Pringles potato chips sit on display in a supermarket in New York, US

For Grey Global Group Inc., its contract to create TV, print and Internet advertisements for Procter & Gamble Co.’s Pringles isn’t just about selling potato chips. It’s about the end of billable hours.

P&G and Coca-Cola Co. are leading the switch to pay ad companies for the value they bring to a brand, making them more accountable. Analysts say the practice will cut fees at a time when the recession erodes sales in the US$456 billion advertising industry, known for lavish parties such as the annual Cannes Lions International Advertising Festival on the French Riviera.

“This is harmful for the ad agencies and they are very much against it,” said Alexander Wisch, an analyst at Standard & Poor’s Equity Research in London.

The practice may shave half a percentage point off revenue in the short-term, Wisch said. The world’s top five advertising companies had 2008 revenue of $44 billion, according to industry publication Ad Age. That means about $220 million in lost revenue annually for those five alone.

The economic crisis emboldened advertisers to demand results before paying agencies, which can lead to lower ad sales and more competition, Wisch said.

More accountable

Cincinnati-based P&G spends about $8.6 billion annually marketing products including Pringles, Oral B toothbrushes and Swiffer sweepers, Finance Director Rich DelCore said.

P&G hires one agency as a contractor that signs up others, including public-relations firms and pollsters. P&G pays one check to the coordinator and compensation is based on performance, sales and market share.

“They are more accountable now,” DelCore said. “It’s about total consumer engagement and brand building.”

The value-based portion of compensation is about 10 percent of the total and includes evaluations of the past fiscal year. Sales and market share are measured for the brand overall, not for the specific media vehicle, P&G said.

Grey declined to comment on its work for P&G.

“Some agencies suspect it’s a tactic to cut fees,” said Tim Williams, president of Salt Lake City, Utah-based Ignition Consulting, which advises agencies on value-based payment. “The hourly system is easy. Count your hours and collect your timesheets. Value takes more time, more work.”

Getting paid

The recession is already hurting ad companies. Global ad spending may drop 8.5 percent in 2009, London-based ad buyer ZenithOptimedia said. Sales at WPP Plc, the largest owner of ad agencies, fell 6.7 percent in January through April. Publicis Groupe SA, the fourth-largest and owner of the Saatchi & Saatchi agency, reported lower first-half profit and sales.

Some of the criteria customers use to set fees are too subjective, ad agencies say.

When an advertiser sums up a campaign based on “whether a team showed interest and if I’m pleased with your performance, then you find by and large that doesn’t get paid,” said Richard Pinder, chief operating officer of Publicis Worldwide, which does value-based work for P&G’s Oral B account.

Sales, market share and consumer perceptions are legitimate ways to determine compensation, he said.

Fair compensation

“The amount of labor or time should not define the value of the work,” said Sarah Armstrong, director of worldwide media and communications operations at Coca-

Cola, which said in April it would shift to value-based compensation. “We didn’t go into this to cut our agency fees. We wanted to ensure we were compensating fairly for work.”

Coca-Cola put a value-based model in 35 markets including North America and Germany, and aims to use it everywhere by 2011. Coca-Cola covers an agency’s initial fee, based on what it sees as the value of the contract, and up to a 30 percent performance-based profit.

“I know our agencies would prefer to stay with the labor-based model, but having said that, we are putting in a new model that requires change and getting used to a new way to work with Coke,” Armstrong said.

The arrival of Internet ads sparked companies’ awareness of what they could expect for their ad dollars and let them pay for performance. Online ads register how many clicks they receive and give more information about a user from an Internet address.

Burger games

Andy Fletcher, head of Atlanta ad agency Fletcher Martin, says he threw out timesheets several years ago to show his devotion to creating value.

“I believe that if we had astronomical success we should get more, and if we fail, we don’t,” Fletcher said.

Some agencies also are doing work they didn’t previously. In its campaign for Burger King Holdings Inc., Miami-based Crispin Porter & Bogusky developed three Xbox games including “PocketBike Racer” that were sold with value meals for an additional $3.99. For Domino’s Pizza Inc., Crispin created a “Pizza Tracker” so customers can follow their pepperoni pie orders online from baking to delivery.

“There isn’t a correlation between hourly billing and better results,” Crispin Chief Executive Officer Jeff Hicks said. “Our incentive was to work more hours and work slower. The client’s incentive was to sell more stuff.”

Source: Bloomberg