How do you put a price on magic?

Procurement has become a dominating force in marketing services and many question whether it is healthy for decisions on creative work to be too heavily influenced by price. The IPA booklet published several years ago, Magic and Logic, which describes best practice in many areas of agency-client relationships, bears a closer look.

Once upon a time, ad agencies were paid on commission. Whatever the advertiser spent, the agency would receive 15% of the client’s budget. But times change and today the notion of paying your ad agency in this way has almost disappeared – and indeed seems rather bizarre.

Two key factors led to this change in agency compensation. The first was the rising cost of media buying, leading to the hiving of media planning and buying as specialist companies; and pressure on marketers to reduce costs on all fronts.This second factor was the catalyst for the rise of procurement as a discipline. Given that many purchased goods and services are commodities, the practices developed by procurement departments were ill-suited to buying advertising services.

To improve the way in which agencies and clients agreed agency remuneration, a thought piece was commissioned by the representative bodies for agencies (IPA), advertisers (ISBA) and procurement (CIPS).

As a start point, Marilyn Baxter, former planning director at Saatchi & Saatchi, interviewed a number of leading advertisers and ad agencies to try to find a better way to manage the remuneration of agencies. During her interviews, Charles Kirschner of the Marketing Supply Chain introduced the expression “Magic and logic” in an attempt to frame the approach needed to best understand the creative and business services provided to clients by their agencies.

This became the name of our think piece, which was subsequently published. It set out what agencies should do to be paid properly for their services, what marketing people could do to get the best out of their agencies, and what procurement could contribute in terms of both efficiency and understanding value. Its theme was how to better produce ideas that make profits. Far from being an academic thesis, it was a practical summation of best practice, the principles of which remain valid.

It was followed up by the publication of Magic and Logic Successes, demonstrating how applying these principles had resulted in specific business benefits for both agency and client. That was some years ago, but the joint industry best practice guides that it spawned have since been periodically refreshed and remain in circulation, responding to the ongoing market need. It still works:

Of the 10 or so best practice guides, some have proved more valuable than others. For example, Finding an Agency set out the industry’s six pitch principles, which could equally be applied to other industry sectors. It led to www.thegoodpitch.com and is being further reviewed in the context of procurement-led pitches and the controversial use of e-auctions.

Briefing an Agency was another one of these best practice guides that was updated to reflect current developments.

This year sees a review of how effectiveness is measured, which will build on the Judging Creative Work best practice guide. The Agency Remuneration best practice guide was able to draw on ISBA’s periodic survey of all the remuneration models used by clients, as well as setting out the pros and cons of each. Since the Magic and Logic work was first launched, the retention and-PBR payment model has become the most adopted approach and commission.

Recent developments in project fees on the one hand, and value-based remuneration models on the other, reflect the growing recognition that you tend to get what you pay for.

The focus of the original Magic and Logic paper was to provide good advice, primarily for agencies not only to be more businesslike in their dealing with clients, but also to demonstrate it in the quality of negotiation, value of the outcome (rather than merely the cost of the output) and understanding of the client’s profitability.

The intent of Magic and Logic was to produce better client-agency relationships, leading to better work and more profitable business results on both sides.

The tripartite bodies responsible for Magic and Logic met again in 2012 to review progress, and the extent to which agencies had demonstrated a much more businesslike approach over recent years was confirmed by all parties. Coincidentally, there has also been research published by the IPA proving the strong correlation between better creative work and higher profitability.

The major trend over that same period has been the growth of procurement within the tripartite relationship and the recognition that ‘marketing procurement’ had emerged as distinct from the more traditional cost-control procurement in appreciating how creative work must be judged on wider criteria. It has been a challenge, since this period has been one of prolonged recession with constant pressure to do more for less, but experience has proved that the principles of best practice set out in Magic and Logic made commercial sense.

The tripartite body that met to review Magic and Logic agreed that today’s generation of players in the marketing arena need to be reminded of that.

Paul Bainsfair is director general of the IPA [email protected]. This article was taken from the June issue of Market Leader. Read more from the archive here.