Marketing-Procurement Execs: Villains Turned Heroes?

There's No Doubt About Procurement's Power, But Questions Linger on Where Cost Cuts Lead

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Hans Melotte is no Justin Bieber. That's what Johnson & Johnson's chief procurement officer had to jokingly remind attendees at the recent ANA Financial Management Conference after being greeted reverently by several attendees, who pointed out that he was the first CPO to address the group.

Given that procurement has been much reviled by agencies, and even marketers themselves, chafing at the financial constraints on their relationships, Mr. Melotte's rock-star reception was one sign that marketing procurement -- little more than a decade old -- is quickly coming of age.

Hans Melotte
Hans Melotte
Among other signs is a survey by the World Federation of Advertisers and consulting firm Spire Worldwide that found 58% of marketing procurement executives have at least some marketing experience, up from 30% four years ago.

In addition, the ANA conference, with record attendance of 550, was bursting at the seams of the Boca Raton, Fla., resort that was reserved four years ago for a smaller crowd. About half of the attendees were client-side procurement executives; the rest included a growing cadre of agency-side procurement specialists and consultants.

Procurement has become so ingrained that it's even used on its own operations. One attendee confided that she had come to the conference partly to network for a new job because her company was outsourcing the procurement function.

While complaints about the cost pressures exacted by procurement popped up repeatedly at the event, it was also clear that those stresses are not putting agencies out of business.

WPP CEO Martin Sorrell, speaking to the group for the first time in a decade, decried the corporate cost consciousness and pressures that have persisted after the Lehman Brothers' collapse and global financial crisis in 2008.

In a question-and-answer session, Mr. Sorrell acknowledged that WPP works with clients to reduce costs by 10% to 20% a year, though he emphasized in an email later that "cutting your way to growth" won't work, and that WPP is looking to invest in innovation and technology.

Subsequent speakers said that , his outlook notwithstanding, Mr. Sorrell and other agency bosses aren't faring too poorly. (The WPP chief's total compensation rose 60% last year, while Omnicom CEO John Wren's was up 43%.)

Pivotal Research analyst Brian Wieser said that procurement's major impact has been institutionalizing a 15% margin for the industry, adding that though that may cap the upside, utility-like margin stability isn't bad for investors. Other speakers pointed out that WPP and other holding companies had record revenue and profit last year.

Still, it was sometimes obvious that things can be icy between client-side procurement and agencies or marketers.

One questioner asked Mr. Melotte a pointed question about "fairness" and J&J's position on payment terms.

"Let's be careful to not confuse fairness with what we like," Mr. Melotte said, adding that J&J's credo directs it to be fair. "We are not in the business of making our suppliers drop their pants."

While admitting that J&J hasn't always paid on time, Mr. Melotte said it's getting better.

The company is also trying to more broadly apply its standard payment term, which is 45 days from the end of the month it receives an invoice. In the U.S., Johnson & Johnson pays 62% of its bills that way, while the rest are paid even faster.

J&J offers a "dynamic discounting" tool online that allows firms to get paid more expeditiously in exchange for a discount, Mr. Melotte added.

Audience members also asked questions about recovery audits, in which clients hire third parties to find instances of media agencies' not executing according to agreements and therefore liable for returning money.

Contingency audits, in which investigators are paid based on a percentage of funds recovered rather than by fee, particularly rankle some agencies because, they argue, they incentivize auditors to find something wrong.

Jim Garrity, president of the Media Audit Council, said his group specifically excludes audit firms that operate on contingency.

And Mark Kaline, Kimberly-Clark Corp.'s global director-media, licensing and consumer services, said, "I can guarantee you that [contingency auditors] don't come through the marketing department [but generally] through procurement, finance or some other wing of the organization."

On the other hand, procurement often reports to marketing rather than operating as an outside check. That's the case with notoriously tough procurer Walmart, whose 3-year-old marketing-procurement department is under marketing, said Chuck Hatsis, president of Surge Consulting.

Despite the tension, there was some lightheartedness from the dais to make a serious point.

Mr. Melotte opened his presentation with a video clip of a procurement executive negotiating a dental extraction for his wife down to $200 from $1,600 after bargaining away the dental assistant and anesthesia.

"Try to imagine you're a marketer ... and that guy making the dentist appointment walks in the room and says, "I'm your key procurement liaison,' " Mr. Melotte said. "How long do you think before the relationship gets below zero?"

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