We exist in an era of disruption. Just think about the sheer number of major industries that have been shaken up by new business models in recent years: transportation (Uber), hospitality (Airbnb), entertainment (Netflix, Hulu), banking (Simple). The list goes on.
Aside from being disruptive to the incumbents in the industry, these innovations have have delighted customers by bringing much needed change to dated, unfriendly business models.
One business model that is in dire need of disruption is that of the PR agency.
Don’t get me wrong, I love PR agencies. I’m a former PR agency owner myself and I have immense respect for the value PR agencies bring to their clients. In fact, based on the data, I believe that PR agencies bring more value than most of them, or their clients, realize.
Which is exactly why agencies are ripe for disruption, starting with their traditional revenue model -- the hourly billable model.
If you aren’t familiar, most PR agencies still bill for PR services by the hour. According to The Holmes Report, corporate respondents gave the current billing model a score of 59 out of 100, when asked how satisfied they were with the way agencies are compensated. With the billable hour, the value equates to the time spent and who was spending that time (read: the more senior the PR pro, the higher the rate). And it usually doesn’t matter if that hour was spent writing a speaker abstract, pitching The New York Times, thinking, or preparing a report.
This model presents an inherent conflict between what’s best for the agency and what’s best for the brand. Here’s why:
Hourly billing devalues reults.
Think about what you want from you PR team. You want strategy and ideas. You want commitment and focus. You want media coverage that drives traffic, leads, sales, and positive brand reputation. You want results. Otherwise, what’s the point?
Hourly billing invites the opposite situation: It places the value on the time invested in a project, not the results generated. It rewards teams for working - but not necessarily working as strategically or efficiently as they could be. A survey of top business communicators showed that only 17% believe that more than 50% of their internal communication initiatives were measured by business outcome metrics; and nearly half of the survey respondents indicated that their companies used no formal assessment of communication efforts related to business performance. This means that results are simply going unnoticed.
Let me be clear, results don’t have to mean a media hit or a keynote secured. A result can be a brilliant creative strategy. It can be counsel that helps the client work through a challenge. The value is on the outcomes provided, not the hours worked.
Think about it, when was the last time you heard a client say, “I’m so grateful for the 10 hours you put into this project!”
More and more brands and agencies are moving toward flat retainer or value-based project fees. Just as companies evaluate sales and other marketing teams based on business results, clients and agencies need to create a system that is based on the value of the work and against performance.
Conversely, clients are starting to demand data that shows the business impact of PR decisions, and they are expecting their PR agencies to have the ability to do this. CMOs report they spend 8% of their marketing budgets on analytics, and expect to increase this in the next three years. The more data an agency can provide, the more value they can prove.
TO BE CLEAR: I’m NOT arguring that agencies should be paid for the outcomes themselves, nor should agencies guarantee anything (because they can’t). The basis is that every PR initiative should have an outcome attached and that outcome should be the focus of the PR initiative, not the hours spent. Clients of agencies need to understand that outcomes can be subjective, and be fair with agencies.
For instance, for a PR campaign with a big media push, it’s reasonable to set a goal pertaining to the media coverage, but compensation shouldn’t be tied to the coverage itself, as there are so many variables at play. Instead, the outcomes for the scope of work could be things like reaching out to a targeted, well-researched media list; aim to get at least X% of those media to write or take an interview or learn why the story wasn’t of interest (just as valuable); develop X# of opportunities for long-term relationship building (so important for successful media relations), and then goals associated with the reach of the earned media.
No doubt some big agencies like hourly billing because they think it’s easier for tracking team productivity and predicting expenses. Let’s say you have an employee who spends 80% of a client’s budget on media relations, which comprises 40% of her time. She gets amazing results. This is very insightful and helps you budget her time as well as the client retainer allocation.
What if that employee (or another one) could get the same results spending half the time and half the clients’ budget? If you’re only focused on time spent and peaceful with the results as they are, you’re missing a huge opportunity to get more, do more, and do better.
We’ve talked before about why brands are jumping off the big agency ship and sailing with smaller firms. This is one reason why. Smaller, forward-thinking firms are adopting value-based pricing structures.
Value-based billing is good for agencies in terms of growth and profitability. By showing clients they are focused on performance and outcomes over hours, they are giving themselves a competitive edge over agencies that maintain an antiquated model. They may in fact find themselves with more chash flow (this is what happened with my agency). If a PR agency can achieve in 20 hours what they estimated would take 40, they get to enjoy the benefits.
In an era of disruption, the question is not if the change will come, but rather when the change will come. You can drag your heels or you can jump in and lead the charge. If you’re still paying – or billing – by the hour, consider revamping your model and line up with modern PR practices.