Marketing management consultants

The Ten Important Consideration�For Procurement�

When Engaging Marketing

TrinityP3 September, 2010

Copyright TrinityP3 2010

Marketing management consultants

For Procurement When Engaging Marketing

1. Think of Marketing as an investment, not a cost

Marketing management consultants

Think of Marketing as an investment

Everyone has heard the quote “Half my advertising budget is wasted, I just don’t know which half”, variously attributed to Lord Leverhulme or John Wannamaker. The trouble is there’s some truth to this, but it is not the whole story as it infers that half the Marketing budget is waste and therefore should be minimised or cut. The fact is that if Marketing is simply a cost of business and not an investment, why do so many companies continue to spend increasing amounts of money on Marketing and especially Marketing communications such as advertising? Therefore the first approach for Procurement to take with Marketing should be to communicate your understanding of the role of advertising and Marketing and discuss the measures the Marketers use to measure “success”. While Marketers will use a range of performance measures, but they usually fall into one of three categories: 1.  Marketing / Brand Metrics - often around brand awareness or brand health, with on-going tracking studies to

monitor changes in the metrics against their activities. 2.  Market Metrics – Share of market, share of wallet or similar to have a measure of penetration into the category /

segment. 3.  Financial Metrics - Some marketers will link these metrics to business financial metrics such as sales, market

share, margin and profitability. Understanding how Marketing measures success will assure them that when Procurement looks at opportunities for “cost reduction” you will do so while maintaining Marketing “success”. Of course, in some cases you will find that there are no success metrics, in which case the first job will be to assist formulating these.

Marketing management consultants

For Procurement When Engaging Marketing

2. Think spend maximization, not cost reduction

Marketing management consultants

Spend maximization, not cost reduction

The language of Procurement is about cost reduction.

But we have yet to meet a Marketer who has more than enough budget for what they need to achieve. Every Marketer is looking for ways to get more for less: more media, more creative ideas, more advertising, more resources, more time, more results.

You would think the two are harmonious.

But when Procurement talks about “cost reduction”, what Marketing hears is “budget reduction”. And the last thing Marketing wants is for Procurement to reduce their budget.

TrinityP3 was contacted by the Indirect Lead in Procurement from a major advertiser wondering what had gone wrong. In reviewing the print sourcing for the organisation they had included Marketing related print in the project and delivered a sizable reduction in the overall print management cost of almost 30%. Unfortunately this translated at the CFO level to a reduction in the Marketing print budget of 30% or around $3 million for the coming year.

The Marketing team would have preferred to have the additional $3 million to undertake more Marketing, but instead the budget was lost and Marketing no longer engaged openly with the Procurement team.

When engaging with Marketing it is important to identify what the areas are for opportunity from their perspective. This could include:

1.  Consolidating supplier rosters to deliver economies of scale and remove duplications in cost to free up budget for further investment.

2.  Implement and manage performance reviews to maximise supplier output and performance without impacting Marketing resources.

3.  Streamlining internal processes such as reporting, cost management and contract management to free up Marketing resources.

Demonstrating ways to maximize the Marketing budget, rather than reducing it, is key.

Marketing management consultants

For Procurement When Engaging Marketing

3. Value is more important than price

Marketing management consultants

Value is more important than price

A major Marketer contacted TrintiyP3 to complain that their media agency was underperforming in developing strategy and providing account management, and the Marketer wanted to terminate the relationship and select a new agency. TrinityP3 talked through the pros and cons and asked if we could look at the current arrangements to see if the situation could be improved without going to tender, which was potentially costly and disruptive.

When TrinityP3 reviewed the agency remuneration against the size and complexity of the spend we noticed that they were paying their media agency about 30% less than the industry benchmark. TrinityP3 discussed this with the Marketer and discovered that 18 months earlier their Procurement function had done the same and negotiated a cut in the agency retainer of about 30%. In the intervening time this had been exacerbated as the Marketing team had moved an increasing amount of spend online which required high levels of agency resources to optimise the media plan and buy.

