Has Procurement Gone Too Far?

I fail to see why a purchaser of a service or product should not be using whatever strategies will result in their reduction of cost of goods. If they will receive a benefit from paying more then it is the supplier's job to inform them of such and then permit the client to decide if the cost is justified.

I also find it interesting that the marketing mavens are complaining about having to actually market their services and benefits to non-marketing people. Isn't that what marketing is all about???

Commodization of the creative process is basically saying "ideas don't count". I have seen time-and-time again that strategically brilliant ideas (which come at a fraction of the cost of the media placement) can make the media placement cost much more cost effective.

As the speaker pointed out, a significant reduction in agency margins did not materially increase advertiser margins.

I once had a client that decided to cut our commission rate from the standard 15% of billings to 10%. Thay said it was only a 5% reduction in our income. My reply was it was a 5% savings to the client and a 33.3% reduction in our income. This made it increasingly difficult to staff their account in the manner to which they had grown accustomed to expect.

I think there needs to be more accountability and I am a big proponent of marketing ROI. The issue is "value", which is "what I get for what I paid", not simply "what I paid."

Or, as the expression went: "If you want fresh, clean oats, they come at one price. If your willing to buy oats that have already been through the horse before, that can be had at lower cost."

Charlie Larson
Indianapolis, IN
larsonassoc@earthlink.net

Jonah Boom?

Nice knowing you Hoag.

Michael, above, echos the common perception of most people out there, that creative agencies should just learn how to compete for reasonable compensation. Like most people, he fails to acknowledge (because like most people he's convinced he's just as creative as those odd-balls at the ad agencies), that those 'Creative Specialists' actually can do something that most people cannot.

Working with strategically astute teammates both in-house and client-side, agencies (the better ones) develop media-neutral marketing efforts that build brands out of mere products. That's worth something. Actually, it is almost incalculably valuable -- the difference between carrying a Zune and an iPod. The difference between soapy stuff in a bottle and Pantene's global sales results.

It is something that sometime soon the smarter (and visionary) clients will begin to acknowledge by transforming the compensation business model from commission-based, to break-even retainer + revenue-sharing-based. This shift will be accelerated as the more astute agencies begin to acknowledge that they've been 'giving away' their sales-driving, brand-creating IP for the sake of a steady salary. Forget the Cleos, Lions and BMW leases and share the risk/reward like your clients do: accept lower salaries but demand really big bonuses.

From one of my posts on the subject:

"Trimming the fat from your golden geese will kill their value.

"That's the underlying insight for clients, here. When the aggressive, strategically-creative, entrepreneurial types out there who create and run the world's most creative and leading-edge businesses lose the opportunity to "strike it rich," they abandon that pursuit, to the detriment of their clients' brands (and go to work in the 'creative financial sector').

"Sure, clients should look for ways to cut costs, for 'efficiencies', but they need to keep in mind that there are some high-margin supply businesses that, strategically, should be coddled and nurtured, not cut to the bone. (Yes, their principals drive new Porsches and vacation in Patagonia -- that's called "a cost of doing business" -- a small price to pay for captivating and motivating marketing efforts.)"

More at: http://preview.tinyurl.com/yak7zbt

I think that you agency folk are all chasing your tails. In my experience I have found that marketers are legislated by their boards to use the Procurement to negotiate fees. It is not their choice. Agency compliants cause resentment with the marketing group, as they are being squeezed between two "partners". It is a no win situation for them and they must comply with their company's policy. They are not going to fight this battle for you.

I'm not sure there is an answer for agencies but you have gotten yourself into this predicament and should not punish your clients for it. Your best bet is to hire professional negotiators to represent you with Procurement.

Linda Fidelman
ADvice & ADvisors, Inc.
New York

As a Supply Chain Management senior at a university that has arguably the best procurement program in the nation, I have yet to learn how to best procure innovation. Moreover, most professionals who have extensive experience in procurement roles do not know how to source innovation. When speaking with a Senior Procurement Manager from General Mills, he informed me that innovation in suppliers is a key characteristic the company looks for, but has a hard time measuring. A common metric used to measure supplier innovation includes the number of new products launched per year. Other metrics are similar, and most of these metrics have a hard time (1) accurately evaluating a supplier and (2) predicting the likelihood of success for the client.

Advertising and marketing have soft qualities that most procurement agents don't know how to gauge--at least not yet. Though it is becoming increasingly popular for people in the procurement function to have marketing backgrounds, many procurement agents solely focus on data. But there is no PPI for an advergame developer; there is no process kaizen measurement for drafting a creative brief. The service quality can not be determined by the NORMSINV function in excel. Simply, Supply Chain folks are not yet ready to take on the procurement role for marketing. A seasoned (and incredibly intimidating) negotiator from Intel even admitted that he overpaid for ad space despite all the research he conducted.

Additionally, it is a common practice for companies to outsource the procurement of direct materials and labor to a third party consultant like Li & Fung with good cause. It's a little strange that a client would hand over the procurement of direct materials and labor--something its procurement team should be experts on--, but won't let agencies procure indirect materials and services.

I've been following this debate for a while now and am staggered by some of the things that are being said.

A couple of points:

- It is everybody's job to maximise shareholder value. ROI calculations (yes, even for creative spend) are key to that.

- Making multi-million pound investments based on good, solid data is good practice. Making such decisions without such information is, well, negligence.

- C-level marketing folk in the business are working with procurement to drive down cost (with the full support of the CEO). They are happy with this because the money saved isn't always passed to the bottom line - often it stays in the business function and is reinvested, ie, more marketing dollars to spend.

- This isn't going to go away. Procurement is growing in strategic importance all the time. Agencies - indeed all suppliers - should recognise this, adapt and improve as a result.

http://blog.procurementleaders.com/procurement-blog/2009/11/18/advertising-agencies-have-to-grow-up-and-quick.html