By Adam Fraser
As you will know from my Twitter bio, I am a former “numbers man” turned social media obsessive.
As a former CFO I had a lot of experience with investment banking – IPOs, mergers and acquisitions, fund raising, etc. Typically investment bankers are largely remunerated on a success fee basis – get the deal done, or your retainer fee will barely cover costs. A strong incentive to perform.
Advertising agencies have traditionally operated on a much different model, typically featuring share of media buying (with all the potential conflicts and commercial ambiguity that comes with) and consulting services (in essence at labour cost plus a margin).
In the USA there has recently been a shift toward more performance linked remuneration for agencies, but a recent announcement from McDonald’s took this to a whole new level.
That Mcdonald’s ousted its agency partner of 35 years (Leo Burnett) was in itself massive news. As one of the world’s leading brands, with a forecast 2017 advertising spend of US$1bn, this is clearly major news for the agency sector. Crushing blow for the loser, game changer for the winner (Omnicom Group).
However this in itself was not the most eye catching aspect. The remuneration model McDonald’s has negotiated with the Omnicom group is revolutionary. Whilst the precise details have not been revealed it is widely reported to be at zero margin on costs (labour and media buy), with all upside coming from performance based pay (an approach which led to WPP pulling out of the tender process).
Drive brand equity, customer numbers and burger sales and this could be extremely lucrative for Omnicom. Don’t deliver on the business objectives and that’s a whole lot of effort and quality labour devoted for zero margin.
This seems to be a great outcome, from a risk sharing or risk mitigation perspective, for Maccas. If performance isn’t there, they will save significant amount on agency fees. If the agency delivers, they share some of the upside. For Omnicom, this is an exciting but very risky proposition. Whilst brand affinity and advertising are big drivers of McDonald’s performance, there are a whole range of factors which can drive business performance, many of which would seem to be out of the control of Omnicom (think product quality, customer service and pricing to name just a few). Attribution will be extremely difficult in both directions – what caused McDonald’s performance both good and bad? To what extent did Omnicom’s creative and media services actually contribute?
I support the overall principle of aligning interests and encouraging a true partnership approach between brand and agency. The intent is good, but in terms of allocation of risk, the Golden Arches seem to have secured the most favourable outcome here. It will be fascinating to observe how this pans out and to see if advertising remuneration moves further towards the corporate finance fee model over time.