensation based on results. This involves a basic fee structure that allows the agency to cover its costs plus a basic margin, with bonuses paid based on the results achieved by the client.
The key issue in establishing the bonuses is agreeing on measures for results that are aligned with the clients’ marketing objectives, and are as directly as possible attributable to the agencies’ efforts. Some measures used include sales and profit of the client as a whole or for the relevant division, media or production savings, and survey measures of brand or advertising awareness and intention to purchase. If the objective of the client were to increase distribution, this would represent a different type of assignment that could be measured, for example, by number and diversity of distribution channels.
By 2004, around half of DDB’s compensation agreements included pay for performance elements. A common criteria is copy test scores, that measure how ads are received by focus groups. Achieving pre-determined sales objectives is frequently used to trigger specific incentive payments. However the most common single method currently used is agency evaluations, in which client staff subjectively grade the agency on a variety of criteria, that could include creativity, responsiveness, results, or any other issues that are meaningful to the client. Usually the assessment is transparent, with both the criteria and points awarded shown to the agency, and DDB given the opportunity to respond. The assessment is then used to determine payments to the agency, based on differential commission rates, bonus levels, or agency profit margins. Some clients use all three of these inputs, whereas others use just one or a combination of these. One major client applies only the agency evaluation system, using it to award a profit margin to the agency of between 5% and 15%.
Since a core element of DDB Worldwide’s business is developing brands, it actively seeks to create its own brands and license these to clients, thus keeping the intellectual property inhouse. In one example, it created the brand H2OPE. It licenses this for an annual fee to the Stockholm Water Foundation, which on-licenses it to companies. DDB has also recently created a series of cat beverages which it is seeking to license, including an energy drink called tigerwater and salmon-flavored drinking water going by the name of L’eau de Chat. Reinhard says that he wants his business to become more like the music industry, in which the creators do not sell their ideas for a fixed price, but instead license them to generate ongoing revenue.
Excerpt from Chapter 6: Keith Reinhard on relationship agreements
In order to enhance its client relationships, advertising agency DDB Worldwide has implemented a relationship agreement, that establishes clearly what each side expects from the other. With one of its major clients, DDB set up an agreement on how the relationship was to be conducted, as a complement to the formal work contract. When the idea was raised in discussions, client executives leaped at the idea, seeing it as a way to establish clarity on expectations. They specified that they expected DDB’s work to challenge them, expressed understanding that creative work requires failures, and indicated that they wanted strategic thinking from the agency. On DDB’s side, expectations of the client included sharing its business plans, and streamlining the advertisement approval process. Keith Reinhard, then Chairman and CEO of DDB, and the chief executive of the client signed the relationship agreement, providing a foundation for a great relationship. This is an example of a practical tool that can leverage knowledge-based relationships by bringing key issues into the open. I challenge you to suggest this to your clients.