NEW YORK (AdAge.com) -- Weeks before Volkswagen of America anointed Deutsch, Los Angeles, its new agency, the carmaker called contenders to its Herndon, Va., headquarters, warning them to bring their calculators. It was the much-dreaded financial part of the review, during which finalists had to present detailed staffing plans and discuss compensation. As executives from one agency emerged exhausted from the meeting room, they stopped before the rival ingoing team and whispered: "Don't cave."
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"We are seeing the beginning of a trend where agencies will push back on procurement [executives who] want to purchase services for fees that are lower than the cost of what it takes to produce those services," said Russel Wohlwerth, principal at consultancy Ark Advisors. "Despite chasing a downward spiral of revenue over the last 12 months, agencies realize that a relationship that starts off as a money loser is not sustainable ... companies need to respect that agencies need to make a profit, just like they do."
That push-back was evident last week when one large agency network, WPP-owned JWT, said it was pulling out of a pitch for shipping giant UPS's $200 million global advertising account because it became frustrated over drawn out financial and contractual discussions.
"UPS is a big business with a very big problem to tackle," JWT Chairman-CEO Bob Jeffrey wrote in an e-mail to colleagues. "They need to treat us or any agency as a partner, and it doesn't seem that is in their culture. We've invested significant time and energy in pitching this business, so we are not taking this decision lightly."
All about fees
That same week, Group Danone elected to keep its $100 million U.S. work at Havas' MPG despite a nearly four-month chase among at least three agencies for the business. That lent credence to grumbles by those in the hunt that the review was an exercise in procurement. "From the get-go, obviously both fees and media prices were a critical issue," said one agency executive close to the review.
So much so, in fact, that many of the parties privately fretted that price would eventually trump the quality and innovation of the work presented. "They are awfully cheap and are going to leverage as much of the position that the market is in as they possibly can," one agency leader groused this summer when the business went into review. "They are notorious about price."
Consider the parade of questions asked by Danone in its global request-for-proposals: "Can you [provide] precise flexibility of budget you allow to keep these guarantees for 2010?" "Could you improve beyond the 2010 grid?" "Can you improve your net CPM?" "Can you improve the net GRP?" "Can you improve the level of guarantee and penalty you're willing to give to reach the financial commitment?" "For each country, confirm that your guaranteed method is also valid beyond 2010 cost grids."
"Every single question was about pricing," seethed another executive. "This Danone pitch was purely about money, but they dressed it up to look like it was about strategy and have wasted a whole bunch of people's time in the process. Their first set of questions, I'm not joking, was the most arduous set of spreadsheets we have ever filled in. These are the people who treat media as an utter commodity."
Tom Finneran, exec VP-agency management services at the American Association of Advertising Agencies, said such RFPs have become increasingly common -- and increasingly a point of consternation -- for the agency community. "There has been a good deal of discussion about the over-the-top practices that have evolved in the past year, particularly. There are outlandish RFPs that have been issued, some that are 300 questions, only 10 of which are related to marketing. They may take an RFP form that they use for sourcing manufacturing vendors, or research and technology providers, and use that same form for agencies."
"This is not all procurement [marketing departments], but it is a goodly number of them," he said, adding that "part of the procurement strategy these days has become isolating for their own marketing department."
Cutting from somewhere
While the argument can be made that agencies have padded margins since the era of Don Draper and therefore clients can be smart to crack the whip to bring costs in line, it's also true that shortsighted clients simply seeking a cheap provider risk cutting off their nose to spite their face. After all, even a well-intentioned agency that lowballs a pitch too much has to make up the difference somewhere -- and that could ultimately cost the client in staffing or other resources.
While the involvement of procurement officers in the agency-selection process is far from new, industry experts say their participation has grown exponentially in recent years. What's more, it's not just large blue-chip marketers that are allowing procurement departments to have their say, but smaller marketers too -- a consequence of the fact that advertising dollars are a big, fat target in the economic downturn because they rank among a company's biggest expenditures.
Not everyone thinks that's a bad thing.
Universal McCann CEO Matt Seiler, for one, has been a vocal proponent of procurement, and as recently as last month, during a panel discussion at Advertising Week, he said he welcomed those executives to the negotiation table. Dominic Proctor, CEO of WPP's MindShare, speaking on a panel of top media executives in Valencia this spring, said that while he doesn't love the phenomenon, media agencies have to accept that some reviews are going to be about little more than driving down prices at the behest of procurement executives.
"While there are overbearing officers who only look for lowest-cost providers, look at titles and not experience, and try and get that fee down as far as possible, there's a chunk of them that are good or are at least willing to listen to marketing departments and can appreciate the creativity that agencies provide," said one consultant who asked not to be named.
Clearly, procurement-department involvement in the marketing process is not going away, and agencies and marketers will need to find a way to work together. So what's the solution?
For starters, a "more aggressive two-way discussion early on in the search process between the agency and the marketer," suggested the 4A's Mr. Finneran, who recommends an RFP on both sides of the review process. "Agencies need to say 'We'd love to answer the questions you've asked, but here are the questions we have for you. And we don't have an interest in pursuing your piece of business without your responses.'"
In other words: Don't cave.
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Michael Bush contributed to this report.