by Tom Kaneshige

Why CMOs Shouldn’t Rely on ROI for Everything

Mar 10, 20153 mins

CMOs are increasingly being asked to ensure every dollar spent offers a clear-cut return on investment, Here’s why that approach is wrong when it comes to marketing agencies.

As the new enterprise tech buyers, CMOs are falling into a potential purchasing trap that every dollar spent needs a clear-cut return on investment (ROI). The faster the return, the better.

Some CMOs are taking this tech-buying philosophy to other parts of their marketing spend, namely, marketing agencies — but they shouldn’t.

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“A great relationship between a CMO and her agency accelerates innovation, generates breakthrough creative ideas, and produces successful cross-channel marketing,” writes Forrester analyst Sarah Sikowitz, in a report entitled It’s Time to Abandon Performance-Based Agency Compensation. “But these relationships are showing cracks as CMOs, who are themselves under pressure to prove their financial contribution to business, struggle to articulate the value that their agencies provide.”

CMOs spend resources not only on marketing tech but creative, media and digital services from marketing agencies — usually more than one and possibly up to 10. An agency’s value was often measured in broad performance metrics, such as brand awareness, message recall and brand lift. Agency turnover has been traditionally chaotic, around three years per agency.

Why ROI Doesn’t Work for Marketing Tech

With the arrival of marketing tech, however, the CEO and CFO evaluate marketing agency spending the same way they evaluate tech spending. That is, they want to know how much incremental revenue the investment has returned, says the Forrester report.

[ Related: Digital Marketers Must Own the Customer Lifecycle ]

But a big problem with ROI in marketing is attribution. Imagine an ecosystem of marketing technology and marketing agencies all working in concert across multiple channels, both physical and digital, to produce a happy customer. Which investments played a pivotal role? Which did not?

Marketing agencies say they’re feeling the sting of this ROI-driven, tech-spending mindset. Some CMOs, for instance, are introducing performance-based compensation contracts and service-level scorecards with dozens of key performance indicators. Others are bringing in procurement experts to get the best prices, which is problematic when you’re buying something whose value isn’t always quantifiable.

Forget Performance-Based Pay

Forrester’s advice is in the title of its report: abandon performance-based agency compensation. Such short-term financial incentives won’t motivate marketing agencies to do bold, creative, innovative work. Instead, Forrester recommends CMOs build a long-term partnership with marketing agencies.

What exactly does this look like? It means letting marketing agencies take creative risks and share in solving big problems, not relegating them to mundane assignments with detailed deliverables, Forrester says. CMOs should consider bringing marketing agencies to strategy meetings, perhaps even letting agency employees attend training programs and work inside the company for a few months. CMOs should create a feedback loop with marketing agencies, too.

“Rather than invest time and effort in complicated performance compensation contracts, CMOs should invest that time and effort in building a trusted partnership that lays a foundation for great agency work,” Sikowitz says.