Advertising agencies are being pushed to adopt value billing instead of hourly billing, according to The Economist, May 16, 2009 at 72. Coca-Cola has started a “value-based” compensation system for its advertisers. Under the new system, Coke guarantees to cover advertising agencies’ costs, plus a bonus of up to 30 percent that depends on a number of metrics. Procter & Gamble has also ditched hourly fees in favor of performance-related fees for 12 of its brands.
The article explains that “Billable hours have been the standard way of doing things since the 1970s.” The shift may take a while. “Some agency executives are skeptical about being paid for value, because it is so subjective. They interpret talk about value as code for cost-cutting.” The article also states that some creative firms “are trying to develop new ways to capture the value their work can create.” Where have we heard similar comments?
The swirl of controversy is the same as in the legal industry. In fact, the article points this out as it notes that “some accounting, consulting and law firms are also scrapping the billable hour, often at the request of their clients.” My view, unpopular in some quarters, is that the legal shift will take many years and even then value-billing will account for only a modest portion of amounts billed.