Nick Hand And Darren Discuss Redefining Agency Value and Fees in the Age of AI

Speaker A: That old adage, what gets measured, gets managed, doesn't often start from a position of what actually matters to the business. It starts from what's easiest to measure.

Speaker B: Hi, I'm Darren Woolley, founder and CEO of Trinity P3 Marketing Management Consultancy. Welcome to Managing Marketing, a weekly podcast where we discuss the issues and opportunities facing marketing, media and advertising with industry thought leaders and practitioners. If you're enjoying the Managing Marketing Podcast, please like, review or share this episode to help spread the words and wisdom from our guests each week. The concept of value, particularly when it comes to agency fees for service, is a conversation that's gained additional momentum with the application of generative AI to automate and streamline much of the agency services process, helping us to define what agency value could look like. Please welcome to the Managing Marketing Podcast, the commercially savvy CFO and senior finance consultant at Trinity P3, Nick Hand.

Speaker A: Hi Dan.

Speaker B: Welcome Nick.

Speaker A: Thank you very much. Thanks for having me back.

Speaker B: Look, uh, we're living in interesting times as they say. I think it's meant to be a blessing and a curse being in interesting times. But you know, one of the topics that we talked about for years and years, which was this need to move away from cost based system to a value based system, has suddenly sort of reared up with AI and the promise of being able to do more for less. Agencies are suddenly realizing that charging by the head hour is no longer a valued way of making money. In fact, it's a race to the bottom if the machines are taking over the work. But there's a lot of talk about value and yet not a lot of talk about what value is other than either uh, paying for what's produced or paying for the outcome that those uh, outputs produce.

Speaker A: Yeah, I think. And agencies struggle with it because they've never considered it before. Uh, that was something that they didn't have to worry about because they were being paid on inputs, they were being paid on cost recovery models. And now all of a sudden, as you say, that discussion has flipped on its head and they are scrambling to try and figure out how they can get paid, um, away from the cost inputs. I think the struggle also uh, stems from a lot of organizations and marketers within those organizations don't know what value looks like either. And so I think, uh, we mentioned this when I, uh, uh, we discussed this briefly in the pre Christmas ensemble episode is that you've got the agency off doing one thing. You've got the marketer thinking that values something completely different entirely. You've got the C suite that is looking at a third different stream. Everyone's going in a different direction. And so you never get this uh, pullback to the things that actually matter to the business. What does success look like? And um, as you say, agencies and marketers alike are struggling with it.

Speaker B: And it's going to vary, isn't it, depending on who you're talking to. I mean you just spelled that out in that if you're talking to a marketer who has a defined budget, then they're going to be looking for how to maximize what they get for that. Right. If you're talking to a marketer who's got a very much a growth agenda, they're probably going to be looking for how does you know, how do they engage an agency to help grow that? It's going to depend, isn't it? But one of the things I find that agencies always struggle with is that they're always thinking of value from their revenue perspective and not from the consumer's perspective, being the client, the marketer and the organization. Because ultimately that's where value resides, isn't it? Is in the mind of the person buying the service or goods.

Speaker A: Absolutely. And I think what's helpful in that regard is to, for businesses to take a step back and imagine they are consumer. In our personal lives we make value decisions, uh, every single time we go to purchase something. We assess of all the options available to us, uh, is the benefit that we're going to derive from that good or service outweigh the cost it's taken for us to acquire it. But a lot of businesses don't think that way. They again think more insularly about, uh, as you say, how can agencies maximize the revenue that they're getting from uh, a particular client rather than, well, what's underneath the brief? Potentially it's uh, a grow brand awareness. Well, what does that look like commercially for the client? Perhaps the client isn't quite sure what that looks like. It's the agency's job to get under the bonnet of that, interrogate that, don't just take the brief on face value. Always, uh, looking for what is the primary commercial objective that the business here is trying to achieve, uh, what is the problem that they're trying to solve and that generally will point to where the value is going to be created.

