DAVE BEALS & GREG PAULL R3 WORLDWIDE

Myths, Challenges & Best Practice

in Digital/Social Agency Compensation

#overcharged?

THE FIVE BATTLEGROUNDS OF

DIGITAL INVESTMENT ©®TM

Digital vs Traditional

Ratecard vs Retainer

Fees vs Production

Make vs Buy

Transparency vs

Opaqueness

2

1

2345

THE SITUATION Digital has never been more important

THE SITUATION

58%

4

Clients unhappy with the way their digital agency charges them CMO Council Study 2013

Agencies don’t see client transformations

5

THE SITUATION

SOURCE : 2014 SoDa Report

6

THE SITUATION

Clients and Agencies differ on what matters

SOURCE : 2014 SoDa Report

Marketing creativity

Product/Service Innovation

Expertise in emerging trends

1

2

3

4

5

6

7

Costumer-Centered Marketing

Process/Project Management

Market / Marketing research

Measurement Analytics Capabilites

CLIENTS AGENCIES

Marketing creativity

Expertise in emerging trends

Costumer-Centered Marketing

Product/Service Innovation

Process/Project Management

Market / Marketing research

Measurement Analytics Capabilites

7

THE 3 DIGITAL BLACK BOXES

FEES PRODUCTION

MEDIA

Ratecards hours

Profit

margins

vs traditional

Make or buy

Mark ups

Rebates

RTB

Publisher

roles

DIGITAL vs TRADITIONAL

1

What % of US marketers pay for digital on fee basis?

A. What’s a fee basis?

B. 28%

C. 82%

D.102%

9

POP QUIZ #1

Not so “unique” after all – MACRO LEVEL

10

Not so “unique” after all – MICRO LEVEL

11

AGENCYSTAFF POSITION

SAMPLE DIGITAL AGENCIES (US$

range)

SAMPLE TRADITIONAL AGENCIES (US$

range)

Account Supervisor $125-175 $125-170

Sr. Account Planner $170-220 $185-240

Creative Director $250-325 $275-350

Copywriter $100-140 $105-160

Media Planner $95-125 $80-110

Comparing digital to traditional agencies

• Hourly rates for similar positions not that different (and sometimes less expensive)

• Overheads and margins not dramatically different either

Not so“unique” after all12

Basic compensation methods and financials far more alike than different, especially as:

Digital agencies are having to show sound,

internal cost management and

accounting

More marketers get comfortable with digital agency compensation

More digital agencies are bought by the holding companies

Understand the Talent Gap13

Work harder to identify,

nuture, reward

Massive squeeze from multiple sources

CLIENTS

OTHER AGENCIES

AD-TECH

GENERAL TECH

=

If your digital agency is perceived to be more expensive than your traditional agency, there are likely other factors :oPremiums paying by rate card?oPremiums paying project by project?oFees for digital production: apples to oranges vs. traditional agenciesoPaying multiple agencies for similar services?oLack of agency revenue transparency? Fees on top of other agency revenue sources?

14

Digital vs Traditional Why is my agency expensive?

Digital vs Traditional Take-aways

No need to vary from your preferred method of agency compensation

15

1

2

3

4 If your digital agency is perceived to be more expensive than your traditional agency, there are likely other factors

Don’t forget importance of incentives

Work harder to reduce turnover

RATECARD vs RETAINER

2

17

What is the typical premium of Ratecard over Retainer?

A. We have to pay agencies?

B. 0%

C. 30%

D.100%

POP QUIZ #2

18

Project vs. Retainer Rates

o Recent examples from R3 client-agency contract reviews

Proposed Project Staff Rate as % of Retainer Rate

Client A - Agency A 105-106%

Client B – Agency B 107-111%

Client C – Agency C 120-125%

So why not move to retainer?

• Difficult to plan ahead with confidence• Scope parameters and

requirements change rapidly in digital and social media

• Confusion over who does what (and best) -- fear of locking in retainer services• Internal vs. external agency• Multiple agency resources

19

The Digital SOW

AREA EXPLANATION

TECHNOLOGYMost digital channels – SEO, PPC, Social, Display, Mobile, Affiliates – require the management of a technology platform

TALENT Just as for traditional agencies, retained digital shops should work on a Direct+OH+Profit basis

PROCESSInvest time to understand how it can impact your final fees

DATAKnow which data you have, what you need, who owns it , and what is costs to maintain

