Ian Wilding, founder of Radical Company, looks at what businesses should consider when taking out a zero margin contract, following McDonalds recent deal with Omnicom.
In recent weeks, attention has been drawn to performance based contracts, mostly due to McDonald’s new deal with Omnicom to create the ‘agency of the future’. McDonalds has tasked Omnicom with building a dedicated customised agency which uses business intelligence to drive brand equity and traffic. The fast food chain has committed to paying the agency’s variable cost but nothing more, so profit will come from performance-based pay.
This zero-margin contract forces both agencies and businesses to answer the questions; what does success look like and how will it be measured? It has the potential to flip traditional agencies, putting huge amounts of pressure on those pitching to prospective clients who prefer this type of contract. Firms with a reputation for overachieving on KPIs will relish the opportunity, while those with a less successful track record may well run for the hills.
However intimidating a performance based pay structure might sound, it has the potential to change the client / agency relationship for the better. Adopting a zero margin contract forces agencies to reassess what is really needed to complete the job effectively and most importantly deliver value to their clients.
With the McDonalds and Omnicom deal leading the trend, this is an exciting time for those considering a zero margin approach. For businesses new to the idea, there are some key considerations:
Establish a robust value tracking model
A business should be proactively tracking the value created directly from every initiative. It is essential to establish a definition and measure of success. The work and its outcomes can then be assessed and value attributed to the activity. Whether a business chooses to go with a zero margin model or a traditional model, this ability to track success is imperative.
Encourage transparency
A zero margin contract can test an agency even at the initial pitch, making them question how confident they are in their proposal and whether it can deliver the value sought by the client. It is therefore wise to encourage agencies to be realistic and honest with what can be achieved, how it will be done and the anticipated cost. Transparent communication from the outset can prevent issues from arising at a later date.
Create a collaborative culture
An us / them mentality can often occur for both clients and agencies, with critique flying in both directions. It is important to recognise this from the start and ensure an environment and culture focused on collaboration, honesty, and empathy is in place. This could even be included as an agency requirement to ensure everyone is taking necessary steps to make it work.
Zero margin contracts have the ability to reshape the way in which agencies operate and how clients choose their metrics. Despite the unclear rewards, the payment by result strategy is one that appeals to agencies confident in what they can deliver for their clients.
By Ian Wilding
Founder
Radical Company