Speaker B: But Nick, I think what we've seen is that marketers are ah, very much driven by wanting to get more for less or more for the same amount. And the reason for that seems to be that it's either there's A belief that if they do more the business will get better results or just by proving that they got more for the same amount or less, that they've somehow done a in quotes value deal because they managed to get more from the supplier, in this case an agency, for the same amount of money. It depends on what's driving that. And you would have to say that even then when you have those conversations, many marketers will default back to wanting to look at an input model, the traditional head al right, because they actually put value around the people that they're getting, particularly if there's someone at the agency who's highly regarded. They like a retainer model or a fee model where they can dictate getting those people on their business. You know, I think the reason that we've, we've seen a struggle over the years to get to a value based proposition is that value up to now with the cost input model has been that uh, from the buyer's perspective it means I get a person and a person is tangible, whereas everything else is less tangible. I was going to say intangible but less tangible.

Speaker A: Yeah, I think that makes sense. And that's fine. In an era where budgets were higher, uh, channels were fewer. To your point, marketers are trying to do more with less. Uh, but as we've seen with the proliferation of uh, uh, social media channels and other online channels and the amount of content that needs to be delivered on a regular basis to feed that um, machine, um, has led marketers to going down that path and thinking, well I've only got a set budget and I need to do more with it without stopping to think about, well, what is it that I'm actually trying to achieve? Am m I just trying to get eyeballs or do I actually want those eyeballs attached to a human being to uh, do something in regards to the message that they've just received. And so uh, I think, you know, as you say, a lot of these relationships uh, are bought on cost but they're expected to deliver value. And more and more C suite executives in particular, uh, are ah, looking at, well, uh, what is marketing actually delivering to my bottom line? Um, you wrote an article that's on the website not so long ago about how marketers can speak in finance, CEO and CFO language. And I think that sort of comes to a lot of the crux of what we're talking about today is that marketers just simply don't know how to articulate what value um, I'm perhaps being unfair a little bit earlier that they probably do know what the objectives of the business are, but in terms of distilling that down in a brief to the agency, because they don't necessarily have the tools or the vocabulary to, uh, articulate it clearly, that's where the disconnect comes from.

Speaker B: So, um, one of the things that we've seen is that marketers that are given a budget to spend is very different to a marketer who, who pitches to the CFO for a budget to invest. Right. So that's the first distinction that we need to make here. There's a big difference between being a marketer that has money to spend on marketing and getting the best value from that spend, in which case it would be the volume of work that you produce.

Speaker A: Right.

Speaker B: Uh, without any correlation to business impacts, growth, margin, improvement, profit, whatever. Right. Whereas a marketer that wants to position themselves as a budget to invest would have to have very clear and agreed objectives and measures on how they're going to measure that. So I guess the first thing is, do we push all of the marketers to one side that just have a budget to spend and say, well, that's pretty much always going to be buy as much stuff as you can as opposed to the marketers that have an investment to make who would then, I imagine, want to align their vendors, their agencies to likewise have skin in that game.

Speaker A: I think that's the key because as was pointed out in that piece you wrote, is that, uh, the CFO will give you more money to invest if you can show the commercial return that that money is making, to be able to attribute, at least partially the marketing program, the advertising program, uh, back to tangible business results. Uh, marketers will always get more money if they can show the activities that they're doing are contributing to that. And likewise, if one of the marketing activities or a number of the marketing activities are not working, stopping that and then reallocating the money to something that they can prove is working. I think that's the key. As you say, if the market is just spending money, then this conversation about creating, uh, value or where is the value created, becomes a bit moot because they're measuring the wrong thing, measuring the amount of stuff that they get from their agencies, rather than measuring the impact that their agencies can actually bring to bear.

Speaker B: So let's go back then and just explore that a little bit. Where they're spending a budget and they're wanting to maximize the amount of stuff that they get right under, uh, the traditional head hour rates or hourly rates, um, retainers and that type of thing, it was really a matter of retaining a number of people, negotiating the lowest possible fee that you could for that retained number of people, and then throwing as much, uh, briefs, work demands and getting as much as you could in the period that you're paying them, wasn't it?

