Can payment-by-results work in Asia?

Paying creative agencies according to the results their campaigns achieve is hardly a new concept.

But in light of the financial pressure placed on agencies over the past couple of years, it is being discussed again with new vigour.

Last year Coca-Cola announced it wanted to move towards a system that recoups agencies for costs and offers profit mark-ups of up to 30 per cent if the agency's work meets targets. By 2011 Coca-Cola wants all advertising and media relationships to operate on this basis .

Such agreements exist in Asia, but are generally restricted to the multinational clients that have implemented them elsewhere. Companies such as Procter & Gamble, Unilever and Kraft have moved in this direction, but it is still rare among Asian clients.

Unilever and Kraft have payment-by-results deals with Ogilvy. Tim Isaac, chairman of Ogilvy & Mather Asia-Pacific, says these are top-up agreements that pay the agency a bonus. Ogilvy's targets fall under several categories: the company's own key performance indicators, brand-related indicators, and the service the agency provides.

Many of the big creative networks are keen to promote payment-by-results. In a recent speech, Jean-Marie Dru, chairman of TBWA, pointed out that the old commission-based system was at least loosely linked to performance (the better a company performed, the more it spent on media, and the more commission an agency would get). The fees system, which is based on hours worked, removed that link completely. The growing role of procurement departments has seen a squeeze on fees and agencies are eager to restore a link with the value they create.

In Asia, progress is likely to be slow. Agency payment models tend to pass from commission to fees to payment-by-results, and many Asian clients are still making the transition to fees.

Ian Millner, global CEO of Iris, points out that payment-by-results can be applied when client-agency relationships are mature and clients are confident in what they will get. However, Asia's rapid economic growth, the entrepreneurial nature of many businesses and a still-forming agency market, mean that many clients see more value in flexible and project-based relationships.

In some categories and on some types of campaign (especially direct-response), there can be a clear link between results and payment. Rob Burr, chief marketing officer at Sun Life Financial, points out that a payment-by-results approach was used by Jaguar in Australia 10 years ago. The agency, FCB, was paid a bonus for every car sold.

However, for other campaigns where a direct link to sales is more difficult to quantify, it can be hard to agree measures on which to base remuneration. BBH Asia-Pacific CEO John Hadfield identifies this as a key stumbling point in Asia, where there are so many other factors, such as distribution, that affect sales.

Then there are the agencies themselves. Not all of them favour payment-by-results models that could jeopardise a large chunk of profits. Payment-by-results requires time, effort and trust on all sides. In Asia, developing the apt marketing environment may be some way off.

Industry comments

John Hadfield, CEO, BBH Asia-Pacific
"Virtually all our client engagements have some element of performance-related pay. Normally, when they don't, it's upon the client's request.

The issue we encounter is measurement. It's often difficult to separate out the communication's effect from other elements in the marketing mix. This is a greater issue in developing markets as distribution is normally much less 'perfect' than in developed markets, and it can have a significant impact on sales.

If clients and agencies are to work as partners, it is good that they should align behind shared business objectives, and that they both have skin in the game."

Ian Millner, CEO, Iris Worldwide
"Performance-based results (PBR) can be applied in Asia when client agency relationships are mature and clients feel confident about the agency's capability and delivery.

It will work better where markets are growing more slowly and only have a small number of mature agencies, but in most cases, now is not the time for PBR because there is so much growth and entrepreneurial behaviour, plus the agency market is still forming. In these conditions clients tend to get more from flexible and project-based relationships.

Agencies need to make PBR models deliver value for client, consumer and agency."

Ian Thubron, EVP, TBWA Asia-Pacific
"Many clients see the need for marketing communications services as a cost not an investment and somewhat of a commodity. The rise of procurement has a role in this.

We want to drive the conversation back to compensating agencies fairly for the value they create. There is no perfect model, but linking pay to sales is the best practical way. It's not perfect as there are other factors which drive sales, but it gives a tangible, realistic assessment of the client's performance and agency value.

In Asia we are seeing the agency selection process based purely on price rather than value and that is not in client interests."

Preeti Kumar GM, Mediacom Singapore
"Results-based creative is something that's been around for a while. As far as clients are concerned, the objective and key performance indicators of each campaign is linked to the creative. However, sales are influenced by many factors and the marketing mix. How each marketing element affects sales is not clearly defined or measurable. You have sales distribution and promotion, marketing services, and creative, that's why measurement of the end results is not very clear.

I don't think any agency has the ability to influence the end result. You need to go back to the objective of the communication based on the objectives set."

This article was originally published in the 17 June 2010 issue of Media.