Process vs. Incentives

Senior fellow Tim Williams is a thought-leader in the advertising world on strategy, branding, and compensation. He is the author of Take a Stand for Your Brand, a book I highly recommend (well, except for the Appendix, which Tim has repented adequately for).His consulting firm, Ignition Consulting Group, publishes Creating Value, a quarterly newsletter, full of incredibly valuable insights based upon Tim's extensive intellectual capital in dealing with agencies of all sizes.Even though it's written primarily for advertising agencies, most of the content is just as applicable to accounting, law and IT firms.It never ceases to amaze me how similar many issues are across the various professional knowledge sectors, especially when it comes to customer selection, pricing, and dealing with procurement.He recently asked me to look at his 4th Quarter 2008, Issue 8. Here are a few nuggets that I found compelling.The first article deals with treating your compensation agreements as a stock portfolio.Just as no investor would put all of their money in gold, a PKF should diversify its compensation agreements from relatively safe to high risk/high reward deals. This is impossible if you bill by the hour.The next article deals with how to deal with procurement, a topic that confounds ad agencies, but is increasingly being felt in law firms as well. If customers employ professional buyers—procurement—shouldn't sellers have professional pricers?The central insight here is that procurement deals with process and compliance, something lawyers and CPAs are well versed in.But economists don't give much thought to compliance and process, however. Economists deal with incentives. If you structure the incentives correctly, the process and compliance take care of themselves.Consider this example. When Great Britain sent prisoner ships to Australia, they initially paid the shipping companies based on how many prisoners boarded for the journey. The problem was many of the prisoners died making the trip.They could have proposed a process and documented compliance—such as with the ludicrously expensive Sarbanes-Oxley law—insuring that adequate food, medical supplies, etc., were on board.A competent economist would laugh at this, as much as they laugh at SOX. Rather, an economist would suggest they pay the shipping company for how many prisoners they deliver to Australia alive.Once the incentives are aligned, who cares about process and compliance? This is a much more efficient and effective compensation agreement that ensures the objectives—another word for value?—are delivered.Ad agencies are beginning to understand the necessity of aligning incentives with their customers. One such agency is the Brownstein Group in Philadelphia.In its December 2008 newsletter, The Monthly Magnet, they wrote about this very topic.This is the only way a PKF can change the conversation with procurement from inputs, efforts, costs, activities, processes and compliance to one of value, output and results.Once again, if we don't discuss value—another word for incentives?—we'll end up talking about costs and hours.Aligning incentives changes everything. It all starts with changing the conversation.To download a complimentary past issue of Ignition Consulting Group's Creating Value, which is all about setting a value-based price, visit here.