Speaker A: Yeah. And that basically, uh, reframes advertising as a commodity, uh, because price is the most important factor, efficiency is the most important thing, rather than delivering business results. So, um, a lot of the processes that marketers and their procurement people have set up either, um, intentionally or potentially unintentionally, I think that's mostly the case commoditizes agency services. So outside of perhaps one or two people in that retained team that the marketer would like engaged on a regular basis on their business, uh, really they don't care who does the work, uh, provided it can be done at volume, at speed, um, and as much of it as possible. So, uh, I think that's a distinction that marketers need to make. Do they want their agency services to be a commodity? And that's fine. Uh, there's more than one way to go about this, but that's not necessarily going to correlate to moving the needle on the business results that your CFO and CEO are looking for.

Speaker B: And then let's consider that approach when you then take the agency resources in house. Because we've seen a huge growth in in house agency. And often marketers will think, well, that's no longer my budget. But that's not necessarily so because they are a headcount in marketing in most cases. So while the marketer may have reduced the expenditure with external suppliers, they certainly have increased cost of marketing to the business, haven't they? And there must be then from a CFO's point of view, a demand for a return on that investment, other than it's cheaper than if I went to the agency.

Speaker A: Yeah, uh, again, putting my CFO hat on, I would be expecting the same or better results, better returns from bringing it in house. Why would I take the risk of employing people, potentially having to house them somewhere? And the additional cost that that brings, uh, the return on the investment that I'm looking for may actually go up in that instance. And from a marketer's standpoint, for those commoditized services where you want to do them as cheaply and as efficiently as possible, and uh, we see a lot of, um, basic design and digital, uh, online production facilities being taken in house. That may be all well and good, but if you are looking for more strategic guidance, if you're looking for uh, more creative guidance, then bringing that in house may limit you somewhat because you are stuck to the people that you hired. You can't necessarily go to your agency partners or your roster of agencies and pick the skills that are specialist for the brief that is currently on the table. You're stuck with the people that you've hired. So uh, again as a cfo, I'd be expecting more of a return, um, from a marketer that creates a bit more pressure and you don't have the flexibility that's necessarily going to help with your uh, non commoditized activity. Trinity P3.

Speaker B: Finance is looking at overall business expenditure. Do you think that vendor external supplier expenditure stands out more than the internal operating costs? I mean, uh, it's an operational expenditure having more people hiring people, but then they're counted as staff, aren't they? They're counted as employees and so would not necessarily get the same level of interrogation unless you were going through a process of reducing headcount, for instance, which we've seen a lot of in the last 12, uh, months to two years.

Speaker A: Yeah, look on face value I think you're right. Advertising, Marketing is the biggest single line item, uh, on the second biggest line item, um, on businesses P and L. But the first is headcount. And uh, I think, you know, it's the usual adage when business is good, you can get away with uh, uh, a lot more than you can when times are tougher and potentially cuts need to be made. So certainly the marketing budget is usually targeted first and then headcount is usually targeted second. And again, with my CFO hat on, I would want to be making sure that every department, because these people will figure in a, uh, counted in a department somewhere, whether it's part of marketing or whether it's its own advertising or media or whatever the case may be. Comms potentially, uh, I want to know, well, what are these people doing and what are they contributing to the organization? Am I getting a return on the work that they're doing? And if it ends up being a lot of administrative style busy work without much commercial impact, then I think that uh, they are equally potentially, um, up for cuts.

Speaker B: Well, to your point, it makes them a cost and a commodity because that could be outsourced anywhere.

Speaker A: That's right.

Speaker B: And it's interesting because although the conversation for in housing is switched from cost reduction, there is still a rapid justification because it is in quotes, cheaper without I think necessarily proving it's cheaper. You know, it's just assumed that it will be cheaper because the company is providing all of this in app, you know, the, the real estate, the technology, the utilities, all of those things that um, is built into an agency fee.

Speaker A: Yeah. So the rationale is generally where you're taking away the overhead, the running costs of the uh, agency and their profit margin. In reality, you're probably really only taking away the profit margin from that, uh, because unless you've got spare space, office space potentially that you just simply can't offload, M, you're going to have to go out and find some more office space. Um, is generally how this works. So it's really the profit margin that the agency would be earning that you're saving from having those arrangements. But then the flip side, as I said, is the flexibility in potentially, uh, not being able to pivot quite as quickly. Yes. For the commoditized work, great. But I think for the more strategically, uh, intense work, that's where those models can sometimes fall down.