20

Pro’s of Digital Retainer

• Lock in desired agency talent

• Generally less expensive than

project by project fees

Also, less administration

• Greater budget certainty and

financial transparency

21

Con’s of Digital Retainer

• Potentially less flexible – changing digital landscape makes it harder to plan against highly variable and uncertain scope

• Potential for corresponding over-commitment (or misalignment) on agency staff/fees

22

Retainer options for digital• Retain “talent” vs. set agency scope/hours

Combination of retainer (for key planning, concepting, design, account service talent) and project fees (for specialist staff against uncertain workload)

23

• Adjust retainer scope/fees on “rolling” basis (e.g., every quarter)

• Use Scope Index to set workload/fee assumptions for various tasks

It’s “Launch and Live”Not “Launch and Leave”

• Plan ahead for the total digital lifecycle of your campaign

24

• Budget for “evergreen” social the way you would for ongoing media flighting

• Find and lock in the right talent

Ratecard vs Retainer Take-aways

Rate card pricing often inflated

25

1

2

3

Rate cards generally do not commit to specific agency talent – potential for less expensive/ freelance resource to be used

Retainer helps avoid overpaying for same agency staff across multiple project SOW’s

Ratecard vs Retainer Take-aways

Retainer requires thoughtful planning on digital roles, responsibilities, core competencies

•Clearly define and align on internal vs. agency roles

•Provide oversight of all digital activity and resourcing (vs. reviewing in silos)

26

4

FEES vs PRODUCTION

3

28

What did Mondelez decide to do in 2013?

A. Tweet “you can still procure

in the dark”

B. Hire a Social Media Head

C. Hire 20 internal twitter writers

D.Add 20m fake twitter

followers

POP QUIZ #3

“Fee” or “Production”Digital agency fees, in total, often seem more expensive than traditional agencies – however, digital agencies often do much of the production in-house vs. third parties

29

TRADITIONAL AGENCY DIGITAL AGENCY

ACTIVITY FEE3RD PARTYPRODUCTION

FEE3RD PARTYPRODUCTION

Planning $100,000 $0 $95,000 $0

Video Concepts

$125,000 $0 $127,500 $0

Video Execution

$50,000 $250,000 $200,000 $0

TOTAL $275,000 $250,000 $422,500 $0

“Fee” or “Production”Best way to evaluate agency cost is the total investment in fees and 3rd party production30

TRADITIONAL AGENCY DIGITAL AGENCY

ACTIVITY FEE3RD PARTYPRODUCTION

FEE3RD PARTYPRODUCTION

Planning $100,000 $0 $95,000 $0

Video Concepts

$125,000 $0 $127,500 $0

Video Execution

$50,000 $250,000 $200,000 $0

TOTAL $275,000 $250,000 $422,500 $0

$525,000

1. Ensure your digital agency budget has addressed and accounted for any agency in-house production,

2. No right or wrong way to define, budget or account for it – as long as there is internal and agency alignment

3. And, applying traditional “fee vs. spend” metrics to digital agency activities is wrong

look at your total investment in agency fees and production, regardless of whether production is done in-house by agency and/or through third party suppliers

31

Fees vs Production Take-aways

MAKE vs BUY

4

Make vs Buy

“Do we need to pay an agency to do this?”

33 A recent ANA study suggested that:

53%REPLACED agencies with some in-house servicesof ANA

membersThis is certainly being felt in the digital space, and issues with digital agency compensation are increasingly being joined by the question of

Verbatims SoDa 2014 Survey

34

- “Paid search” - “Plan to move most things in-house over next three years” - “SEM” - “Social media” - “We handle all digital services in house, aside from our

SEO efforts” - “Website, search and social” - “Everything!” - “We only outsource eCommerce and mobile - “Content creation and video production” - “All functions are now in-house”

Various digital services lend themselves to in-house solution•Those that involve regular, day-in, day-out activities

•Simple and high-volume production tasks that don’t have high-level “creative” demands

35

Make vs Buy

Where are the shifts from agency to in-house taking place?•Website maintenance and basic content management•Social media monitoring and content management•Digital asset production/adaptation (especially for basic OLA – banner ads, simple videos)•Digital strategy

But, caution: some don’t: Those that require high level of

creative or technical expertise that would be more cost-prohibitive than hiring an agency

• Creative talent, digital or traditional, would prefer not getting locked into working with just one marketer – this has big cost/value implications for the marketer over the long-term

36

Make vs Buy

Various digital services lend themselves to in-house solution

Related to digital agency fee planning and negotiation:

37

Crucial to clearly define and align digital roles and responsibilities – between agencies (if more than one), and between client and agency

Multiple internal stakeholders need to be considered

Yes, marketing and PR (if a separate department from marketing)

But also internal IT Achieve clarity on agency roles

within the client’s digital “ecosystem” – and match the agency staffing and fees accordingly

Make vs BuyTake-aways

Commercial Break

38

39

40

TRANSPARENCY vs OPAQUENESS

5

42

What did digital guru Joe Mohen call RTB?

