It has been great to see a growing trend towards performance based contracts. The recent article in marketing week highlighting the deal where McDonalds have appointed Omincom on a zero-margin contract is a great reference point. Getting paid based on the value your firm creates is clearly the way forward for many. The very best firms who have a reputation for creating value for clients will relish the opportunity whilst those who don’t will be running for the hills. As this trend grows it will inevitably see the downfall of a number of firms both large and small who have a reputation for premium pricing who don’t necessarily generate value for their clients.
How the model works.
In a nutshell an agency works with clients at zero margin only passing on the direct costs of their employees who are assigned to the project along with any associated variable cost. A royalty model is then defined that provides a performance bonus based on an agreed set of value outcomes. If the agency hits the outcomes and the clients realise the value, then the agency receives a percentage of that value, which is typically greater than what the client would have paid under a traditional margin model. Conversely if the agency fails to deliver the value they get paid no performance bonus which typically means the agency breaks even at best.
The opportunity to disrupt the agency/consulting firm model is vast. If clients move towards these types of contracts then it actually puts a huge amount of pressure on firms pitching for the work. How much do you believe what you are pitching? How confident are you that you can deliver whats in your pitch? Do you have a team, a process and overarching culture that can deliver and work in collaboration with your client in this way.
This does have the potential to flip the big agency / consulting firm on its head, where the benefits of being small and agile combined with a confidence around delivery and the value you can create become key strengths. Those agencies that tick theses boxes will be able to compete aggressively against those larger firms who lack the confidence and appetite for risk to operate in this way.
Here at Radical we find this an incredibly exciting and it is something we are whole heartedly encouraging amongst our clients. Some key considerations for clients considering the approach.
Do you have a robust value creation model.
i.e. are you pro-actively tracking the value created directly from each and every initiative. If not you will need to define one, so that the work and its outcomes can be ring fenced and value attributed to the activity. Whether you go with a zero margin model or a traditional model you should have this in place .
Zero margin contracts can work out costly if an agency is throwing 100 people at a project that may only need 10. If receiving zero margin pitches you should be encouraging your agency to name names, and show costs.
Both for clients and agencies you often find an us/them mentality with critique flying in both directions. It is important even before the pitch process begins to expose this and ensure you are proactively setting up an environment and culture that is about collaboration, honesty, and empathy. Perhaps include this as a agency requirement so you can be sure they are taking this seriously, and to see how closely it aligns to your own views.
Pick something small and try it out. Make sure it works well for client and agency after all these types of models are new to everyone. Understand what works and what doesn’t. Then refine, evolve, and thrive collectively.