How many KPIs are optimal to drive agency performance?

Darren Woolley

Darren Woolley is Founder and MD of TrinityP3, an independent strategic marketing management consultancy that assists marketers, advertisers and procurement with agency search and selection, agency engagement and alignment and agency monitoring and benchmarking. With his background as an analytical scientist and creative problem solver, Darren brings unique insights and learnings to the marketing process. He is considered a global thought leader on agency remuneration, search and selection and relationship optimisation.

Remuneration based on the performance and/or results of an agency seems to be the most common concept of payment. A survey on Agency Compensation Trends, done by the Association of National Advertiser’s (ANA), has found that the percentage of marketers arranging payments by performance and results is as high as 68 per cent. This is fine if done well, but more often than not, it is poorly executed.

I have previously written about why the practise of basing remuneration on results often fails, and some of the points were:

1. The stick is bigger than the carrot
2. The objective is virtually unobtainable
3. The calculation is way too complex (or too expensive)
4. The metrics are irrelevant to the business
5. Linking contribution and value creation to payment

I have realised another reason for this failing, similar to point three, is that the number of metrics being measured has become far too great.

The metrics usually measured

These generally can be divided into three categories:

Business Performance (Hard)
This includes traffic, profit, market share, volume growth, sales and the like. It is possible to measure these by using the same system and/or criteria the advertisers use in their own systems. Because there are many more factors affecting business outcomes than just advertising, agencies often feel business results are not within their control.

Advertising Performance (Medium)
This includes product awareness, ad awareness measures, consumer measures, attitude ratings, persuasion purchase intent, awards, brand equity, image, effectiveness awards, and so on. Assessing performance in this way means the results are subject to the different research techniques used, statistical anomalies, and certain ideas on creative ‘philosophy’.

Agency Performance (Soft)
This is about evaluating agency functions such as account services, creative and media areas including performance, service, relationships and cost efficiencies. Evaluating performance can be an incredibly subjective process. Factors such as ‘entertainment’ can be of benefit, while those such as personality clashes can be detrimental.

The right metrics

The right metrics are more important than the number. So let’s deal with this first. What constitutes ‘right’ in terms of metrics?

1. Developing a list of metrics available to you We had a client who proposed investing almost quarter of a million dollars a year to buy data on a quarterly basis to measure and pay a performance bonus of less than $200,000. Poor investment.

2. The metrics should be ranked in order of importance to the various stakeholders involved

   You will no doubt be aware that the stakeholders within an organisation often do not have the same objectives (this accounts for the high levels of misalignment and lack of collaboration). Each stakeholder group is incredibly important, and so it becomes important to align the metrics to them. Marketers have marketing metrics, whereas the CFO’s and CEO’s metrics will be based on finance. It is crucial to be able to understand this.

3. We must evaluate each agencies individual influence upon the metric

   Marketing is all about influence; we can’t control everything and must keep this in mind when thinking about agencies. The influence an agency can have on a metric, and the magnitude of this influence is important to understand. For example, we had a client in retail who wanted to use sales as the measure for assessing an agency. We had to show them the agency specialised in foot traffic, which would have a direct influence on sales.

4. Plot the importance against the level of influence of the agency

   It is a good idea to plot a model of the stakeholder importance against the agency influence. On the vertical you will rank the metrics that the stakeholder holds in order of importance, such as relationship performance and profitability. The horizontal axis will hold the metrics that the agency influences in order of those they influence directly (relationships with clients for example) down to those metrics they don’t influence (the company profitability).

5. Metrics appropriate for each situation

   Now it becomes an act of balancing which metrics to choose, finding a balance somewhere between the two. You wouldn’t want to choose metrics that have no significance to the key stakeholders any more than you would want to choose metrics the agency cannot impact. What you are looking for is correlations between the two, i.e. influence upon store foot traffic correlates with the importance of sales and brand health.

The right number of metrics

Often reasoning goes out the window when choosing metrics and we try to cover as many as possible. This is a mistake and can be incredibly counterproductive, especially in these ways:

1. The agencies focus becomes split between too many metrics, and ends up not influencing any.
2. The agency gambles and only focuses on the metrics they know they can influence hoping for the best.
3. Using bonuses becomes pointless, as with so many metrics to cover, the bonus paid for each one diminishes considerably.
4. With so many metrics to measure, it becomes a much more complex and costly process. This also counts for loss of both focus and effort.

In my past experience I believe having only one metric, the most important, is the most effective. If you really want more, or want to have a diverse range, the ideal number would be three metrics. But this depends on the size of the performance bonus.

Reasons this process can fail

There are two main reasons this process fails. The first is due to the marketer or procurement making the performance models horribly complex by trying to make them a surgical tool in supplier management. Largely they fail because they do not acknowledge the bluntness of the tool.

The second is the agency trying to mitigate risk by adding as many metrics as possible. Adding more subjective metrics into the mix can ensure that unlike empirical metrics which will range from zero to the highest level, subjective metrics are inclined to inhabit a narrow range, usually above the midpoint range.

But entering into a performance bonus to mitigate risk, mitigates the reason for the performance measure in the first place. It is like an athlete wanting to add other metrics such as beauty, intelligence and like-ability to determining the results of Olympic 100 metre athletics competition.

Critical to success is a significant carrot, a clear and focused metric or metrics the agency can influence, and is significant to the key stakeholders within the organisation.

How are your performance metrics looking? Are they relevant? Are they complex? Are they focused?

Tags: agency management