Insights

“Lambs to slaughter”

In a recent edition of Campaign magazine there is a story about an agency working with a retail client with a Payment By Results arrangement (PBR) i.e. the agency receives an additional bonus or reward for helping to hit pre-agreed criteria. The retailer has reneged on the payment despite the agency hitting the agreed targets to trigger the PBR. This is not the first time that an agency has been stung by non-payment of a PBR. I specialise in helping agencies be more profitable and successful and unfortunately I’ve come across similar stories all too often. What does the agency do? Sue the client? Or simply accept the disgraceful behaviour of the client?

So who is at fault? The client/prospect or the agency? It doesn’t really matter! In this case the agency was the loser.

Warren Buffet once said “What we learn from history is that people don’t learn from history”.

Some senior procurement people see agencies as ‘lambs to slaughter’ because of their commercial naivety. How can agencies protect themselves against poor client behaviour?

1. Some clients see PBR not as a bonus, but as a penalty in the case of under-performance. Be clear whether the PBR is a carrot or a stick.
2. If as an agency you agree to PBR then don’t put more than 5%, maximum 10% of your fee at risk in a PBR agreement. The project should still be profitable for the agency even if the PBR bonus isn’t paid.
3. Ensure any PBR financial deals are agreed in writing and at director level at the client end. Ensure you are talking to a decision maker and not a ‘messenger’.
4. Ensure any PBR performance criteria are objective and measurable rather than at the whim of the client. Don’t agree to a PBR bonus being paid on subjective criteria such as ‘quality of client service’. Beware of agreeing to criteria which you can only partially influence and which can be substantially influenced by outside factors ie currency fluctuations, the weather etc.
5. If the PBR is too generous towards the agency, the client is more likely to renege on the deal or downgrade it the following year.
6. Major corporates like the idea and theory of PBR but often find it impractical to execute in reality. Typically they find it hard to accrue for (so I’ve been told) Some entrepreneurs/start-ups want to have PBR with their agencies. This can be great for the agency if you back a winner, and a nightmare if you back a lemon. Ask yourself ‘if this were a stand alone investment opportunity would I really choose to invest in it?’
7. Commercial realism needs to be second nature. Wake up. Stop being a pussy-cat! Do not simply assume or hope ‘it’ll be alright’.

I’ve worked with over 120 different agencies and hear so many horror stories about clients behaving appallingly including reneging on a PBR deal. However agencies need to take some responsibility for their actions. They have chosen to agree to the PBR deal. They are half the partnership.