Reprinted with permission of Advertising Age and Crain Communications.
By Debra Aho Williamson
Internet agencies, hit hard by dwindling revenues and an
ultra-competitive market for new business, are dangling a tantalizing offer to clients:
We'll stake part of our compensation on the success or failure of your project.
Performance-based compensation isn't exactly a new idea in the agency
world. Thirty-five percent of agencies responding to a recent Association of National
Advertisers survey use an incentive-based compensation plan. Procter & Gamble Co. a
year ago stopped compensating its traditional agencies based on media commissions and
began paying them a commission tied to product sales.
Now, the concept is gaining momentum among i-shops. Why? Chalk it up to the current
economic environment. I-shops are struggling to get and retain clients, and marketers are
looking for solid proof that the dollars they spend on the Internet are working. What
better way for an agency to prove the effectiveness of an interactive initiative than to
put some of its own skin in the game?
''We really believe in putting metrics on our work, and if we're going to assume the same
risk our client does, we also want to participate in the upside,'' said Steven Marrs,
president-chief operating officer of Tribal DDB, a unit of Omnicom Group's DDB Worldwide.
''It helps align everyone's interests properly.''
Marketers are keenly watching the developments. The Internet for years has been touted as
the great measurable medium. In marketers' view, it's a natural evolution for i-shops to
put the money where their mouth is. Delta Air Lines, for one, is looking for ways to tie
compensation to performance measures at its interactive shop, Modem Media, Norwalk, Conn.,
which is minority-owned by True North Communications.
''Even if we were in a great economic boom, and money wasn't an issue, I'd still want to
do this,'' said Rob Casas, general manager of business-to-consumer e-business at Delta.
''We just want to get more out of our dollars like anybody else. These are creative ways
to help you do that.''
MAKES SENSE OF IT ALL
In many ways, performance-based compensation seems like a more natural compensation model
for i-shops than it does for traditional ad agencies since the entire medium is
response-driven. But it's not just accountability that's driving the change; it's the
economics of supply and demand, which right now favor clients. Eighteen months ago, the
i-shops could take a ''Take it or leave it'' attitude. After all, marketers were
desperate. They needed a Web site yesterday, and were willing to pay whatever the shops
wanted to charge.
''It is chaos,'' said one i-shop executive. ''Everything is in flux.''
Average hourly bill rates at many i-shops plummeted in the first quarter, a reflection of
the slowing market for Internet development services and overstaffing at i-shops (see
chart). Hourly rates at Agency.com and Razorfish fell 14% from the previous quarter; rates
at Digitas and Modem also were down, according to research by Bear, Stearns & Co.
During a conference call to discuss its second-quarter earnings last week-in which the
Boston-based company pared its estimate-Digitas executives would only say that the issue
has come up with clients, attributing any changes in its compensation to ''mix
adjustment'' in the kinds of initiatives that clients are currently spending money on.
JUST ONE ELEMENT
But it's important to note that performance-based compensation is just one element in a
scenario that, overall, has served to drive down the cost of hiring an i-shop in a
depressed industry. Mr. Casas, of Delta, said he's been approached by i-shops offering to
do work free just to prove themselves. In pitches, potential clients often use price as
leverage, said Luminant's chief operating officer, David Quackenbush.
Marketers tell i-shops ''I've got 15 companies saying they can do what you can do for a
lot less money,'' Mr. Quackenbush said. ''The projects these guys are doing, they're
shopping them really hard. They're hounded by so many companies that are coming in with
great deals.''
''Everyone is fighting for all the projects,'' said Tribal DDB's Mr. Marrs. ''I think
price plays a large role in it.''
DIFFERENT PRICING PRESSURES
In most cases, i-shops aren't explicitly cutting their rate card when they pitch new
clients or new projects from existing clients. Some shops will throw additional people on
a project, essentially giving a client free labor. Or they will intentionally
underestimate a project's cost, creating a hidden discount.
