The business model is backwards.
The agency business has evolved to a state where there is little relation between the value they add and the compensation they get. This is a historical problem. The original commission system rewarded agencies for how much their clients spent, not for the actual work the agencies did. The fee-based compensation that is most common today rewards agencies for how many people they can get to work on the account. Neither system is related to the strength or effectiveness of the ideas and programs that they develop. In fact, the most valuable thing that agencies do is often given away for free. In the typical new business pitch, agencies get their best people to work feverishly on developing their best ideas to the point where they’re ready to be executed. They do all this for free, and then hope that if selected, the client will compensate them after the fact by paying a premium price to manage the production and execution of those ideas. It’s like a restaurant giving the food away for free, and hoping to make it back on the valet parking.
This model might have made sense when marketer-agency relationships averaged 10 years or more. But now that the best relationships last only 3-5 years, it doesn’t. Marketers may think they’re getting something for free, and initially that’s true. But whenever the compensation model of the seller is out of sync with the objectives of the buyer, something is lost. Can marketers really think they are getting the best service and advice from a provider who gets penalized if they can develop and execute programs more quickly and cheaply?
Agencies have been shy to take on results-based compensation because there are so many factors beyond their control, like sales and distribution, that effect the outcome in the marketplace. But some may come to realize that facing the same market risks and rewards as their client puts them in a far better business and financial situation than constantly justifying monthly retainers with procurement.
The Ryan Report 
You guys are really nailing it with your “Agency” series of blog posts. I don’t know of a more detached and confused group of people in the media world than those within agency walls. The pace of change has never been quicker, the media landscape has never been more shaken and they’re stuck in a MadMen mentality.
I’m ready for #5 (or is it #2?)! 😉