18 of top 25 use purchasing - Procurement: Get used to it

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Procurement executives hold sway over billions of the dollars spent by some of America's largest advertisers-but that doesn't mean they are focused exclusively on price, nor should it prompt griping from agencies.

Nearly three-quarters of the top 25 U.S. advertisers deploy procurement-also called purchasing, or sourcing-in marketing spending, according to exclusive Advertising Age research (see table, P. 12). That means procurement officers now sit in on many account reviews, regularly attend meetings with agencies and have a big say in the level and type of agency compensation.

The invasion of marketing by purchasing pros is driven by the dual imperatives to cut costs and improve corporate governance and accountability. After spending the past decade finding more efficient ways to buy goods (ingredients, computers) and then services (travel, telecom), procurement now has marketing in its scope.

"Procurement is here to stay in pretty much every industry, and that's a fact, which means it's just not worth whining about," said David Bell, chairman-CEO of Interpublic Group of Cos. "Agencies and holding companies are going to have to adjust to this new reality."

Cost savings are real. A procurement executive with a leading national advertiser said the company reduced the cost of doing advertising by 6% to 9% a year in the first two years it employed procurement, and it continues to find savings of 4% to 6% a year. The company has reinvested savings to stretch the marketing budget.

Consultants are primed to help clients take out costs. Arthur Anderson, managing principal of Morgan Anderson Consulting, said an advertiser could cut ad agency compensation by between 25% and 30%-and give the agency a higher profit margin-by adopting the most efficient practices at the client and agency. Procurement "has to be win-win," he said.

Some agency executives have complained that procurement executives and consultants sometimes seem only interested in slashing costs, and the American Association of Advertising Agencies recently hammered some "dishonorable" compensation consultants for "exploiting" marketers' need for a "quick fix" solution to cost pressures (AA, Sept. 8). But enlightened procurement is not about whacking agency fees. The smart strategy balances needs of client and agency, short and long term.

"When we think about purchasing and its involvement with our advertising agencies, the goal is not to reduce our spending with advertising agencies," said Kim Kraus, a veteran Procter & Gamble Co. procurement executive who is director-corporate marketing responsible for building strategic relationships with agencies. "The goal is to make our spending go farther."

Added Dorothy Wetzel, Pfizer's VP-consumer marketing for U.S. pharmaceuticals: "People tend to think we're focusing much more on the financial part, but job one is producing advertising that is going to break through the clutter." Advertisers should pay a fair price and treat agencies as partners, "and it's in no client's interest to be nickel and diming," she said.

Pfizer has consulted with Beekman Associates and Advice & Advisors on agency matters. The company parted with Interpublic's Deutsch early this year over issues including compensation. Ms. Wetzel declined to comment on that parting, calling it "water under the bridge," and agency Chairman-CEO Donny Deutsch didn't return a phone call. Ms. Wetzel noted Pfizer strives to set compensation agreements so that "if the agency produces great work, they get great profits from it."

Some agencies said controversy over procurement boils down to questions about tactics of aggressive compensation consultancies such as Beekman, which is thought to have been one of the consultants criticized by the 4A's. A 4A's task force met last week to discuss a key area of dispute with consultants, the quantifying of overhead. Beekman principal Bob Cauley said he strives for compensation to be fair to both sides. "Most agencies understand the process and welcome the process because it eliminates any question of mistrust," he said. "It puts everything on the table."

newcomer

Procurement long played a limited role in marketing-P&G's purchasing group worked with marketing services agencies some 20 years ago-but it's taken a big interest only in recent years. This new role reflects the evolution of agency compensation and corporate purchasing.

The agency track is simple: Shops' historic 15% commission over the past two decades gave way to fees, giving the client-or consultant-something to negotiate.

Purchasing went through its own evolution. Decades ago, manufacturers relied on the purchasing department to hammer suppliers to get the parts or ingredients at the lowest cost. Michael Farmer, principal at advertising consultancy Farmer & Co., said global competition and the advent of just-in-time manufacturing changed the mission from purchasing at lowest cost to sourcing through strategic partners that designed, produced and guaranteed quality of critical components.

Newly empowered procurement groups then took the discipline into overhead costs such as transportation and technology. The next steps for many companies were services, such as health care, real estate brokers, accounting, legal counsel, consulting-and advertising.