Speaker B: Okay, Nick, so let's now go back to the other side of this coin, which is where the marketer has a budget and the budget is for investing. And that, uh, that is very much aligned to a set of KPIs, a set of metrics, either business or, you know, could be brand engagement metrics or whatever. Those metrics would have to be something that is at least valued by finance if they're going to be the way that the marketer is seen for delivering on that investment, aren't they?

Speaker A: It has to be. Otherwise. It goes back to my earlier comment that if you've got the agency, the C suite and the market are pulling in different directions, uh, then that's not the definition of success. So the marketing team, how they're measured, needs to be in lockstep with what are the objectives of the business. If the objectives of the business are to buy, uh, media at the lowest cost per thousand, then that should be a primary KPI. If that's not, if that's just a, uh, mechanism to deliver the objectives, then that's should be measured. Absolutely. But that's not the primary measurements that you need in order to judge whether the marketing team, the advertising, the communications has been effective or not.

Speaker B: Okay, so this is where we suddenly get into the first big roadblock from my perspective in that in most cases, if we think of marketing for the want, uh, for the sake of this conversation as the four Ps, right, that agencies have very little to do with product, they have very little to do with pricing, they have very little to do with the placement distribution. So it's really only promotion, which is one of four levers for driving sales margin and ultimately profit. So how can you align an agency based on the value that they've created in their role with the brand in a way that has the appropriate attribution for the fact that they're really only contributing to one of the at least four different, um, mechanisms for driving business and financial value?

Speaker A: Well, I think the conversation there is tempered by the amount of influence that the agency actually has over these things. Uh, we were talking just before we started recording that, uh, the notion of paying agencies for outcomes, uh, has really taken off in the last little while. And it ignores or perhaps kicks down the road that very problem. You can't tie the entire agency's fee to the outcomes that they generate, but you can certainly judge the agency on their proportion of their influence to creating the outcomes, the promotion, as you say. And maybe it's appropriate that a portion of their fee is tied to that. They achieve some of the upside when the client's doing well, but they also, uh, share, uh, in some of the pain when they're, when they're not. But I think the key is, um, apportioning the agency's influence to the right degree.

Speaker B: Nick, I absolutely get where you're coming from here. Except that it gets us back into what's been around as PBR performance based remuneration or payment by results, which is, well, here's a fee that we'll pay you now. You sacrifice part of that and then we'll put it up on, and there'll be a variable component based on this. It never works.

Speaker A: They never do.

Speaker B: It never works for a number of reasons. One is the downside is a high risk for the agency and the upside is rarely enough to take the risk. Right. The second is there'll be a whole lot of metrics that get measured and no one can really agree on what the final attribution would be. And in fact, I know so many examples where it either went gangbusters and the agency was expecting a big payday, only to be told, well, you didn't really contribute that much, so we're not going to pay it. Or it goes really badly for a whole lot of reasons like the factory burning down that the agency couldn't control, so they ended up losing on that particular deal. I think when I'm seeing the conversation around value payments, which is what they're calling based on outcomes, they're saying, all in. We're sitting at the poker table and the Agencies are being encouraged to push all their chips on the fact that playing together with the client is going to get a winning hand, that they're going to get payday. All of the examples that we've seen in the past, and you and I both know 10% sacrifice to get 15. Would you do it with your own salary? You wouldn't. So why would you do it as a business?

Speaker A: Uh, I think the key for this conversation that we're having, it's not necessarily about payment by results. It's about uh, what mechanisms, what frameworks are in place to measure whether the uh, client relationship has been a success or not. And perhaps the setting of the price up front. Something costs $100. Why does it cost $100? What is the marketer, what is the advertiser expecting that the agency is going to contribute to the business that justifies that particular service being $100?

Speaker B: Okay, so are we now talking about value based outputs rather than value based outcomes? That is that if I've got a service that produces something that then we'll start negotiating a value price on that based on its contribution to the overall. And I'll give you an example just to make it very clear. So if I'm producing an EDM that goes out to customers to tell them that our, uh, services will be shut for the public holidays, that has very little value compared to an edm, um, that goes out to promote a particular offer or sale where I'm hoping to get increased revenue. Would I pay the same amount for both of those to the agency? As a value proposition, one has no value as far as driving sales, whereas one has the potential of driving sales.

