What clients really seek during performance contract talks
I can't begin to tell you how many prospective clients have asked me if I was willing to guarantee the return on investment on my proposed direct marketing projects. My answer has always been an eager “Absolutely.”
The performance contracts I am referring to are those that share the winnings with the client for a considerably lower fee. As the consultant, I am essentially trading a significant portion of my time for a share of the profits.
That lowers the client's risk a little. But what the client really gets is a demonstration of the confidence I have in my recommendations. And as you know, direct marketing clients usually track results for their campaigns closely. So the profits resulting from my recommendations are relatively easy to quantify.
But after many hours of extra effort to calculate a fair and equitable contract, the client has almost always told me, “Thanks. But I want to go back to the fee-for-services model.” What's worse, I usually get the project without further clarification about why the performance contract was not approved.
So now, I qualify such requests carefully before spinning my wheels going through the exhaustive process of developing a performance contract.
Why do you qualify them, you might ask?
Companies do not award performance contracts for a variety of reasons, some of them good. Reasons such as reduced campaign costs, the professional's willingness to share in the risk and the partnership relationship all assure the extra dedication to win big. However, there are drawbacks — including the assumption of success, so that the client pays more in the long run; the client must share decision-making authority with the consultant. Also, performance contracts often requires higher-level authorization, making it difficult to get approval, and the client may fear they may be giving away too much money, now that the consultant has proven his or her willingness to accept a performance contract.
In the final analysis, most clients only want to see how strongly the consultant believes in his capabilities to generate profits. Going through the exercise, therefore, is proof to some clients that the consultant knows what he is doing.
Before agreeing to go through this exercise, I first ask for clear commitments from the client.
Here they are.
• I've given you the pro forma. I know this program will make money based on your past response rates. Will you give me a performance contract — if I reduce the fee substantially to expand the program to meet your sales goals — in exchange for a scaled, revenue stream tied to the program's profits?
• Do you agree that I must gain more than just making up the fee reduction? If you want me to take this risk, then I want to make several times my lowered costs to you. In fact, the more I make, the more you make.
• If you want me to share in the risk, I am more than willing. But you must give me final sign-off authority with you on the elements that we both agree affect response rates and the ROI. At a minimum, this means sign-off on list selections, run dates, creative work and fulfillment processes, and anything else that is covered by the assignment specifications. Do you agree to this?
• Do you agree that, if the program makes economic sense, you can — and will — approve such a plan?
If the client still wants to play after all of this, then I might decide to revise my proposal to him and create a performance contract for our final negotiations.
So clients really don't want performance contracts. They want assurances that a service provider truly believes in their abilities to help them achieve their ROI goals.