The agency community reaction to The Coca-Cola Company's (TCCC) approach to Value Based Compensation (VBC) has been mixed.
- There is some skepticism about whether Coke's approach is really a wolf in sheep's clothing--aka a way to cut agency compensation disguised as a strategy to recognize and reward value. Is that the real reason that TCCC's VBC approach is strategically geared to set base fees at a level where an agency can't make money?
- There are agency concerns about the even handedness and equitableness that will be involved in the implementation and stewardship of a Coca-Cola type VBC arrangement.
- There are concerns about the starting point for base fees, i.e. a historic fee database of payment ranges for similar categories of SOW projects. Is the historic database a compilation of "discounted" fees that are not really reflective of agency costs and value added?
- "Current Value Considerations" seems like a legitimate and strategically sound approach for establishing a client value framework for a project or scope-based arrangement. However, how is an agency's "Current Value Considerations" factored into the determination of the base fee?
- The Coca-Cola VBC scheme includes a P4P (Pay for Performance) overlay that sits on top of the base fee. Under TCCC's P4P approach, an agency can earn up to a 30% increase (mark up) on top of the base fee. To some, this seems like a client endeavor to dictate and manage agency profitability. To others, the skepticism pertains to the actual level of payout that agencies will achieve over time.
- The Coke P4P criteria are a blend of criteria; prototypical structure is 40% qualitative (Agency Evaluation) and 60% quantitative (40% Specialist Metrics, 10% Marcom Metrics and 10% Business Results). There has been a good deal of industry discussion about the appropriateness of the criteria and weighting.
The 4A's does not--and can not--endorse any one particular form or level of compensation arrangement. That being said, I believe that there is value insight and strategic learning that can be derived from evaluation of a Coca-Cola type compensation approach.
So…..What Agencies Can Learn from Coke’s VBC Approach?
Coca-Cola spent three years thinking about a workable approach to framing value. The strategic thinking, discipline, information and tools that Coca-Cola evolved in the creation of their new compensation plan is laudable.
- TCCC collected, organized and analyzed a robust SOW project fee database that includes a significant amount (three years) of information across a broad range of activities involving a diverse blend of agency relationships. Agencies would be well served to develop their own database of historic fees (and costs) for appropriately similar types of engagements.
- Agencies would be well served to establish criteria, tools and management responsibilities for applying the agency’s "Current Value Considerations" to all significant pricing proposals.
The types of agency value considerations that you might want to assess before finalizing a pricing proposal include:
(i) What are the "opportunity costs" related to the assignment? Does accepting the assignment create conflicts or other restrictions that potentially limit other agency growth possibilities? Could the premier people that are being allocated to the assignment be better utilized on another opportunity?
(ii) Are key--most highly valued--agency services, capabilities and personnel being charged at premium rates?
(iii) Are there learning, credentials or other "non-economic" benefits that the agency might derive from the assignment?
(iv) What is the agency's competitive advantage (or disadvantage) versus other agencies that realistically compete for the project?
(v) Are there client-side continuity, speed-to-market or other considerations that provide the agency with a favorable "negotiating" platform?
(vi) How important is the project to the client? What is the range of upside for the client if the program is successful? If there is a misfire what are the client’s risk?
Pricing of products and services is normally the domain of the product or service provider. However in the marketing services industry many purchasers have begun to dictate the method that they prefer to use to purchase services. Given this industry dynamic, when iconic marketers like Procter & Gamble and Coca-Cola introduce carefully considered, highly visible changes to the way they conduct business it is reasonable to expect that other clients will evaluate the feasibility of structures that are either strategically or tactically similar to TCCC's VBC approach as well as P&G’s sales based-BAL agency compensation models.
The 4A's encourages agency members to thoroughly evaluate some of the recent client initiatives that relate to agency services and compensation including the Coca-Cola and Procter & Gamble models. As a prudent practice the 4A recommends that members develop a robust data base of pricing, servicing and cost information at the agency.
Finally, members would be well served to evolve alternative compensation strategies and toolkits as means to optimize agency pricing as well as manage over reaching compensation tactics that are advanced by client procurement groups or one-dimensional compensation consultants.