TrinityP3 asked if the Procurement team had undertaken a media buying benchmarking at the time, which they had not, and so we proceeded to undertake a current media buying benchmarking with the agency. The results of the benchmarking showed that the media agency were now achieving a 20% drop in media value.

Lets look at the effect this had on value:

The Marketer was spending $20 million on media and paying the media agency about 5% in fees or $1 million.

The Procurement team cut the agency remuneration by 30% to $700,000, a saving of $300,000.

TrintiyP3 estimated at the time the media agency should have delivered $32 million in media value on a $20 million spend with negotiated discounts and added value.

Today, the media buying benchmarking showed that they were delivering only $29.6 million in media value for the same spend. Assuming like for like comparison the saving of $300,000 up front had under resourced the media agency and effectively reduced the media value by $2.4 million per annum.

The solution was to provide the media agency with two thirds of the fee they originally lost and provide the same amount again as an incentive paid for over achieving the level of media value delivered over market.

Marketing management consultants

For Procurement When Engaging Marketing

4. Not all metrics are useful, in fact some are misleading

Marketing management consultants

Not all metrics are useful

The metrics to be wary of are the ones that are cost based only. In media, the prime example is cost per thousand, or CPM. However, this is a dangerous metric if you do not understand what you are actually measuring. It is the cost of delivering 1,000 audience members through a particular media or channel. The problem is it assumes that all media are equal in the level of engaging the audience and, even within one media channel, that all environments are of equal quality. Let me explain. A major Personal Care manufacturer used CPM as a global measure of media cost effectiveness and in fact provided major incentives to the media agency in each market for delivering the lowest possible CPM. The CMO approached TrinityP3 to benchmark the media agency performance because, while they qualified for the bonus by delivering the low CPM, he was concerned that he saw his competitors commercials on-air more than his. The issue was the use of CPM to incentivise the media agency. The CMO only watched television when he got home from work at about 7.30 pm, (this is prime viewing time, called Zone 1 and comes at a premium compared to daytime and after midnight). The CMO’s viewing habits were increasingly selective, watching only popular, relevant programs. The problem for the media agency was that to buy spots in these programs would deliver increased audience reach at a premium that would drive up their CPM. Unlike his competitors, who could afford to have a mix of high rating, high quality, Zone 1 programming in their media mix, his media agency focused on building audience reach in off-peak times, often with high and wasteful frequency, but it meant they kept their CPM low. Hence, metrics that are cost focused without a measure of quality can be false economy. There are many of these in Marketing Procurement, such as looking at agency FTEs against cost or average cost per FTE. This simply and incorrectly assumes an FTE is an FTE. However the agency can load the retainer with more junior or inexperienced resources and drive up their FTE count while reducing their average cost per FTE to create a false economy. So when you look at metrics in Marketing Procurement ensure you have a measure of value, not just cost.

Marketing management consultants

For Procurement When Engaging Marketing

5. Don’t under estimate the relationship between marketer & their agency

Marketing management consultants

Don’t under estimate the relationships

There is a relationship between Marketing and their agencies that is much more than just transactional, with many Marketers describing it as a ‘partnership’. This is a relationship that delivers benefits for Marketers beyond the core delivery of the services contracted, as the following example demonstrates. Procurement for one of TrinityP3’s Manufacturing clients wanted to look at their current agency remuneration model which still included retainers and media commissions. They asked TrinityP3 to benchmark the cost of resources, however we pointed out that it is more important to benchmark the level of resources against the outputs the agencies delivered. The results were staggering, with the agency resources much higher than the level expected for the volume and complexity of the advertising produced by the agency. The agency remuneration level was also higher than expected. Looking at the scope of work delivered by the agency, it appeared extensive but did not explain the high level of agency resources, especially in the Account Management area. TrinityP3 discussed this with the agency Account Director, explaining that it was difficult to justify the level of resources against the work produced, however they informed TrinityP3 that the scope of work provided did not include “non-advertising” services. Further investigation revealed that these “non-advertising” services included: 1.  Preparing PowerPoint Presentations for the Marketing Team for internal presentations on brand strategy. 2.  Attending charity functions that the CMO supported and in one case making a sizable donation to the charity

