By Anthony Groves, Chief Commercial Officer, dentsu

As marketers, we often talk about how the digital revolution created a climate in which consumers are empowered to choose between endless options and expect to be met with remarkable customer experiences, creating a culture of convenience. However, the same can be said for organizational expectations of service: in today’s hyper-connected world, baseline support has become a commodity and the supply-driven economy that characterized the industrial age has been replaced by a value-driven one that increasingly emphasizes the extreme differential between poor and high quality work.

In concert with greater maturity in data measurement, this cultural shift is driving the rising popularity of outcome-based commercial models where the compensation for service providers is tied to the business impact delivered in a defined area of focus for the client. Outcome-based compensation in right hands can lead to industry defining work, not only in terms of the impact on the clients’ growth but also for the innovation and societal value of what is delivered; however, these models need the right conditions put in place to be fully successful.

In governance and communications, both parties are accountable

We live in an age of accountability for stakeholders and outcome-based models ensure we are holding our teams accountable to delivering against the agendas of our various stakeholders. However, accountability can only come to fruition if, through systems, processes and collaboration, the client and the service provider align to gather and validate the data necessary to measure progress against the objectives outlined in the covenant between service provider and client.

Executive sponsorship on both sides is critical. When a component of an agency’s fees is at risk against performance and the agency can see a way to drive an uplift that certain client stakeholders are resistant to, they may play more of an agitator role that previously seen – for example challenging other providers that are focused on a limited scope deliverable or a single technology platform – sponsorship here is critical to support this behavior or intervene as required. In addition to this, industry forces are always evolving and evolving fast. Executive alignment is needed to ensure the covenant can sustain the pressures these forces will inevitably apply and to foster a culture of flexibility where the model can be evolved over time based on the new market drivers that are emerging.

There are few greater hall marks of trust in a relationship than when the parties agree to compensation around outcomes, but trust needs to be cemented by both parties doing all the required due diligence on the KPIs, a comprehensive budget analysis that forecasts for all the possible scenarios, an always-on tracking of resourcing and performance and very detailed contracting to ensure all variables are documented. Most importantly, this type of covenant requires ongoing, crisp communication, because even though it may be in support of a specific client stakeholders, the parties adjacently involved in an outcome-based relationship go beyond that and need to understand the value and implications of the model.

Growth and innovation start with discreet, KPI accountability

It’s actually rare to see outcomes-based compensation purely driven by a KPI as simple as sales – at dentsu we treat this as a lagging indicator of performance where clearly there are multiple variables such as pricing, competition or even the weather, that lie outside of the service provider’s control. Our recommendation is to focus on leading indicators that can be tied to marketing, operations and procurement outcomes that are ultimately dependent on the provider’s performance alone and will eventually fuel business growth in concert. As you develop the KPIs for your outcome-based model, keep it simple and follow the standard rules of S.M.A.R.T. KPI setting, identifying objectives that are Specific, Measurable, Actionable, Realistic and Timebound.

The outcomes that an agency-client covenant is based upon are not necessarily immediately growth-based, in the sense that can they support the business even if they are not immediately tied to awareness and revenue. In a recent ANA Masters of Marketing conference presentation Manoj Raghunandanan, Global President, Self Care (OTC), Johnson & Johnson discussed how the brand got all of their agency partner to agree on including a measurable focus on DE&I as part of their performance contracts. At dentsu, we work with a retail client with a strong focus on purpose that works with a number of preferred charities. The model we have built in our covenant with them sees 25% of the outcome-based compensation we generate being pledged by dentsu to those charities. In the case of this particular client, all our profit is tied to an outcome-based model and we can hit our group margin goals as long as we hit 75% of the leading indicators-driven KPIs.

In a value-driven economy, trust and transparency are more critical than ever before: it’s not simply about everybody winning, but also about making everybody feel that they are winning to create the shared purpose that innovation, creativity and marketing excellence are dependent upon.

Anthony Groves is a panelist at Forrester’s Technology & Innovation NA Event, Wednesday, November 3 @ 2PM EST: The Truth About Outcome-Based Commercial Models.