Speaker A: That's exactly right. It comes back to my first point, is that businesses need to start treating these transactions like they do in their, uh, consumer lives. We all value things differently. Everything is contextual and everything can, uh, be valued differently because one thing is going to uh, be a benefit to, more of a benefit to the business than the other, as your example alludes, uh, to. So, uh, absolutely, it's about setting the price for those services based on the advertiser's perception of the value that that is going to generate for them business.

Speaker B: Now when I had those conversations in the past, the marketer would say, but it takes the same amount of time to do this EDM as that edm, except that we're living now in a generative AI world where the amount of time has been largely decoupled from that. But what you would want is more of a qualified human in the loop to make sure that the one that will generate incremental sales is going to be really effective, perhaps even do AB testing or multivariate testing on it to work out what's best. Whereas the other one is just an information. And I'm thinking here, particularly for banks and financial services, they produce huge amounts of communication to customers that is largely regulatory or required compared to the promotions that actually sell new credit cards, drive home loan choice, things like that, which are incredibly profitable for banks. Which one you're no longer talking about paying the same amount for every output, but actually having value attached to each of those outputs depending on its task?

Speaker A: Yeah, absolutely. I think where that falls down is that a lot of agency scopes aren't necessarily detailed enough to identify those differences.

Speaker B: Right.

Speaker A: If you're going to go down that route, you can't just have a line in the scope of work that says edm. It needs to be uh, fleshed out to explain exactly what uh, this EDM is expected to drive in terms of uh, response sales, all those sorts of things that ascribes it a higher value in the marketer's uh, mind than the one that says we're closed, uh, on Easter Monday. So uh, there's rarely. No, that's not fair. Uh, I think through a lot of the work that we're doing, uh, coaching and assisting marketers, the scopes of work are getting better, they're getting more detailed, but generally that's where that falls down because there's not enough detail to differentiate between the different levels of uh, requirement. In that example, Trinity P3.

Speaker B: That would be if the scope of work is being viewed up front with a view to locking in a payment to the agency, a fee to the agency for the delivery of that scope of work. I mean if you follow that through to the logical conclusion of making it a retail relationship, the agency has a range of services all beautifully laid out. Some of them are uh, high return services, some are medium return and some are low return or no return services that would, the low or no return service would be priced at the discount end. It would probably largely be done by AI with very little, you know, just enough human uh, intervention to make sure it's not hopelessly wrong. Right. At the other end would be the very best thinking that the agency can muster to make sure that, that, that's where the work is being done to maximize the return on that, spend that investment.

Speaker A: Right.

Speaker B: Huh. And so you would naturally pay more for that. So there's a pricing differential and then something in the middle I don't know, I just like threes but yeah. So then you could actually like you are as a shopper, go along and go, well this month I need 5 of those and 6 of those and 27 of those and then pay the bill, couldn't you?

Speaker A: Absolutely. And it doesn't even necessarily need to be worked out. The bill doesn't need to be worked out in advance. It may well be that for the regularly recurring commoditized services, the low value ones, um, the marketer and the agency agree what the fee is, what the price is for that particular service. I say price because it would be the agency fee. Plus there might be some additional costs, uh, involved external costs. So that could be settled in advance. Not necessarily the volume that's required as you say the marketing company just pick off the shelf and say I need five of those. For the higher value work that may not even be able to be scoped, um, initially up front you may be able to get some sense of what that looks like, but that may be a um, bespoke service that the agency will be asked to do at some point in time. You don't necessarily scope that or price that upfront. It will depend on what the requirements are. And as we know that those higher level strategic, uh, uh, creative um, high level media thinking is often quite nuanced and varies from certainly from client to client, but even from brief to brief. Um, so that may be not necessarily agreed up front but quoted at the time that the brief is submitted. Now from the uh, marketer's perspective, how do they know that they're paying a fair price for that? Certainly that could be benchmarked like anything. But also all those lower value middle value commoditized fees that you have agreed on will set the frame of reference for what that higher value price should be. So you'll be able to see in that continuum you can have that price framing, um, but acknowledging that there are these higher and lower value and being able to articulate what they are is the starting point to be able to get to that level.

