NEW YORK (AdAge.com) -- The deepest recession in a generation is prompting package-goods marketers to pile more pressure on agencies, pushing them for ways to slash marketing-services costs.
Unilever, which spends some $5 billion globally, and Reckitt Benckiser, a $1 billion global spender, have called worldwide media-agency reviews in recent weeks, ratcheting up pressure on incumbent shops amid a contentious U.S. upfront. Both said cost savings weren't the impetus, but it's a safe bet that savings will be a byproduct of the process.
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Procter & Gamble, which spends some $7 billion globally, is shaking the sofa cushions by beefing up its marketing-procurement function. It is also narrowing its roster of TV production companies. Additionally, the world's leading advertiser is expanding its Brand Agency Leader system, which is designed to cut costs and manage marketing-services shops, to more of its brands.
The BAL model, in which a lead agency gets a preset fee from which it pays other marketing-services shops like a general contractor, has been introduced fairly slowly in the past two years, reaching about 40% of P&G's business as of July 1. But by year-end, it likely will cover brands accounting for about 70% of P&G sales, a spokeswoman said. That likely will lead to a reduction in the number of agencies working with the giant.
P&G's agency-model shift largely eliminates the less predictable sales-based compensation model it has used for a decade -- and the tendency for greater use of digital or nontraditional media to generate higher overall fees for brands. It also essentially shifts the burden of cost control from P&G to its lead agency once the overall fee is negotiated each year, based on the "value" of the work, with incentives dependent on sales and performance reviews.
BAL should help P&G with a problem it's targeted for at least six years: reining in a massive global roster of more than 15,000 marketing-services shops. One person familiar with the plan said it's unlikely P&G will reduce the number of holding companies it works with, but it likely will cut the number of individual shops considerably as the newly empowered agencies themselves look to get more efficient.
The reluctance of many P&G executives to cede control of agency selection held back faster adoption of the BAL model, he said. Ultimately, a tougher economy and greater cost-control pressures appear to have changed minds.
P&G spokeswoman Martha Depenbrock said there are no discussions about reducing the number of holding companies but declined to comment regarding plans for the overall number of shops. Cost efficiency for P&G and agencies alike is one advantage of BAL, she said, but it's also about getting better marketing programs.
Brand-franchise leaders -- the client-side executives in charge of the relationship -- can still overrule decisions by the agency leaders on down-the-line shops, she said. But the BFLs are usually general managers or VPs, while selections of marketing-services shops in the past have often fallen to marketing directors or brand managers.
There's a seeming financial incentive for agencies to shift work to siblings within their holding companies, though that's not happening much yet, according to P&G. Agency executives are divided on the subject. The reality of holding-company politics is that agencies often get along better across corporate lines, one said. Others, however, said holding-company alignments already have taken place in some cases, such as WPP's Grey Global Group shifting communications-planning duties on Pringles to sibling MediaCom from Aegis Group's Carat.
So far there haven't been many BAL-related shifts, but most of the assignments are new, said another executive for a P&G agency. "Year two is when the rubber hits the road," he said.
Meanwhile, Unilever and Reckitt Benckiser certainly appear to be turning up the heat on their incumbent media agencies by calling global media-agency reviews during the U.S. upfront. Indeed, the growing list of global reviews by consumer-package-goods giants in all disciplines is "primarily cost-driven," said Stef Gans, CEO of global marketing consultancy Effective Brands, though he added that the lure of agency lineups that better reflect current marketing realities is another motivator.
Unilever and Reckitt both say the timing is coincidental and they're just making routine, periodic global reviews -- though cost efficiency is always a consideration.
Unilever had been considering a review since last year, said Laura Klauberg, senior VP-global media, but decided to delay it given the global economic meltdown and the volatility of global media markets.
"There's always a drive for greater value in any relationship," she said, "and we would be remiss in not trying to continue to drive value. But it's way broader than that. There's huge change in the media landscape, and we need to constantly reassure ourselves that we have the strongest agency partners around the globe."
Unilever, too, has undergone considerable consolidation in the past five years, Ms. Klauberg said. Naming a single global media agency isn't the goal of the review, she said, but it's a possibility.
In the case of P&G, the cost-cutting drive has extended beyond agencies to production companies. The marketer is endeavoring to control TV production costs by creating a global roster of production companies that could end up as small as a quarter the size of its current group of about 125. That move from the industry's largest player, which spent $3.36 billion on measured media alone last year, is likely to spur similar efforts by other package-goods marketers.
TV production costs have been a relatively unturned stone in marketers' cost-cutting efforts, but they can amount to 10% of media costs or more, and that approaches outlays for creative-agency fees, said Fran Furtner, a P&G alum who's president of MRA, a Cincinnati production consulting firm.
Other marketers, particularly competitors, will be watching P&G closely, Ms. Furtner said, to see if top production houses follow through on threats not to participate; to consider whether they should try the same thing; and to ensure they don't end up getting charged more to make up for discounts P&G gets.
P&G long has had a hand in selecting bids from among production companies submitted by agencies, and has tried similar roster schemes in smaller countries, she said. But trying it on a global scale is definitely "a bold move," she said.
The shift is just one more sign of the growing power of procurement executives and processes in P&G's marketing-services decisions. The impending departure of Bernhard Glock as P&G's global media chief has added the final pieces -- media agencies and purchasing -- to the marketing-services responsibilities of Stewart Atkinson. Mr. Atkinson is a former Army officer who spent most of his 23-year career at P&G in purchasing for laundry, health care and beauty products before taking up marketing procurement in 2006.
As manager-global brand building purchases, he's part of P&G's "product supply" organization and reports to Rick Hughes, P&G's top global purchasing official, though he retains a dual report to Global Brand-Building Officer Marc Pritchard.
Marketing procurement is "a capability we've been developing for many years," Ms. Depenbrock said, adding that Mr. Atkinson's expanded role "lets us make fuller use of it."