As big firms get tough on pay, agencies are being warned to talk about fees earlier on in the process

With clients demanding more for less the last 18 months has seen a major shake-up in how agencies are paid. Fees are either coming under closer scrutiny or contracts are project based while innovative new measurement systems are being tested.

The most interesting issue is a bursting of the bubble of hype that has surrounded payment by results (PBR) for the past few years. Although accountability is more crucial than ever, it seems that clients have largely avoided using systems that link PR agency performance to pay.

A recent IPR study into the subject found that 17 per cent of respondents (a mix of agencies and clients) had used any form of PBR - a figure that hasn't changed over the last two years. More anecdotal evidence from agencies suggests that fewer than five per cent of most agencies' clients have instigated any kind of PBR system.

Despite clients being keener than ever to justify the money they spend, several stumbling blocks deter them from using PBR.

While clients often like the idea of PBR they often trip up when it comes to working out how they are going to set up a system for measuring performance.

At the same time, most clients like the ease of knowing in advance how much they're going to have to pay and the variables of PBR can play havoc with budgets.

In many cases, PBR is proposed by the agency because it can see the chance for more revenue if it is confident about certain targets, while offering the client the chance to add an extra control tool.

'We do suggest it to clients, but they often don't want the uncertainty,' says Carolyn Paul, Edelman Health international business director. 'Anyway, clients seldom want to pay for the level of evaluation necessary for the kind of measurement you'd need for PBR.'

Despite widespread acceptance that the size of a cuttings folder does not always reflect changed consumer attitudes, most clients still using PBR opt for a crude volume system based on frequency and quantity of coverage. Some believe that this is harming the take-up of more sophisticated methods.

'The continued dominance of traditional measures of PBR certainly contributes to scepticism about the use of PBR within the PR industry,' says Chris Genasi, chairman of the IPR's professional practices committee.

'The presence of these measures is impeding the application of more progressive PBR that when used strategically can add real value to the client and the client/consultancy relationship,' he adds.

Although there has been some caution and scepticism about the relative value of PBR, some clients have wholeheartedly embraced it. Drinks group Diageo brought basic PBR in two years ago after a review of its consumer agency roster. Comms director Ian Wright believes that it is 'relatively undemanding' to set measures and acceptable targets for brand-based communications.

The difficulties start, he says, when you move on to try to measure internal comms, financial PR and reputation management. The company is working on finding ways to measure the latter, and Wright foresees that within the next three years agency and staff contribution to the company's reputation will be able to be ranked.

'As long as you can measure data over a long enough period to be able to iron out seasonal and other glitches, it should be possible to link agency and staff bonuses to it,' he says.

'Having some form of PBR built into the renumeration system is always desirable,' says Jon Aarons, Financial Dynamics partner and IPR president, 'if only to force both sides to set clear objectives on the programme.

But agencies must be allowed to cover their costs,' he adds. 'We're not charities. We must recoup the cost of time and resources, but there's nothing wrong with the agency's profit being linked to results,.'

Additionally, if structured in the right way, PBR can be a useful tool for motivating an agency - as long as it is used more as a carrot than a stick.

For example, agency Lawson Dodd was paid an extra £2,000 by project client AMP London Life because its account team managed to get the company's phone number into over 50 per cent of media coverage. The performance-related bonus motivated the agency to go the extra mile to get the detail included.

PBR may not have taken off in the way industry observers were expecting it to, but clients have effectively come up with their own much simpler version of the idea - more project-based relationships.

The public sector in particular is increasingly relying on project contracts.

The London Borough of Camden hired Ala'ddin PR on a four year £25,000 contract to publicise its work cleaning up its streets as part of the Boulevard Project. LBC head of press and PR Steve Gladwin says there is 'political pressure' to make sure these projects are given priority.

Agencies managing private sector clients also report greater proportions of their total revenues are now coming from clients who have only committed to paying a lump sum for a project that may last just a few months. If the project is deemed a success, more work could be forthcoming.

A popular style of payment now is a blend of retainer and project fee. BNFL group director of corporate affairs Philip Dewhurst favours this approach: 'People can get complacent if they're on some great big retainer. Paying for a separate project keeps the team motivated.'

Of course, some methods of renumeration are more suitable than others for certain industries or types of PR. City agencies are often paid by fixed fee with a bonus paid if the acquisition or merger is successful (the bonus can sometimes be over 100 per cent of the fee). A consumer launch is the type of work that generally suits a simple project fee, unless there is a clear way of assessing its success. But having a corporate agency that advises on issues as they arise would generally require a similarly ongoing retainer arrangement for fees.

The other big change regarding fees is the increased involvement of purchasing departments in the pitch process.

Most of the large corporates are now doing this, in an attempt to bring some regulation to the process.

Although this can add a layer of bureaucracy to proceedings for agencies (as well as more people to impress), some claim that they welcome the input of the professional buyers.

'Let's face it, most PR people are pretty bad at negotiating contracts,' says one agency chief. 'At least with a watertight contract drawn up you won't get into those unhappy situations that occur when each side has a different expectation of what is going to be done, when and for how much.'

'The involvement of purchasers and tighter contracts often means that agencies will need to discuss money at a far earlier stage of the pitch process,' says Pippa Evans, Countrywide Porter Novelli UK and European head of consumer.

'The first meeting is often more about the client wanting us to prove that we've got the resources, the billing and evaluation systems that they want. That discussion can include issues like how we charge disbursements, and what sort of budget they have in mind,' she adds.

Although this puts the financial squeeze on agencies at a much earlier stage of the review, it does at least mean that the agency doesn't commit time to a creative pitch if they don't regard the budget on the table as high enough. 'It's probably more effective for both sides,' says Evans.

Clients are discovering ways of encouraging agencies to aim low with the budget at pitch time. Agencies told that they are competing against seven others for example are more likely to quote a modest fee.

But set against the ability of clients to negotiate ever-tighter fees, agencies continue to look for ways to squeeze out budget increases. CPN is just one agency trying to do this by offering 'free' extra services if a client increases the budget.

'We have found that internal communications skills are something that many clients are keen to access but perhaps cannot afford,' says Evans.

It's easy to regard the growing sophistication in managing budgets by clients as alarming news for agencies. But the current climate has to be set in context. This year still doesn't compare to the early 1990s when many agencies went under. Many lessons have been learnt since then in terms of agency management and the industry is better placed to weather any storm.

Perhaps the greatest lesson that anyone can learn about the process of negotiating fees is that the two sides are never going to be totally happy with their lot - any agreement will inevitably include an element of compromise on both parts.

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