Speaker B: And then going back to your point, anything that's spent at that premium end would have to be assumed is making a contribution to growth and the growth KPIs or metrics. So then there could be an additional bonus paid on overall growth as part of that contribution to it. So that the more the client spends in that area as a percentage of the total spend with the agency, the larger that share of bonus if they're getting the results at the end of the Year or six monthly or whatever. Um, as a way of keeping the agency focused on why are we doing this type of work, the, the premium work, it's to drive this, why are we doing the low cost commodity work? It's to get the job done as quickly and as low cost as possible so that the money saved there can be invested back up here.

Speaker A: Absolutely. And so to then to your earlier example of the at risk and the reward to pay a bonus on the commoditised stuff because that's part of the uh, overall fee, doesn't make a lot of sense.

Speaker B: No.

Speaker A: So bonusing the agency, incentivizing the agency on the higher value work is certainly the way to go.

Speaker B: There's a trap in here though for marketers and I want to share it with you and that is that when I've a number of times, I won't say how many because but there was a number of times a conversation would be how much do you spend on brand building, how much do you spend on product promotion, how much do you spend on retail and their percentage as a whole? You know, they'd be so 30% on brand building and 30% on uh, product promotion and 40% on retail would be their gut reaction to that. When we looked at the previous year's expenditure, it would be like 60 to 70% on retail and 20% on product and only 10% on brand. And that's because of that move, that natural move of trying to drive sales, we're inclined to go short, you know, the long and the short of it that the investment would go to the ones that felt that they would be driving immediate sales without and giving up on the longer term brand building.

Speaker A: No. And if you're going to incentivize the agency, then that needs to be factored into it. Perhaps the agency could be bonused on churning out a lot of the lower value work faster, more effectively, more efficiently to manage or help manage those short term goals that the organization's got. And if the agency is able to do that, perhaps that's where an incentive comes in. Huh? That then becomes the higher value work. Even though it's priced at a lower level, it means more to the organization than the long term brand building. If that's not the objective of the organization, and they'll all say it is of course, but follow the money. Where is the money being invested? If that's not the primary objective of the organization, then perhaps that's lower value. We keep saying that's the high level premium work, but in some instances Perhaps it's not.

Speaker B: Well what happened in one particular case is they realized that product promotion was actually in with brand and so suddenly they went uh, up to 30% of spend. And so that was the high premium work. Uh, retail then got split because they actually realized that there was two types of retail. And so they ended up with these three piles. But it's interesting because a lot of marketers don't like to think about the work that they do in that prioritized way. You know, everything is important, everything they do has to be done. And so perhaps that's also one of the things that has maintained us stuck in this either project fee or retainer as a way of paying agencies. Because there is no distinction. Every single thing you do is uh, just as important as every other thing. And yet from an financial point of view, an investment point of view, that's not true.

Speaker A: No, I think, I mean it's, it's easy for me to sit here when I don't have to manage these marketing budgets on a day to day basis. But it needs to be treated like an investment portfolio. And you know, again comes back to your own personal experiences. When you're investing money, uh, you will invest in different areas to um, spread your risk, mitigate m your risk. But also because uh, you know that certain investments will be of a higher return so you put more money on there, other investments, higher short term return, other investments will be uh, as steady as she goes, longer term proposition. And you invest according to the state of life that you're in. Your um, propensity for risk, appetite for risk, all these sorts of things. And if I think marketers started to look at their marketing, uh, investment in a similar way, it might be uh, you might see more of apportioning the importance therefore the value of those marketing dollars depending on what it is that is trying to be achieved at that moment in time. Trinity P3.

Speaker B: It's interesting because um, I was just thinking when we worked with a consumer packaged goods company, we did a uh, global review of the way they were paying their agency the budgets for, they had a range of products, uh, and the budget for each product was absolutely aligned to the current market value and what was seen as the market potential. So if you had a small product that had big growth opportunities, it got a certain budget compared to a large dominant market player that was static or one that was declining. So the budgeting process took into consideration the financial value that was going to be invested in each of those brands. So if they were launching a new product and they had high hopes they would in many ways over invest on the current market value. But they were investing because they wanted growth and they wanted it quick. Right. Uh, whereas there'd be other brands that they couldn't even invest in at all because there was no financial argument as to supporting it through advertising or promotion in any way.

