Terms of engagement

Procurement's involvement in agency-client relationships is now getting beyond basic negotiations about price.

Procurement's involvement in agency-client relationships is now getting beyond basic negotiations about price.

In an era when corporate governance is under the microscope, procurement officers have become increasingly sophisticated in outlining financial expectations within a contract.

But some agencies - and their clients - are questioning whether the same precision is in place to manage work expectations. "I think we have a long way to go ... to do a disciplined job of outlining the scope of work," says Stephen Boehler, founder of the Mercer Island Group, a management consulting firm that serves the marketing industry. "The clients aren't particularly good at it ... and the agency isn't good at pushing the issue."

Purchasing officers often overlook key elements of the agency-client relationship, Boehler notes. "The procurement people approach the relationship very differently than the PR staff does; they are not as focused on the quality of the staff or the intellectual property," he says. "It really is important for the people on the agency side to maintain a constant dialogue on the scope of the work and key expectations."

"Occasionally the dialogue becomes so price-driven that the inference is that [PR] is a commodity," says Bob Feldman, CEO of GCI Group, who adds that corporate communications executives often turn the negotiations over to the procurement officers.

But negotiations shouldn't just be about budget; they should also encompass work expectations. A clarification of these allows firms to set limits, Boehler explains. "Without a clear scope of work, a client expects more than the agency expects," he says. "It's harder for the agency to defend its work."

For clients, however, the most pressing concern is how to ensure accountability, notes Rod Hanlon, chairman and founding partner of Wanamaker Associates, a marketing management consulting firm. Companies are putting processes in place to measure not only work scope, but also billing accuracy, staff competency, and whether the appropriate people are being assigned to the right projects on an account. Hanlon notes that these elements of a relationship are typically given short shrift by purchasing officers.

"The financial areas are receiving the most scrutiny from the procurement industry. That's their comfort zone," he says. "A well done contract ... will clarify those things in advance and [leave] very little room for deviation."

Compensation trends

Concerns about work expectations and accountability have also influenced compensation models.

An increasing number of companies are using incentive-based compensation - where a portion of the agency's fee is tied to performance - to encourage accountability, Hanlon notes.

But this model has its limitations, particularly in an industry like PR, where there is no gold standard of measurement. "We think it's misguided to tie [PR] too closely to sales and market share," he says.

Nonetheless, measurement tools are in high demand because more than 90% of corporate marketers believe that incentive-based compensation improves performance, says Francisco Escobar, president of JFE International Consultants. "In order to put these arrangements in place, you need to have a mechanism to measure performance," he says. "The use of benchmarking has become much more prevalent."

Helen Ostrowski, CEO of Porter Novelli, has also seen procurement become more sophisticated in developing methodologies to assess performance. But she notes that the definition of performance-based compensation has changed. The performance model still requires agencies to meet certain benchmarks, but it is less likely to award bonuses for exceeding expectations. "Those have been extremely hard to get into the contract," she says.

Hourly billing (and variations on it) remains the most common model, but value billing is also gaining support, says Ostrowski. With value billing, agencies set a compensation fee based on what they can accomplish for a client.

With other compensation models, "You could do some pretty remarkable things, but you're still not getting compensated for what you're able to provide," says Michael Bigelow, CFO of Waggener Edstrom and an advocate of value billing.

Many of the compensation trends agencies are now seeing started within the advertising industry, Escobar notes. This includes a move toward what is known as "cost-plus," a controversial compensation model where agency fees are calculated based on the combined cost of staff and overhead, plus a profit.

"There's a pretty big delta in that 'plus,'" he says. "There is a major discrepancy between what clients and agencies consider a reasonable profit."

Two trade groups - the American Association of Advertising Agencies and the Association of National Advertisers - have already started a movement to standardize what should be included in overhead, Escobar notes, adding that what they decide might ultimately be applied to PR.

But regardless of the billing model, Bigelow stresses the need to define what agencies are expected to do for a client. "Without having it documented, you set yourself up for trouble," he says, adding that agencies must anticipate that nearly every account will involve at least some reactive work. "With the nature of our business, it's hard to anticipate everything."

Wag Ed has attempted to standardize the negotiation process by providing clients with contract templates, the complexity of which vary based on the scope of the work that needs to be done.

Clients will sometimes prefer to lead with their own master contracts, which might need to be adapted for PR, Bigelow notes.

Michael Lasky, a partner at marketing communications law firm Davis & Gilbert, also notes that firms should have sample contracts on hand during the negotiation process. "It's important for there to be clarity for what is being done and what's not being done. Otherwise the client always asks the agency to do more with less," he says.

But he warns agencies not to lose sight of a client's expectations. "There's both standardization and the need to be extremely flexible to meet the client's needs," he says, adding that he doesn't necessarily see the emphasis on hourly billing as a stumbling block in agency-client relationships. "So long as the client understands what it's being charged for ... and the value of those services, there is at least an argument that working on an hourly basis puts higher value on the work."

Negotiation guidelines

Ostrowski notes that not every client puts the same emphasis on cost; others are more focused on conflicts that the agency might have with other clients or team structure. "I don't know if you can really standardize [the contract negotiation process, but] there are best practices," she says.

Bigelow notes that the first discussions with a client should determine what is guiding the negotiation process, such as whether the client is looking for a long- or short-term engagement and whether the client wants to enter into a win-win situation or simply award the contract to the lowest bidder.

"Depending on the size of the client you're working with ... it makes good sense to think about what principles will guide the negotiation process," he says. "It is key to really understand up front what it is they want."

Bigelow notes that working with procurement has forced agencies to develop a greater understanding of the services that they can provide to clients. But after the pitch, Wag Ed sends its financial officers to negotiate the terms of a contract.

"We try to make sure the right people in each organization are talking to each other," he says.

Still, corporate communications executives must remain active during the negotiation process, notes John Pyne, senior finance director at GCI. "When clients want counsel on critical communications issues, branding issues, influencer issues ... there needs to be an understanding of the value equation that marketing people intuitively understand and procurement people do not," he says.

Escobar notes that procurement officers are often responsible for negotiating contracts with all outside marketing firms. Some even oversee contracts with all external suppliers. He adds that the procurement team might also include representatives from the company's legal, finance, and HR departments.

The Council of PR Firms has recently published a booklet on how to build a better relationship with procurement. "Firms need to make the same effort in understanding the procurement objectives" as they do in understanding the needs of corporate communicators, says Council president Kathy Cripps.

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The right agreement

Many companies set the tone for negotiating contracts with PR firms based on their relationships with advertisers. At the same time, the recession and corporate governance scandals have led to a greater emphasis on PR over advertising - and more scrutiny of the unique sensitivities in PR agreements.

The recent controversy over the relationships between firms and spokespeople has also turned the spotlight on these deals. Even though it was the government's use of VNRs and paid media pundits like Armstrong Williams that has been criticized, corporate clients are watching them, too.

Helen Ostrowski, CEO of Porter Novelli, agrees that secondary agreements - under which umbrella relationships between agencies and subcontractors fall - are beginning to come under greater scrutiny.

"The contracts have been pretty solid," she says. "The question is, are you doing what the contract specifies?"

Michael Lasky, partner at marketing communications law firm Davis & Gilbert, notes that an example of this change might be the greater emphasis on the terms of agreements with spokespeople.

Contracts, for instance, might specify that spokespeople will not endorse products or services in any form of media where they are employed or consult.

"We're in a world of disclosure and transparency, and there are things that are more important than ever to have in a contract," says Lasky. "Cynicism and distrust have found their way into contracts."

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