Clients Don’t Really Want Performance Contracts

I can’t begin to tell you how many prospective clients asked me if I was willing to guarantee the ROI 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 Ted. 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?

Here is what I have found keeps companies for awarding performance contracts.

The pluses:

•    Reduced campaign costs
•    Professional’s willingness to share in the risk
•    Partnership relationship assures the extra dedication to win big

The minuses:

•    Assuming success, the client ends up paying more in the long run
•    In a partnership, the client must share decision making authority with the consultant
•    Performance contracts usually require higher level authorization making it difficult to get approval
•    The client fears they may be giving away too much money now that the consultant has proven his 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 ask for commitments from the client up front first. Here they are.

1.    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?
2.    Do you agree that I must do more than just make 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.
3.    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 are covered by the assignment specifications. Do you agree to this?
4.    Do you agree that if the program makes economic sense that 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 I truly believe in my ability to help them achieve their ROI goals.

Posted on August 28, 2007 and filed under General.