Speaker A: Yeah, well that certainly is aligned with uh, my previous point. The interesting thing there is, were the fees paid to their various agencies aligned with that approach as well?

Speaker B: No. And that was the point we were bought in because if you were a small brand with a small budget, you paid exactly the same fee to the agency for an equivalent piece of work that they were paying a, uh, large brand was paying to the agency. And so we designed a pricing model that was based on the value of the brand and that could be reviewed every year. So we ended up with a tiered approach to brand values. Each brand had its value, which was basically dictated by finance because they were the ones that were calculating the growth potential and the return, not um, year on year for each of those brands. So then we're able to then price deliverables on each of those brands based on um, the value that the company saw those brands representing. So paying more for more upside and paying less for less upside. And I think the agency couldn't get it. They couldn't get the. Because from their perspective it took the same amount of work to do this as it did this.

Speaker A: And obviously the agency's completely missed the point is that the client was expecting them to spend the bulk of their time and bulk of their time thinking about the high value brands rather than the lower value brands. And that's the trouble. If you give agencies, uh, sort of a flat playing surface, they'll end up crafting some ad over here for one of these declining brands and not putting enough thought into the strategy that's required to grow the uh, the newer potential, um, high growth brand. So, um, that's on the agency, that's not on the marketer?

Speaker B: Well, it was also on the marketer because I had brand managers going, so I'm paying the agency less. And uh, I'd go, yes, but that means they won't spend as much time on my brand as I want them to. They were fearful of being considered second or third tier and yet their total budget was second or third tier because that's how, you know, grow it. And when I pointed out, but you'll get more things that are uh, priced to be aligned to what you have to spend, you know, they were um, ah, what's a good metaphor? A shopping metaphor. You know, they were a Walmart budget but they wanted to go down to Chanel and Louis Vuitton to buy that back.

Speaker A: Champagne taste for your budget.

Speaker B: Exactly. Yeah. So there is a whole lot of emotional drivers happening in here. From an agency's point of view, they are seeing it as cost recovery. They want to make sure they have their costs covered. From a client's point of view, brand managers see their budget as representative of how important they are in many ways and um, how important their brand is. So it's a real consideration. We've been talking about AI and generative AI from the point of view of being able to improve productivity and lower cost. But there's also a flip side to this, which is AI will also enhance the ability of agencies and marketers to be able to explore a lot more ideas and really analyze huge amounts of data to inform their decision making process as well. So even AI, uh, is a double edged sword or two sides of the same coin. There's the productivity improvement, but there's also the upside for performance improvement, isn't there?

Speaker A: There is, look, and you and I have talked about this uh, on air, off air, uh, in the pub, uh, about the claims that agencies are making and some marketers are making about how much cheaper AI is going to make it. And we haven't seen those claims come to fruition yet. They may still, uh, it's still nascent and uh, uh, once investments are made and agencies start to amortize those investments over a longer period of time, the price may well come down. But I think your point is a valid one and this is certainly what I'm seeing is that clients are getting more options to choose from rather than just seeing two or three different iterations of a piece of work. Using generative AI, the agency is able to pump out 20 or 30 different iterations. Now that lends its own problems because potentially you get um, uh, paralysis by analysis because there's too much choice. Once upon a time the marketer had three choices, scopes called three concepts or three ideas, whatever the case may be. Uh, so there's the potential time suck of evaluating more options as well. How's that factored into everyone's workflow and the overall timeframes that these things come out. The other thing I'm seeing is that the AI is not, uh, in the absence of it being cheaper at this point, it's certainly making the go to market faster. Um, if you are not having to make all these decisions and if it is quite clear cut, the work can be churned out and go to market much more quickly. So in the case of a media agency, for example, where you might have a lag of some 12 to 13 weeks from brief to going on air, while that still may be the case for, uh, lower supply inventory, channels, tv, that sort of thing, but certainly for digital channels where there is basically infinite inventory, you can get the brief into market in a matter of days, hours, uh, because of the way that it's able to be sped up. Ah, now that could also be from a pricing perspective. The agency could argue, I've not seen it yet, that that is much more valuable to the advertiser. So that comes with a premium. So where the advertiser say, right, we've got this opportunity, we need to be in market as soon as possible. And using the old predominantly human way of getting that brief to market, may have taken two, three, four weeks. If you can now do it in two, three, four days, what's the benefit in financial, uh, returns to the advertiser for that speed to market? So it may not be a question of AI should reduce the price. I may actually give the agencies a, uh, reason to increase the price, put a premium on it because they're able to uh, get the client work into market much faster and the uh, additional returns that that will generate.

