In May, details of McDonald’s search for a new creative agency for its North American business surfaced, leading to an industry-wide uproar. It revealed the winning agency would be asked to operate at cost, and would not profit from this base pay.
Any profit the agency will make will come from performance-related pay, reliant on certain market metrics such as sales but also subjective metrics established by McDonald’s. It was rumoured WPP dropped out of the pitching process early due to this stipulation.
Yet Omnicom went with it and won the account, ending McDonald’s 35-year relationship with Leo Burnett in North America. It will now set up a 200-strong team, led by DDB North America CEO Wendy Clark to work on the business.
Speaking to AdAge, McDonald’s US CMO Deborah Wahl says: “Omnicom has built a new agency of the future for us. This agency of the future really has digital and data at the heart, which allows us to be customer-obsessed at a whole new level in everything that we do.”
Finding the right agency partner
Despite the furore, payment by result contracts are not new. Big global brands such as Coca-Cola and Unilever are constantly experimenting with new agency models.
“If you look at Procter & Gamble’s model, their agencies get their reward through increased growth of its brands. So brands are always experimenting and then they naturally evolve over time,” says Debbie Morrison, director of consultancy and best practice at ISBA.
For clients such as McDonald’s, the appeal of a payment by result arrangement is obvious. As Marketing Week columnist Mark Ritson explains: “If Omnicom can’t deliver the kind of communications that will grow brand equity, drive traffic into restaurants and increase sales, then McDonald’s has a sophisticated hedge that will save it money. If Omnicom is successful, McDonald’s will have no problem paying a small proportion of its profits to its agency partner for its hard work.”
But the rewards are less clear from an agency point of view. At the time of the pitching process in May, Paul Bainsfair, director general at the IPA, told Marketing Week: “This seems like a process likely to lessen the chance of McDonald’s finding the right agency partner. Given the importance of advertising to this brand, it’s hard to understand why the company would set criteria for selecting an agency that makes an optimum outcome highly unlikely.”
Nevertheless, others have argued that provided the client chooses the right metrics and sets the right levels of reward, there are upsides for the agency.
“I am a big fan of performance remuneration models, and believe it should be standard best practice,” says Vladimir Komanicky, managing partner at Oystercatchers.
“With these types of contracts agencies have a much higher accountability for the success of the campaign.”
Vladimir Komanicky, managing partner, Oystercatchers
There is also a bigger incentive for agencies to deliver on their goals, as they put their profit at risk. In order for agencies to meet those benchmarks, it is critical for any client to set up clear KPIs and form a close relationship.
“If you have such a deal in place, it needs to be set up in the correct way and clients should manage that agency in the same way they’d manage their own team. You have to continually discuss what is going well and what isn’t,” says Komanicky.
One UK brand that wholeheartedly agrees with this is Mumsnet. Last year it built a pregnancy app in partnership with marketing and technology agency DigitasLBi and put in place performance-based parameters.
According to its COO Sue Macmillan, Mumsnet had built apps with external agencies before on a different contract and run into trouble.
“We found that every time we wanted to change something to respond to the needs of our users, they wanted to charge us more money. They weren’t rewarded on performance or on whether our users liked the app or not,” she told Marketing Week.
“We treat it like a real partnership, but in any external partnership effective communication is vital. Agreeing objectives and what success looks like clearly is the key.”
Sue Macmillan, COO, Mumsnet
When approached by Marketing Week for comment, McDonald’s confirmed this new payment by result model would not impact the way it works with its UK agencies. As a result, there don’t seem to be any plans as of yet to take it global.
However, research by ISBA does show these types of contracts are becoming less popular within the UK marketing industry. According to its ‘Paying For Advertising VII’ report, which looks at how ISBA members pay their creative and media agencies, PBR was an increasingly popular method of remuneration – up until 2012.
“In 2012 we started to see a significant decline in use of PBR mechanisms, however we were not sure whether this was a symptom of tough economic times or due to the increasingly complex and fragmented media landscape,” Morrisson said.
“[The McDonald’s contract] throws up big questions on how agencies are structured and how they are going to operate if more brands move to this model.”
“You can’t run a successful agency without profit, so agencies will need to take a closer look at how they are going to manage resources.”
Debbie Morrison, director of consultancy and best practice at ISBA
PBR contracts also touch on another sensitive topic: trust. Agencies sometimes have a distrust towards clients and question their ability to set a remuneration structure that’s fair towards them. But clients are increasingly concerned about how agencies are generating profits.
“Agency are afraid that the KPIs are skewed towards hard business metrics, such as market share growth or sales growth. Agencies can then feel they are putting too much at risk for delivering KPIs they don’t have full control of,” Oystercatchers’ Komanicky adds.
“This can backfire into demotivating the agency. If brands don’t consistently measure KPIs or give feedback, agencies can’t influence their success.”
Despite some agency worries, bigger accountability and an incentive to deliver on well-defined KPIs can only be a good thing. The potential rewards have to outweigh the risks, however.
As Morrison concludes: “If Omnicom wants to keep the McDonald’s account on a long-term basis – and McDonald’s does have a history of sticking with its agencies – it needs to be very rewarding. No agency is going to run at cost forever.”
Learn more about driving change at the Festival of Marketing, which is running on the 5 and 6 October at Tobacco Dock, London. For more information about the event, including how to book tickets, click here.