Payment by results, good news or bad news?
An agency MD who I recently worked with contacted me to ask my advice on Payment by Results. They’d pitched solus to a warm prospect, having previously worked with him at another client. It was looking good and then the Client MD got involved and asked for payment by results at the end of the agency’s presentation and implied they would put the brief out to a wider pitch if the agency didn’t comply.
So is PBR good news or bad news for agencies? Well it depends!
Firstly, what is PBR? At its simplest it’s where part of the agency’s fee is dependent on helping the client achieve specific business targets. Clients see PBR as the agency being accountable. The principle seems sound. The agency helps the client grow sales, win new customers or increase market share and the agency is rewarded for the impact their work has on the client’s business. The greater the impact, the greater the reward.
It certainly will focus the agency on achieving the client’s business goals. Some clients also see PBR both as a bonus and as a malus i.e. the agency is rewarded/penalised for over/under-performance. However, things are rarely simple and straightforward. “Many a slip twixt cup and lip” So how can it go wrong? Here are some real examples where I’ve seen PBR become a serious problem for agencies.
Too much at risk: personally, I wouldn’t put more than 5-10% of the fee at risk. I come across situations where 30-40% of the fee is at risk tied into the PBR.
Wrong criteria: choose very carefully what criteria or targets need to be achieved to trigger the PBR. The danger comes when the client’s criteria are subjective i.e. Based on how well the agency ‘serviced’ the client. This is too open to interpretation. I know several agencies which had their PBR triggered by achieving specific client satisfaction scores. Spookily the agency always fell 1-2% short of the required trigger regardless of what they did for the client.
Too rich a reward: year1 the agency hits targets and wins a sizeable bonus – probably more than the client envisaged. The client feels they’ve over-paid the agency and looks to downgrade it for year2.
Untrustworthy client: I know of several cases where the client reneged on the deal saying they hadn’t accrued for the bonus in their budgets and there was no budget to pay the bonus, despite the agency hitting the pre-agreed targets.
Bonus paid too far in the future: the bonus can be dependent on YOY sales for example which means the agency can sometimes wait 12-18 months to get their bonus. Add to that poor payment terms of 90-120 days or more…….
Having outlined the above cautionary tales there are also some agencies doing very well with PBR. It can and does work well in some cases!
If you do decide to enter into a PBR, here are three tips.
- Have an official contract or agreement signed by a senior client.
- Think through the ‘What ifs’. What could go wrong in the future? What might I regret in a few years time.
- Ensure the reward criteria are measurable and objective… and realistic and achievable. Ones that the agency can truly impact. (sales uplift for an ice-cream company is probably wrong as the weather may well have a greater impact. Instead market share increases may be more impacted by the agency’s work).