which was billed back to the Marketing team with agency mark-up. 3.  Sending four account management staff to help tidy up and dress the Marketing department prior to a visit from

the Regional CMO. 4.  Buying, gift wrapping and delivering farewell and birthday gifts for various members of the Marketing team on

behalf of the CMO. And the list went on…. An example of how the relationship can extend way beyond the professional role of developing and delivering communication strategies and campaigns and it is often this extension of the relationship that is being protected.

Marketing management consultants

For Procurement When Engaging Marketing

6. Agencies will sacrifice margin and profit to an unsustainable level to win business

Marketing management consultants

Agencies will sacrifice margin and profit

Agency people are definitely glass half full, as opposed to glass half empty, people as are many of their Marketing clients. This is a positive attribute in regards to developing effective Marketing communications but not always positive in regards to business management. In this regard, agencies will often find themselves in competitive tenders offering remuneration proposals that are unsustainable. In recent cases, TrinityP3 has seen agencies offering discounts of 20% and more on the industry benchmarks and often proposing senior agency resources for free. Why? Because for the agency, winning is often more important than on-going profit. There are a number of reasons for this: 1.  Their optimism means that they believe that if they win the business, they will find a way to make it profitable. 2.  A win in a competitive tender is good for morale inside the agency and reputation in the industry, while a loss

can have negative effects on both. 3.  As a hangover of the old media commission remuneration model, many agencies are still measured on billings

or revenue and not profit. The problem is that all of these do not justify or help sustain a flawed remuneration agreement, which often leads to agencies under delivering the level and quality of resources, to the medium and longer term dissatisfaction of the Marketers. Therefore it becomes incumbent upon Procurement to not just drive the process to achieve the lowest cost, but more importantly the best value and the most sustainable model, especially in competitive tenders.

Marketing management consultants

For Procurement When Engaging Marketing

7. This is a people business, not a manufacturing process

Marketing management consultants

Marketing is a people business

There are times when TrinityP3 has seen Procurement principles for a manufacturing process applied to the advertising category. Almost everyone in Marketing has heard the stories of Procurement teams running reverse auctions for media buying based on agencies bidding the lowest cost per thousand (CPM), not realising that this just results in getting the low quality media buy that no-one else wants. Or the Procurement team that provided a supplier contract for agencies during a tender which asked the agencies to detail their manufacturing process, identifying contingency plans for system failures. Or our favourite; the Procurement team that asked the PR company to demonstrate how they could deliver a 5% annual increase in process efficiency to be delivered as fee reductions, not realising that this is totally dependent on the way the Marketing team engaged with the agency, which to date had been poorly planned, ad-hoc and reactive. When Procurement operates in a way that treats Marketing and the agencies as ‘manufacturers’, it reinforces the fact that Procurement do not understand or appreciate the process. And so why would any stakeholder risk someone screwing up what, to them, appears to be working? The most common area this occurs is in the selection of new suppliers through the tender process. RFP, RFI, RFT in a formal procurement manner do not recognise the fact that the relationship being procured is one of co-creation, where the underlying chemistry of the relationship is paramount. Agencies bemoan tender processes which separate them from interacting with the Marketing team. Or where they are only able to communicate their philosophy, values and personalities through spreadsheet templates. Or where five or more agencies are asked to develop expensive, time consuming, fully costed strategic and creative recommendations, all at no cost and only to have the business awarded to the lowest quote. Or where, in order to provide a level playing field, Procurement shares the questions the agency ask to the other tenderers, only to effectively reveal each agencies strategy, which is one of the attributes they are being selected on. Once a supplier has complied with the basic mandatory fiscal and legal requirements, all other essential attributes should be evaluated through structured face to face time to assess the chemistry between the parties.