A different type of pricing pressure comes from clients that are cutting interactive
budgets and delaying projects until the economy improves. When an i-shop starts work on a
project, only to see a client pull back, it forces the i-shop to scramble to gain revenue.
At Digitas, for example, clients have cut budgets an average of 10% for 2001, CEO David
Kenny told analysts recently.
Although other factors are also changing i-shop compensation, the longer the economy stays
soft, the more logical the idea of performance pricing becomes. Such deals often are
structured so that a shop will take a smaller fee and then create a list of deliverables
that must be met in order to receive additional compensation.
A shop could get a bonus for launching a Web site on time, take a commission based on the
number of transactions at an e-commerce site, or get a percentage of sales generated from
a site.
At Ogilvy Interactive, for example, the agency works with clients to decide on criteria,
and then hammers out a profit margin that both parties feel is fair, including an upside
if the deliverables are met.
''If everybody thinks 'X' is the appropriate profit margin an agency should make, then (a
performance deal would have) a lower profit margin with the ability to make a higher
profit margin if you deliver,'' said Dorothy Young, chief financial officer of OgilvyOne,
parent of Ogilvy Interactive.
She said a ''large percentage'' of the agency's clients have such a relationship with
Ogilvy Interactive, but like most agency executives interviewed for this story, she said
specifics of client contracts are confidential. Ogilvy Interactive's clients include IBM
Corp., Unilever and American Express Co., which are major clients of the Ogilvy &
Mather Worldwide unit of WPP Group, as well.
Bcom3 Group's Novo, based in San Francisco, is willing to include performance measures in
its compensation negotiations. Said Chairman-CEO Kelly Rodriques: ''Our view is that in
periods of price pressure, what companies are looking for is firms that are going to have
skin in the game.''
Mr. Rodriques said three of the agency's 15 clients have done performance-pricing deals,
where the agency received a small bonus on top of its normal hourly compensation if it met
certain objectives.
Tribal DDB will take a lower amount in fees and stake some of its profits on the success
of its clients' campaigns, said Mr. Marrs. So far, about 20% of its clients are on some
sort of performance pricing, though he wouldn't identify which ones. The i-shop's clients
include Pepsi-Cola Co. and Anheuser-Busch, which are also clients of Omnicom.
Some shops, particularly those that handle media buying or customer acquisition, are
making performance the base of their business.
At Orb, a media buying and customer acquisition shop based in New York, performance-based
pricing is key to the company's revenue model.
IPO AFTERMATH
However, it's worth noting that the agencies that seem most supportive of the trend are
those with plenty of distance between them and the street, Wall Street, that is.
Stand-alone interactive consultants that went public during the IPO boom tend to be most
wary of pricing their work with performance goals attached. When the pressure is on to
produce revenue in the short term, they simply can't take the risk on performance-based
agreements.
About the biggest vote of confidence for the trend among public shops is at media shop
i-traffic, a unit of publicly held Agency.com. It takes part of its revenue based on
performance, although to a lesser extent than Orb does. However, a deal is currently
pending for Agency.com to revert to private status under the aegis of Seneca Investments
LLC. Other public i-shops said they're open to performance deals, but it's the kind of
begrudging openness that really means ''we'll consider anything these days.''
WPP Group-backed Luminant Worldwide Corp., for example, is willing to discuss performance
deals with clients but hasn't done any yet, said Mr. Quackenbush. Modem Media said it's
done a few such deals, but is reluctant to pursue them now.
''I personally am not a fan of it,'' said Modem CEO Marc Particelli. ''If you're doing
your job right, your job is to deliver value to the client regardless of the situation,
and situations always change.''
But he acknowledges the momentum gathering behind performance deals. ''As we learn more
about what drives performance, we may actually get to the point where pay for performance
makes sense,'' Mr. Particelli said. ''We would be open to pay for performance if we can
precisely define what success is.''
Defining success is probably the biggest sticking point in the use of performance pricing.