`last frontier'

"Marketing is one of the last frontiers for most purchasing organizations," said the procurement executive who has been generating 4% to 6% annual savings out of the company's ad budget. Procurement executives said the drive for marketing efficiencies is fiercest among companies struggling to grow revenue and profits. Mr. Farmer said ad agencies doing good work reflected in good sales are "a little more immune" from procurement pressures.

Pfizer's Ms. Wetzel said the post-Enron imperative for corporate governance is as important as cost pressures in driving marketing procurement. It's no surprise a buttoned-down outfit like Pfizer would want to account precisely for its $2.3 billion worldwide '02 ad spending. In the next few years, marketing procurement is destined to become a fact of life regardless of company, industry or state of the economy. "It's the way of the future. It's not going to go away," said Mike Thyen, global sourcing manager-marketing at pharmaceutical giant Eli Lilly & Co.

In an Advertising Age survey of the 25 top-spending advertisers, 12 of 16 responding companies said they use procurement groups in marketing spending. Industry executives said procurement is involved in marketing at some companies that wouldn't comment (AOL Time Warner's Warner Bros.; Walt Disney Co.; Unilever; Kraft Foods; American Honda Motor Co.) and in at least one that said it didn't use a procurement group for marketing (Nestle USA).

Bottom line: It seems likely that around 18 of the nation's 25 largest advertiser deploy procurement for some aspects of marketing spending.

When it's done best, marketing procurement cuts costs for the client, provides fair profit for the agency and strengthens the partnership between client and agency.

Fantasy? No, reality.

Consider Eli Lilly, which in 1997 brought procurement to marketing and hired Gerbig, Snell/Weisheimer, Westerville, Ohio, as its lead professional agency. Blane Walter, chairman-CEO of Gerbig Snell parent inChord Communications, said Lilly worked with the shop to generate a "double digit" percent decline in agency overhead while profit margins "have maintained to slightly improved."

how it's done

Lilly asked the agency to book travel through Lilly, which gets a bigger discount; it arranged for all phone calls between the agency in Ohio and marketer in Indiana to be billed at a local rate; the two share digital files over the Web, saving "hundreds of thousands of dollars" by negating the need for redundant servers, Mr. Walter said.

Lilly understands the agency's cost structure, and the two have matched up inefficiencies with the goal to eliminate them. But Mike Kinney, the director of sourcing for sales and marketing, contends the company's competitive advantage comes from discovering and effectively marketing prescription drugs. "We are not going to win in the marketplace through cost management."

Here's the bigger reality: The best marketing procurement programs focus not on cutting costs but on adding value. Mr. Kinney handles sourcing (procurement) and transactions (purchase order to check), but he said the pivotal role is "supplier relationship management." "What we really do is facilitate relationships between the buyers and the sellers-and we are neither," said Mr. Kinney.

Mr. Walter said procurement functions "almost [as] a third party," keeping relationships between the shop and some 15 brands on track, and allowing the agency to share in some of the gains that come from improving efficiency.

"We certainly have run into procurement people that have focused on the cost side as a primary outcome," he said. "Lilly focuses on the value side, of which cost is a component, and that's rejuvenating for an agency because it puts values on the ideas."

The apparent Lilly-agency harmony isn't quite the norm, however.

`"Enlightened procurement people' is probably an oxymoron," said the head of a New York agency. "The enlightened people are in the marketing, not purchasing, department."

Account people "tolerate purchasing people," said a procurement executive, who tends to have easier conversations with agency financial chiefs since they're having the same talks with their own suppliers.

good and bad purchasing

Of course, it's unfair to lump together all procurement people. "There's bad procurement and there's good procurement," said James Singer, VP at consultancy A.T. Kearney. The bad ones-naive about marketing and destroying good client/agency relationships simply to cut costs-appear in the minority.

Inside companies, the onus is on procurement executives to learn that lowest price is not always the point, and to put marketing and agency executives at ease that procurement values brands and relationships.

Brand executives must be willing to change processes-such as streamlining ad approvals to reduce revisions, and clearly defining scope of work-as a key step to control costs, and they must recognize how procurement adds value.

Agencies, for their part, need to show a willingness to work with advertisers. Said Interpublic's Mr. Bell: "We have to find a way to work constructively with our clients' supply chain management. And we need them to understand that we're an output business, that we create real value when we're not simply focused on input. This is a fundamental issue that our industry faces, and we're going to certainly be working on it. The trick will be to strike a balance."

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