Kitcatt Nohr Digitas

Much interesting talk at the 2010 IPA Finance conference last week on the thorny old subject of Payment By Results -  PBR. Tim Williams of Ignition Consulting spoke compellingly of agencies in the US who are remunerated on adding value to clients’ business, rather than being paid by the clock.

He also spoke of Crispin Porter Bogusky, where no one completes timesheets. He argues that timesheets lead to people justifying their existence by notching up hours rather than by delivering value.

These have always been, and remain attractive ideas. But they ignore the rather inconvenient fact that agencies are, and always have been, low margin businesses. There is not a lot of fat, let alone skin, to put in the game. Average agency margins are now below 15% on income, and typically half that on turnover – not great for high risk, volatile businesses. . The timesheet argument is misguided too. It’s fine to say one should try to separate value/price from the cost of production, but you still need to know what your costs are.

I have always been up for PBR deals, but we talk about them more often than we achieve them. Partly because the clients who are really hot for them typically just want to transfer risk – they are often inexperienced, short of funds, or both. Partly because the reality is that so many other things can affect a successful outcome. We may do a great job of the marketing, but if call centres fail to answer the phone, web site enquiries get lost, the product is wrongly priced or just doesn’t get to market on time, or some media-dominating event erupts, then the campaign may underperform for reasons outside the agency’s control.

The truth is that we have always had a PBR clause in our contracts. It’s called a termination clause. If clients don’t think what we do adds value, then they can fire us. It may not always be fair, but it’s simple, effective and actionable.