''You're asking the agency to wait to get paid until your sales go up,'' said Skip Pile,
chairman-CEO of Pile & Co., an agency review consultancy in Boston.
IT'S ALL ABOUT CONTROL
Unless an agency has full control over all the variables that could make or break a
project, it might shy away from the risk.
''It's hard for a company like Organic to take utter responsibility for a client's
sales,'' said Jonathan Nelson, chairman of the San Francisco-based i-shop. ''It's hard to
take all the risk when you have half the control.''
But performance pricing can work if the agency and client can come to agreement. One
i-shop lowered its profit margin to 15% from its typical 20% for one client, but the shop
can make as much as 25% if certain targets are met. This same company, which declined to
be identified, also structured a deal with a different client giving it a margin of about
6% to 8%, with a chance to make as much as 30% based on performance.
Fortunately for those who are wary of such deals, marketers acknowledge the challenges in
performance-based compensation.
''Modem (depends) on us as a company to come through on the IT side,'' said Mr. Casas, of
Delta. ''We couldn't possibly tie the overall product delivery on them. ... We have to be
careful in making sure that it is a process that is totally within their destiny to own.''
At Williams-Sonoma, which recently hired Digitas, pay for performance is an intriguing
idea, but one that the company sees as carrying risks for both sides.
''It's a one-sided dive for agencies to want to get into that relationship,'' said Shelley
Nandkeolyar, VP of e-commerce at Williams-Sonoma. But he warned if shops seem too willing
to take a lot of their compensation on a performance basis, they may not be around to
complete the job. Digitas declined comment on its pricing models.
Sony Electronics, even as it compensates Orb, its interactive advertising agency of
record, based on performance, is adamantly opposed to paying other i-shops, with a more
diverse set of responsibilities, that way.
''How could you possibly be fair to somebody like that?'' asked Michael Sive, VP-marketing
for Sony Electronics e-Solutions Co. ''If I were on the professionalservices side, I
wouldn't find that fair. As a potential client I wouldn't want to treat a
professional-services firm in a way I wouldn't find fair.''
Even if i-shops do start to do more performance deals, they probably won't take all of
their compensation that way. Retainers, time and materials fees and fixed-fee bids will
still make up the bulk of compensation. But there's no reason why marketers shouldn't take
performance into account when they negotiate fees for interactive services.
''From the get-go, part of what (i-shops) were promising ... was the fact that they had a
measurable tool and the proof would be in the performance,'' said David Beals,
president-CEO of agency search consultant Jones Lundin Beals in Chicago. Bottom line, if
enough clients ask for it, i-shops will have no choice but to deliver.
''A year ago, agencies foolishly were turning away clients. (Now) they're all doing what
it takes to get business,'' said Barry Judge, VP-marketing and e-publishing at online
consumer electronics retailer BestBuy.com, which recently tapped Digitas. ''They're open
to creatively looking at how the business could be managed. We're in a fortunate
situation. We're a big advertiser out there. There's a lot of potential business.''
By Debra Aho
Williamson
Look out marketers, the techies are coming.
Tools for automating marketing aren't new. Software exists that helps marketers manage
lists or analyze databases of customer information. Marketing departments use a variety of
collaborative tools, from Microsoft Project software to Lotus Notes to keep projects on
track. Plenty of companies offer software to manage customer relationships via the
Internet-so-called CRM software.
The new twist is the ability to manage all these tasks, and more, with a single sofware
package. Depending on which vendor is talking, the business is called marketing resource
management (MRM), enterprise marketing management (EMM) or marketing project management
(MPM).
''The largest discretionary spend in companies is often in marketing, and it's often the
least well-managed,'' says Joe Meyer, VP-product marketing at Aprimo, an MRM company.
''Marketing has sort of survived as this last great unautomated frontier.''
