No need to fear procurement

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We recently interviewed more than 20 senior executives from large and small agencies trying to find out what's keeping them up at night. The one issue on everyone's mind is procurement, along with a fear that this is just another step toward squeezing agency profits even further.

In our view, this is incorrect.

The best practices in procurement are more about efficiency, quality and productivity rather than simply cutting a deal with the lowest-cost provider. The best procurement people work collaboratively with vendors, understanding that they have a vested interest in building mutually profitable long-term relationships. But beyond these factors, it is important for agencies to understand why procurement is being introduced into advertising-purchase decisions.

The world of business is undergoing an inexorable and seminal change on the order of Henry Ford's first assembly line. There are many terms being floated around, such as supply-chain management, enterprise resource planning, customer relationship management, sales-force automation and radio-frequency ID, with common threads of control, measurement, accountability and coordination. All are driven by the availability of increasingly powerful computer processing, dirt-cheap memory and unprecedented global communications capabilities. Tremendous productivity gains have been achieved in production, sales-force automation, customer service and distribution. Along with this, the procurement function has been elevated from a tactical position of simply executing to becoming a full partner early in the strategic-planning process.

The advertising budget until now has been relatively immune to this, but time is running short. And in fact, with advertising accounting for anywhere from 10% to 30% of selling, general and administrative expenses, this has become a high priority.

Advertising agencies are at a crossroads. While many view this as either a threat to their profitability or as a "penalty box" for past abuses, those perceptions are completely off-base. Furthermore, as with any market undergoing fundamental change, there will be a lot of business in play. Some agencies will evolve and thrive, others will be relegated to small islands of business, and some will simply become fossils.

Agencies that thrive will adapt to procurement's participation in the advertising budget. A smart agency can differentiate itself by embracing procurement as a sign that advertising is being brought into the supply chain management/enterprise resource planning family and that, as a family member, it can be more valued and better understood. It can also give agencies a greater influential role.

Agencies must also understand that this change means they will have to evolve their business models, organizations and cultures. How this will occur and what agencies of the future will look like is not entirely known. Nor will this be the same for all agencies and all clients or all industries.

chance to thrive

Here are four ways an agency can increase its chances not just for survival but for the chance to thrive in this new era:

* Get educated about what your clients are thinking that can affect their marketing planning. We recently surveyed a group of senior agency executives about their knowledge of RFID. Not one could explain what this was. Yet RFID will affect marketing and advertising in far greater ways than bar codes and scanning. Agency executives need to find the time to keep on top of the changes that will be top of mind for their clients.

* Align yourself with the ways clients run their business and how they use procurement. Every client has quality-control and quality-assurance processes in place. Quality assurance used to be a subset of operations, but over time it has been elevated by many companies to report directly to the chief operating officer. Quality assurance is married to procurement, and an agency cannot effectively respond to a procurement-driven RFP without explaining its own quality-assurance processes. What?! You say your agency does not have a formal quality-assurance process? Time to get with it!

* Start to think about operating in real time. When supply-chain management works well, finished goods are available just in time and in the correct assortment to meet demand. Work in process and excess inventory are reduced, while service levels and quality are improved. The net result is more agility to respond to market changes as well as improved speed to market. It's all about readiness and operating as close as possible to real time. Agencies need to understand this, and that their role is to provide on-demand at the right time and right place.

* Learn to measure results or learn to place greater value on measurable advertising. Agencies can manage this change or be steamrolled by it. But change won't come easy, because not only must internal processes shift but attitudes such as "advertising value is hard to measure" must change as well. Agencies need to focus on profitably acquiring consumers for their clients. Agencies that try to approach procurement with splashy campaigns will produce glassy-eyed stares. Agencies that approach procurement with hard results will have the edge every time.

planting seeds

If you've read this, perhaps you have found a kernel of truth, or maybe it has planted a seed of change. That's great, because you are ahead of most of your colleagues. We can practically guarantee this will not be the last time you'll read about these changes.

If you've read this and feel confused and unsure about what to do, that's natural, because how this will play out is still unclear and evolving. However, smart agencies will take a cue from Dorothy, who discovered the wizard was just plain human and that she and her companions would not have made it this far if they didn't already have the brains, heart and courage to succeed.

ABOUT THE AUTHORS

Alan Krinsky (l.) is president of Alan Krinsky Associates, New York, a consultancy specializing in enhancing the relationship between agencies and marketers. Steve Marcus (r.), with an extensive agency and client back- ground, is a strategic partner at the company.

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