McDonalds and Agency Fee Transparency

McDonalds recently shifted its agency to Omnicom - specifically, DDB (only creative was up for grabs here, the media buying wasn't being reviewed). After working with Publicis' Leo Burnett for the past 35 years, and after growing to roughly $1B in annual media spend, this is important for both Omnicom and Publicis in the obvious ways. The transaction was also important for the agency industry as a whole and may (or may not) serve as a model for future deals.

McDonalds would be a large, tier 1 customer for any agency. It has the heft and cachet to push the bounds on the nature of the terms it uses in agency relationships. But McDonalds also conducted its agency review not long after the ANA released its transparency report. So when it came time to look for an agency, McDonalds wanted to make sure the agency's primary interests were increasing McDonald's sales. McDonalds required that the winning agency handle its business "at cost" - meaning (generally) make no profit whatsoever on the fees charged. All profit would be tied to an explicit incentive structure based on performance.

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Agencies do not operate like this. As discussed in previous lift letter (The ANA Report on Media Transparency), media agencies make money directly and indirectly based on the media. Just like any professional service organization, a creative agency would expect to add its profit margin to the fees charged. One wouldn't expect a law firm to work at cost with outcomes tied to business success. McDonalds, however, is at an interesting point in its history. Nutritional and cultural trends may be working against it, and it may be struggling to rebrand in line with current market forces. Further, unlike a law firm - whose primary interests are protecting against downside risk - ad agencies can be much more closely aligned to overall business success.

The major questions here are whether an incentive structure like this catches on and whether it makes sense. It's to-be-determined if this structure works long term, but the operative questions are whether McDonalds and DDB can sufficiently align on the nature of the incentive structure, and whether the agency doing a good job can, alone, be dispositive of McDonalds - and thus the agency - attaining the performance tiers.

One could imagine that if a company paid their marketing department bonuses based solely on company revenue, that department's questions would be 1) whether the company has a sufficient investment in marketing programs that they will be able to meaningfully impact overall performance, 2) whether the targets for the team are reasonable and whether their good work could be undone by other departments' bad work, 3) what the company's overall plans are, and 4) what prevailing market conditions look like. McDonalds and DDB are making a meaningful investment that they can align on these answers. If not, this may have the opposite impact - DDB could be demotivated by unreasonable or otherwise unattainable performance targets such that they wouldn't do great work. If they are aligned, this could be incredibly powerful. The thresholds, however, are both very difficult and very important.

The question of whether this catches on could extend beyond creative and into media buying. In a world of rebates and undisclosed margins as discussed in the ANA report, advertisers might be forgiven for growing wary of a complex media world. Instead, a system that simply says "do what you want with my media dollars, but your profits have to come only from overall performance" could create incredible or terrible performance. Ultimately, whether other brands have the stomachs to try to resolve the alignment questions, and the hearts to better align their agencies with their outcomes may determine the compensation system over the years to come. This, in turn, may have dramatic effects on the media ecosystem as a whole.