Speaker B: It's interesting, this conversation suddenly made me realise, you know, how important trust is in all this, you know, and that at a pitch stage where a client is first engaging with an agency to be able to say to them, we're going to pay you on how uh, much upside we get from working with you, uh, requires a high level of trust from the agency to go into that arrangement as it does for the marketer. I mean, in a way they're saying, um, we're appointing you to give us an upside. Whereas a pricing model does have the advantage that you can agree a price up front and then adjust it later, you know. And so, you know, if it has the basis of at least getting that agreement, I think also it means marketers need to think about their scope of work, not just the services they want, but what they want, when they want them and what they want them to achieve a lot more. And while that may feel complex, you could actually build a framework. It's almost like a Boston Matrix or actually a three by three, not a two by two matrix, which is what's the purpose of it? How much of it do you need and when do you need it could be easily Built out, uh, in that format, couldn't it?

Speaker A: Uh, absolutely. I think the proliferation of data that we now have from all sources I think is overcomplicated measurement. Um, in the pursuit of perfection, uh, sometimes having something simpler that's agreed and understood by both parties is uh, a lot more effective than something that's highly complex. Even though that may sound counterintuitive to uh, the people that like their data, um, if that measurement framework isn't used daily, then it's pointless. Um, uh, that old adage, what gets measured, gets managed, doesn't often start from a position of what actually matters to the business. It starts from what's easiest to measure rather than defining what the success looks like. Um, and this is not just success for the long term goals of the business, it's potentially success for this particular campaign that we want to launch. So um, I think if you can make it as simple as possible while still providing the degree of clarity that's required, that's going to help both parties, certainly going to help the agency who often feel they're working in a vacuum because that's not been fully articulated by the advertiser, by the marketer as to what it is that they're actually seeking, uh, from this engagement.

Speaker B: Does that mean that when we're talking to marketers about their scope of work, that part of the conversation needs to be what does value represent to you? Is it the people you're buying from the agency? Is it the work they're delivering and the value of that work? Or is it actually the incremental improvement in the business positioning? And how can you make that work? As an attribution model where the agency is fairly remunerated for that contribution has to be an upfront conversation, doesn't it?

Speaker A: Absolutely it does. And as part of our process we certainly do that. Quite often though the marketers that we're dealing with haven't always thought about that. They don't know how to articulate it. Uh, they are potentially under uh, instructions.

Speaker B: Law.

Speaker A: We just got to. Here's your budget as you said earlier, here's your budget to spend.

Speaker B: Get as much as you can for

Speaker A: find a new agency and get as much as you can from them. And that's fine, provided uh, that that is something that the agency needs to be measured on. If the agency is, and when I say the agency is going to be judged on, it's not necessarily related to a PBR or some of the uh, outcomes based fee models that we were talking about earlier, it is even closed doors behind the scenes. When the business is looking at the performance of the agency, what are they being measured on? If the agency has been asked to do one thing, but are going to be measured on something completely different that they're probably not even aware of, then the agency is not going to be, uh, deemed as successful. And, uh, the whole edifice is going to come crashing down at some point.

Speaker B: Nick Hand, thank you for this conversation. I think it's a really interesting one about what value actually looks like. Um, and I think, uh, one that'll continue well beyond today.

Speaker A: Fantastic. Look forward to it. Thanks, Darren.

Speaker B: And for you, what does value look like? Sam.