Ad agencies’ procurement tensions ease as relationships improve—experts share best negotiating practices

Ask Stacie Boney, president of Hanson Dodge, about procurement’s role in agency compensation, and she will quote Jessica Rabbit, the voluptuous vamp from the 1998 animated film “Who Framed Roger Rabbit?” “I’m not bad, I’m just drawn that way.” That belief appears to be spreading in the industry as a detente approaches between agency executives charged with protecting margins and the procurement executives charged with negotiating the best price compensation with them. See all of Ad Age's 2023 Leading Women here While most shops can relate at least one unpleasant encounter with a marketer’s procurement department, the once-palpable tension between the two parties seems to be subsiding. Among the reasons: Procurement executives are becoming more educated about the marketing process; agency executives are more often willing to push back and ask for concessions; and shops are beginning to view procurement executives as facilitators rather than impediments. “I have a financial mindset but I’m in love with creativity,” said one procurement executive at a major food and beverage brand, speaking on condition of anonymity because they were not authorized to speak publicly to the press. “Old school procurement would just treat [agencies] as commodities. We're trying to change this.” Look back: Marketers, agencies at odds over procurement Among the ways this is shifting, said the executive, is that more procurement teams are showing a genuine interest in creativity and want to form a partnership based on value in a way that doesn’t necessarily mean driving down costs. In addition, procurement execs are now scouting agencies on their own and having conversations with them to understand what it will take to service a piece of the business before it’s awarded. Still, there is work to be done on both sides: Agencies say marketers need to be more forthcoming about scopes and budgets, while marketers say shops must be more transparent about fees as compensation shifts away from billable hours. Evolving relationships “The way procurement sees agencies now, they're much more aligned with their marketing partners,” said Tom Denford, CEO and co-founder of search consultancy ID Comms. “They used to be very split. The marketer would walk into the front door of an agency and say, ‘Help me grow my brands.’ And procurement would walk through that same door and say, ‘Save me $50 million.’” Procurement executives have reason to distrust agencies. An Association of National Advertisers report in 2016 revealed agencies were receiving certain hidden rebates from media companies and not passing them back to clients. Newer transparency issues have started to emerge in reviews in which agencies are guarding information on how their fees break down. Look back: Agency groups respond to 2016 ANA report Bridging the divide will be beneficial for both agency and client bottom lines—even if it means thinking beyond cost-per-hour, according to Tyler Turnbull, global CEO of FCB. “If you're too myopic as a team and it's only a conversation around cost of deliverable, you're not going to get the best team and you're not going to get the best work out of an agency partnership,” he said. Understanding the agency As a procurement executive for Aspen Group, Elizabeth Skipor acts as the liaison among the agencies, marketing executives and the top brass who question costs at the health care company, which owns ClearChoice dental implants and AspenDental. “Marketing is a huge relationship industry,” said Skipor, who often battles Aspen’s executives on behalf of agencies, noting that sometimes she has to explain how market average pricing doesn’t always apply for costs, including on people servicing the account. “I get the jargon,” said Skipor, whose title is senior category manager of marketing and professional services. “Understanding at a super high level what vendors do gets you over the board.” Read more: Agencies and clients clash over transparency in fees Vic Drabicky, CEO and founder of January Digital, recently worked with Aspen and was impressed that the procurement team came to the first meeting understanding how his business operated, which wouldn’t have happened a few years ago. They “actually visited our website before, understood what the remit was, understood how it compared to their current agency,” Drabicky said. “The homework [was done] ahead of time, which made us have a more upfront conversation.” Ad Age Agency Report 2023 Revenue, listings and analysis for agencies and agency companies Read more here Focusing on value In the best-case scenarios, procurement executives are focusing on “return on relationship and spend time scouting, understanding capabilities, learning the right fees in the marketplace, building relationships, onboarding and much more,” said Lindsey Slaby, founder of brand strategy consultancy Sunday Dinner. “These are wonderful teams who are there to neutrally support agencies and their business.” Another way to foster successful relationships is shifting focus from billable hours to value-based compensation. Using hourly billing, agencies log how much time their employees spend on an account and apply a fixed rate to that time. Value-based, or deliverable-based compensation, uses a flat fee to cover the agency’s costs of completing a project and links the project’s success to the advertiser’s in-market performance. Also read: Why brands should treat their agencies like small agencies In addition to preventing agencies from raising costs through inflated billing, value-based compensation directly links an agency’s value with the client’s success. “Smart procurement departments are connecting the teams and the structures to the outcomes they're driving,” Turnbull said. But that can also require more transparency. Skipor complained that many agencies don’t provide a rate card and instead push fixed fees that don’t break everything out in detail. “We have to find some sort of KPI where we're measuring the results out of the pricing that was proposed. It's hard for procurement people to go to our CFO to get approval and just say, ‘Well, it cost $1 million last year in operating expenses with this agency and now it’s $1.2 million.’ They’re going to be like, ‘What drove that $200,000?’” But that goes both ways. “Procurement groups who come to us and make us try to guess at what their budgets might be or what their scopes might be, put us in a really challenging position to be effective,” Turnbull said. “Part one is having that transparency and alignment on what the goals are and to make sure those goals are really connected to their marketing teams' agenda and overall goals of the brand.” Some ad agencies have pushed back against procurement doing a full audit of their business, which often happens with big global searches, arguing that doing so can expose other client-sensitive information. “We are 100% transparent on all of it,” Drabicky said. “We go to the procurement person upfront and go, ‘Here is how all of it looks and, we probably are giving [them] too much, but that allows them to have a better view of things and be a better partner in it.” Feeling free to negotiate Agencies of late have also felt more empowered to negotiate on their own behalf rather than adopt a take-it-or-leave-it stance on terms procurement departments propose. “The best agency says, ‘If you want the most strategic and creative people in our company, it's going to cost X,” said Greg Paull, principal and co-found of R3 consulting firm. “If you want us to use our trans creation partner [meaning companies such as MediaMonks or Hogarth] to do some basic content work, it's going to cost Y. If we offshore to Columbia, it's going to cost Z.” A huge stumbling block between shops and marketers isn’t necessarily what agencies are paid, but how long it takes to get paid. Payment terms can sometimes span as long as 120 days—or even in one case, 360 days. Read more: The outrage over 360-day payment terms But just like rates, payment terms can also be negotiated. Peter Carter, a former 40-plus year Procter & Gamble executive and founder and CEO of consultancy Creative Haystack, started a group at P&G in 2017 to better involve the company’s purchasing department in vetting agencies for brand teams, understanding individual agencies’ finances and finding payment solutions for small shops especially so they could work with the giant marketer. “In one case, I had a small agency call me and say that they couldn’t work with P&G because they couldn’t meet our long [120 day] payment terms,” he said. “Our purchasing team went into action and created a plan to help.” Carter was referring to P&G’s Supply Chain Financing program, a P&G spokesperson said, “which is available to all P&G suppliers including agencies. Our Supply Chain Financing program offers our suppliers the flexibility of working with certain financial institutions to receive early payments against approved P&G invoices.” Ad Age Small Agency Awards See all of the 2023 winners Click here Via CEO Leeann Leahy recalled years ago taking the then-radical step of inviting a procurement executive out to lunch to negotiate payment terms. “They knew that we were a small agency and would have to staff up, but they had these really crazy payment terms. I was like, OK, but if you want the payment terms that you have, you're gonna have to front me some cash, because I have to hire people and we're not a bank, so I can't do it without the support. I came into my office one day and there was a $3 million check on my chair.” “Typically procurement is seen as the bad guy but I haven’t seen a ton of that,” said Christy Hiler, president of Lexington, Kentucky agency Cornett. “More recently, what I’m seeing makes me even more hopeful.” Hiler, whose agency works with P&G, said she deals with the company’s procurement team even before the marketing department. “P&G takes great pride in having a team that goes out and meets with agencies, understands their core strengths so when a person on their brand team has a need, they can go to the right agency,” she said. ‘Hugging them to death’ There is a difference between working with internal and external procurement consultants—external firms are not always as willing to budge, and they don’t have as deep an understanding of the business, said Devin Reiter, partner and president of Fortnight Collective. “There’s internal procurement, full-time salaried employees,” Reiter said. “They are incredibly dialed in. They understand from a marketing side what needs to be done, they understand talent, they understand the difference between a CD and ECD. They are a true extension of the marketing team. Then there’s external. They have a little bit of a different agenda. They are there to cut costs at all costs.” Working with external procurement firms can take a bit more negotiating at times, Reiter said, but ad executives need to learn how to deal with them, too. “You’re either going to work with them or not,” he said. “I’ve always had the philosophy of hugging them to death.” Trey Harness, president and partner at Curiosity, said he always facilitates a relationship with procurement with clients. “I will have lunch or coffee or a catch-up meeting with the person from purchasing.” Another benefit of creating a bond with the procurement department is clear and honest communication. Hanson Dodge’s Boney, who was formerly a longtime BBDO executive, related a story regarding a money-losing account at the Omnicom agency. “I booked a meeting, took a three-and-a-half hour flight and I sat down and said [to the procurement executive] ‘This is not working,’” recalled Boney. “And he said, ‘We want to be [to BBDO] what milk is to the convenience store. We want you to lose money on our account, but make it on others.” Said Boney: “I started to laugh. I just laughed, and then he laughed. Then we worked out a deal to have an incentive bonus.”

Ad agencies’ procurement tensions ease as relationships improve—experts share best negotiating practices

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