Marketing management consultants

For Procurement When Engaging Marketing

8. Hourly rates are no measure of value

Marketing management consultants

Hourly rates are no measure of value

This is a classic area for mistakes from Procurement people new to the Marketing area. A Procurement professional recently informed TrinityP3 that that they did not require our assistance as they had negotiated a 50% decrease in the agency art studio fee. It was an impressive decrease so we asked a few questions about the negotiation. It appears that the agency was charging $180 per hour, which the Procurement team benchmarked against the electronic art studio rates provided by their print manager. (Here is the first tip: always make sure you are comparing like for like. The print manager was not providing design and production for advertising, just print art work for printers they worked with, so the quality of operator was lower.) Using this information they entered into the negotiation and the agency dropped the rate to $90 with little urging. Having had such a substantial win the Procurement team took last year’s studio costs and calculated the effective savings at almost half a million dollars. What they missed was that the agency rate card had an existing fee for “file retrieval” and “file archiving” which at $90 was invoiced on new jobs only. There was also a fee of $120 for pdf creation. So by simply applying these fees to each job the agency had effectively increased their art studio costs by 50% - 100%. How? The majority of studio projects were not new jobs but revisions and alterations to existing projects. These usually only took 30 – 60 minutes. Under the old rate card the agency would charge $90 to $180 for these changes. After reducing the studio cost by 50% to $90 per hour and applying the file retrieval, file archiving and pdf creation fee to every job, the cost went up to $345 to $390 for the same 30 – 60 minute revision or alteration. The lesson is: the hourly rate is irrelevant unless you look at how it is applied. Be it production or strategy or creative or account management. For example, it’s the easiest thing in the world to call an Account Executive a Senior Account Manager and suddenly bill them out with a 250% increase in margin.

Marketing management consultants

For Procurement When Engaging Marketing

9. The biggest opportunity is usually improved efficiency

Marketing management consultants

The biggest opportunity

The advertising process is a process. But it is a process that is very rarely reviewed or optimised, except when there are financial incentives for all parties to participate in the process. You see, the process is one of co-creation and efficiency in the process can only be achieved if Marketing and their agencies embrace more efficient ways of working. In many cases, Marketing will contact TrinityP3 because they believe their agencies are expensive. In one case an Automotive client felt that the creative agencies were becoming increasingly expensive as they had asked for significant increases in their retainer for Account Management and Creative at their annual review. This was the first review since the new Marketing Director had been appointed. TrinityP3 collected data from the agencies and found that for the scope of work delivered, the agencies were utilising more than 50% more Account Management and 35% more Creative resources than the TrinityP3 benchmark. This equated to a significant premium. On investigation, TrinityP3 discovered the cause of the excess was that the new Marketing Director had implemented a personal creative concept review process. So before any concept could be approved it was presented to the Marketing Director for approval. However, because of the demands on his time this was often very late in the process. The impact was that instead of 3 – 5 creative concepts being presented before one was approved, the agencies were presenting 27 creative concepts on average, or almost 5 times the normal number. A similar situation arose for a Beverage manufacturer, who had their media agency ask for a 25% rise in their retainer, or an additional $400,000. The Marketing team looked at the media spend and scope of work and could see no reason to justify the increase. However on investigation TrinityP3 found that the Marketing team had introduced a new process where the brand budget would only be approved if fully costed. This meant that at budget time the brand teams were getting media plans for the whole year’s program and then on approval would make multiple changes to the plans. Instead of 5 – 8 sets of media plan changes, the average number of media plan revisions was 18. These are the opportunities for Procurement to provide an analytical approach to process improvement.

Marketing management consultants

For Procurement When Engaging Marketing

10. If you are getting advice, make sure you get advice from specialists

Marketing management consultants

Talk with Asia Pacific’s leading�Marketing Management Consultants

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