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Mr. Thomas Finneran

What Can Agencies Learn from Coke's VBC Approach?

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?

  • In structuring P4P arrangements with a client do you have a point of view of the type of criteria (quantitative and/or qualitative), measurement tools and performance calibrating ranges that you feel are appropriate and reasonable?
Summary Observation
 
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.

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Comments

Proactive or Reactive Pricing?

Tom, This is excellent advice on the lessons that can be learned from Coca-Cola's and P&G's value compensation models. As someone who teaches pricing, I firmly believe that sellers, not buyers, are responsible for innovating new pricing paradigms. However, in both the marketing services and legal professions we are beginning to see major clients begin to impose their own pricing models onto the firms they work with (the latest is Pfizer insisting its outside counsel provided fixed prices). Agencies have a choice: they can either be proactive and innovate new pricing paradigms that recognize no client buys time, or they can be reactive and have the clients force them into a model that they may--or may not--prefer. I would hope one of the lessons learned from Coca-Cola and P&G is that agencies need to take control of their own destinies and begin offering pricing strategies that align the interests of the agency and the client, as these two models are attempting to achieve. The billable hour is increasingly dying in the rest of the professional world; it is simply obsolete in a knowledge based economy because knowledge cannot be measured in time (the value of the polio vaccine is in no way dependent on how long it took Jonas Silk to develop it). Clients know this because they don't price their products and services on this archaic model, which is one of the reasons they are the innovators in this area. It's past time for agencies to become more proactive in this area. If not, clients will do it for them. Sincerely, Ron Baker, Founder VeraSage Institute www.verasage.com Twitter @ronaldbaker
Posted by Ron Baker (Wednesday, September 02, 2009 12:38 PM)

Coke Model Takes the Industry in the Right Direction

While some agencies suspect Coke might have ulterior motives in making the move to a value-based approach, in reality Coke is simply trying to align the economic incentives of their agencies with those of the Coca-Cola Company. In professional pricing circles there is a concern that the agencies (the sellers) should be setting the price instead of the client (the buyer), but Coke took this step forward because their agencies didn’t. There are paradigm-changing pros for Coke’s new approach: • Acknowledges that there is no correlation between labor and value. • Begins with a discussion of “What does success look like” rather than “How many hours will it take?” • Fundamentally changes the basis of agency compensation from hours and activities to value and outcomes. • Seeks to apply a set of factors other than time to determine how an assignment should be priced. • Puts in place a set of tools and processes that allow Coca-Cola marketing people to better clarify what they’re trying to accomplish – scope of value, not just scope of work. • Gets the client out of the business of controlling and dictating the agency’s profit. • Makes the concept of hourly rates and rate cards irrelevant. • Changes the dialogue and language away from billable time, FTE’s, and cost-plus to instead talk about results and performance. Coke's approach still needs some fine-tuning (which they would acknowledge), but we mustn’t let the perfect become the enemy of the good. Overall it moves the industry squarely in the right direction.
Posted by Tim Williams (Thursday, September 03, 2009 2:13 PM)

The reward must justify the risk

The Coke model is a good and thoughtful step towards value based pricing. It moves the conversation away from discussions that commoditize the Agency like hours, rates, and other core expenses that should remain proprietary. It does align Agency compensation with client goals. As a "first pass" the Coke approach accomplishes a lot. In the future, I'd like to see reward milestones that provide the incentives meaningful enough to justify Agency risks at a level that better recognizes the ultimate value of the agency's contribution to the client. Perhaps the devil is in the detail of the client agency negotiation.
Posted by Tim Brenton (Thursday, September 03, 2009 4:31 PM)

Define "Cost"

If Coke is using "cost" as the base pay to the agency, how is "cost" being determined? It seems that the mechanism for arriving at costs based on a specific staffing plan has been eliminated. So how is Coke certain that there isn't hidden agency profit, or other costs not normally accepted by a marketer, built into the base cost?
Posted by Laura Bajkowski (Monday, September 14, 2009 9:57 PM)

Cost to Coke +/- Value Considerations

Coke desiribes that--- they set the base fee  amount by looking at their historic data base of what Coke paid in the past for similar projects----Coke then uses the historic benchmarks of project payment values plus or minus adjustments for "Current Value Considerations" in order to arrive at the base fee amount
 
In the new Coke VBC system the agencies cost is for the agency to manage---Coke does not expect agencies to make a lot of margin on the base fee (although if the agency can get the work done well and quickly then that is to the agencies benefit)....Coke's P4P overlay is intended to be the primary profit mechanism for agencies
Posted by Mr. Thomas Finneran (Monday, September 14, 2009 10:22 PM)
 

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