A. An airport in Honduras

B. The Reason To Believe

C. A Ready To Bake Cake

D.…...something else …..

POP QUIZ #3

43

FastBoys vs Madmen44

Direct vs RTB

AREA DIRECT BUY RTB BUY

Targeting Websites Audiences

Supply Guaranteed Non-Guaranteed

Workflow Manual Programmatic

Pricing CPM eCPM

Best Suited For

Premium, Quality, Content Rich

Mass, Reach, Non Time

Specific

45

RTB Revenue Streams

PROFESSIONAL FEES and/or commissions

46

TECHNICAL FEES For access to the agency’s obvious investment in technology

INCREMENTAL MEDIA FEES Many RTB’s buy inventory and then onsell to others including their clients

Do Your Research47

How Agencies are Aligning on RTBGROUP RTB AGENCY ALIGNED TO

WPP Xaxis GroupM

Omnicom Accuen OMG

Publicis Vivaki AOD Vivaki

Interpublic Cadreon Mediabrands

Dentsu Amnet Dentsu Aegis Network

Havas Affiperf Havas Media

MDC Varick NA

Independent Accordant NA

Independent The Trade Desk NA

Independent Run NA

Independent Digilant NA

48

How Clients are Not Aligning on RTB

49

Digital Rebates

• Beyond RTB, there is so much competition for digital revenue Adtech running at loss to IPO Clients budget slow to move Agencies have strong control

• Media Rebates – in EVERY country – are inevitable

50

Digital Rebates Returned? 51

Source – ANA 2012 Rebate Study

ALL THE TIME

SOME OF THE TIME

NO

ALL THE TIME

SOME OF THE TIME

NO

Transparency vs OpaquenessTake-aways

Have a conversation. Know the issues

52

12

3

4 Be clear on metrics

Understand your own agency’s business model

Test and Learn – mutual learning center

5 Be clear on conflicts

6 Invest in a Financial Audit to ensure transparency

BEST PRACTICE

5

IPG?54

Peets and Razorfish 55

56

• “Pay for Performance” alone (PPP) is often not sustainable for long term agency relationships Incentivizes agencies to make the

wrong decision Encourages short term thinking

• Suddenly the model that was going to align the agency has the opposite effect

“Pay for Performance” (PPP)vs Pay for Performance (Incentives)

Incentive Compensation Best Practices57

Employ combination of quantitative and qualitative criteria

PERFORMANCE CRITERIA

METRICS RATIONALE

AGENCY Qualitative

Totally within agency’s controlTightly customized to client needs

ADVERTISING

QuantitativeE.g.: tracking of awareness, brand perceptions, copy testing, cost/lead, buying efficiency, etc.

Ties to desired marketing performance that is primarily affected by agency’s work

ADVERTISERQuantitativeE.g.: sales increase vs. target, share of market, etc.

Although influenced by many factors outside of agency control, aligns client and agency on a “shared agenda”

Impact of Incentives on Performance58

• Significant majority of those that use performance incentives continue to indicate they are working.

• But, uptick in those who claim the result was no change or poorer performance.

We don’t think that the toilet bowl has any unpleasant meaning.  Human beings can live several days without food but toilet bowl even one day, otherwise the world must turn into the mess. The deep culture of toilet bowl is a criterion of the civilization. Equanimity and imperturbability being able to stand pressure with enthusiasm are the toilet bowl’s characters.The combination of responsibility, sacrifice and readiness is the spirit of toilet bowl. The Toilet Bowl can release the pressure and make you comfortable.The beauty of toilet is willing to clean itself and fresh forever! So! for our client, unconditional offerings is Meikao’s spirit

Unilever60

Samsung61

Summary62

Treat Digital Agencies the same as traditional FEE BASED

Plan for Launch and Live , Not Launch and

Leave

RETAIN TALENT

Invest time to understand fees vs

production

PLAN AHEAD

Set the right KPI’s and incentives

MONEY TALKS

63