Earlier this month, Dentsu announced an $11.5 million investment in Harmonic Corp., a San
Francisco company. Dentsu will help deploy Harmonic's marketing management software in
Japan. Another vendor, Notara, is expanding its software for managing product licensing to
include other marketing tasks. Notara's software is already used by Levi Strauss &
Co., the World Wrestling Federation and other companies. (see story, opposite page).
Aprimo says its marketing suite, launched in January, offers an ''integrated marketing
management platform'' for everything from campaign management to planning, execution and a
marketing knowledge base. Another company, KickFire, delivers Web-based software
''modules'' for project management, collaboration and integration.
In most cases, marketers buy a license to use the software in-house or pay the vendor to
host it. The prices can easily reach six or seven figures. Software and service from
Aprimo starts at $100,000 to $150,000; Emmperative, targeting the upper echelon of
marketers, charges a base price of $30,000 per month, plus service and support, adding up
to $500,000 or more in the first year, according to Hunter Hastings, Emmperative's CEO.
The big question is whether anyone in marketing cares whether his frontier is automated or
not.
Sure, it sounds great to be able to manage everything in one place, but there's a reason
why marketing hasn't been technologically enhanced yet: It's the least technical and most
people-intensive part of a company's business.
''Marketers have tended to do things more or less by the seat of their pants. So what
happens when I come in with a tool that allows for disciplined workflow?'' asks Harry
Watkins, research director with the Aberdeen Group. ''I've got a big disconnect. I've
walked this Jaguar into a company that is using bicycles.''
One vendor, Impresse Corp., tried unsuccessfully to remake itself as an MRM company.
Launched in 1997 as an Internet-based printing procurement company, Impresse unveiled an
MRM product in January, but the company was unable to secure additional financing.
Impresse folded in April and is now trying to sell its MRM technology.
Clearly, the macroeconomic conditions are right for marketing automation. Product
development cycles and product lifecycles are shortening as the number of marketing
channels is increasing. At the same time, the current economic climate in the U.S. is
forcing companies to make sure all their operations are running as tightly as possible.
But the biggest promise for MRM-whittling out the inefficiencies so marketing can be done
better, faster and easier-is also its biggest challenge. Each marketer has its own way of
handling marketing procedures, and if a company has taken the technology plunge, it most
likely has several pieces of software installed to handle different marketing functions.
Getting companies to buy into just one solution- particularly in difficult economic
times-is a hard sell.
It's a challenge vendors acknowledge. ''People have to have the mindset that they are
going to do business over the Internet,'' says Jordan Harris, CEO of Notara. At this point
in the development of the business, ''it's clearly evangelism, it's clearly the early
adopters first.''
Even the early adopters have yet to test the full range of capabilities of MRM software.
Ernst & Young, for example, in 1999 began using Aprimo to manage its marketing
programs to clients.
In one recent example, Ernst & Young used Aprimo software to manage a direct response
ad campaign where people could respond via the Web or by phone. Aprimo enabled Ernst &
Young to tabulate all the responses in one database and then analyze the results-not a
particularly high-tech application of the software.
David Shadick, Ernst & Young's associate director of marketing information systems,
sees the promise of MRM but readily acknowledges the difficulty in getting people to use
the software. ''We've had modest success,'' he says. ''People's acceptance of computer
technology and willingness to learn new tools ... has been a big challenge.''
It's too soon to say whether the all-in-one approach will live up to its hype. For some
companies, the terms ''automation'' and ''marketing'' will never appear in the same
sentence. For others, building a marketing infrastructure will make them more efficient.
Mr. Hastings of Emmperative says automating marketing will provide a better return on
investment, cut out waste and duplication and increase companies' speed to market.
Already, he says, marketers can use Emmperative software to develop a product concept,
test the idea with online consumers, bring back results and gain interpretive analysis.
''This is truly the direction the marketing space will go,'' says Mr. Shadick of Ernst
& Young. ''What a marketing infrastructure can do is help us respond and know more
about our clients, and treat our clients more holistically.''