In Defense of Procurement

A Real Boon to CMOs, There Is Far More to Sourcing Than Cutting Agency Compensation

 by Avi Dan                                           

 Published: April 19, 20

 When sourcing emerged as a corporate

department in the 1980s,

it was primarily to give senior managementtactical flexibility in terms of policy. By focusing on cost cutting, sourcing specialists gave the CEO an alternative to resorting to layoffs as the only course of action when the company missed its profit goals. Cost reduction through tough negotiations and comparative bids was procurement's main objective.

But through the last decade, and especially during the recent recession, procurement became more than just about extracting price economies from vendors. It became a true strategic tool, vital for the company's competitiveness. Nowhere is that more evident than in the growing reliance of marketing on sourcing.

These days, the growing dependency of marketers on sourcing specialists is essential for rebuilding marketing budgets. While it appears that companies are growing more confident as the recovery takes hold, CMOs are being asked to do more with less -- or at least without the benefit of a budget increase. The overwhelming majority of CMOs polled in the recent ANA Recession Survey reported flat budgets for 2010. The CMO's job is becoming more complex, of course. As such, those brand stewards would do well to collaborate with sourcing specialists and rely on them to help maximize their resources through greater savings from marketing-operations efficiencies.

The immediate source of funds procurement executives consider is marketing vendors' contracts. Many CMOs favor renegotiating agency compensation as a source of additional funds to help expand the marketing budget, according to the ANA study. It is likely that many companies, bruised by the recession, will continue to take a look at how they are compensating their agencies. Some will move from fee-based compensation to performance-based compensation. Fee-based compensation is based on labor hours derived from an agreed-upon scope of work, yet there is no correlation between labor and performance, and thus, it is argued, it is an inappropriate way to compensate agencies. Performance-based compensation rewards agencies for meeting performance metrics, such as share or sales, but at the risk of forgoing some baseline profits.

Another important area from which to derive savings is agency roster. Most companies have too many agencies, which makes coordination difficult and inefficient and dilutes marketing resources. Focus is especially important for brands as they seek integration of ideas across many communication channels. A streamlined roster and an integrated process make for an effective process and pointed briefs.

Reduced compensation alone is not the answer, however. Procurement specialists should explore identifying further savings by taking an active role in improving and streamlining the client-agency work process. The briefing process, client involvement, integration -- these are examples of areas of major opportunities to improve efficiencies. Sourcing specialists can help develop a better, leaner process, duplicating the process implemented with other strategic vendors. These are easy wins but those that most companies are still ignoring.

While much of the scrutiny is with creative agencies -- and rightly so, given that the bulk of the marketing budgets, and thus the opportunity for savings, is still in traditional media such as TV and print -- the same approach for savings exists with the so-called below-the-line tactical communications, including direct, digital, branding, promotional merchandise and collateral. Digital is an especially important area for sourcing to understand, given its potential for savings. The complexity of digital creative suggests inefficiencies, and as budgets rapidly migrate there, sourcing needs to explore opportunities for greater savings.

One of the areas that can deliver significant savings is travel. While occasional face-to-face meetings between client and agency are desirable, technology made most face-to-face meetings unnecessary. It's as easy as it is in person to present creative through WebEx or a video conference, to brief on a telephone, and to set up a secure intranet to let all stakeholders view progress on a project. Old-fashioned focus groups are a relic. Video focus groups enable consumers to be interviewed from home and enable clients and agencies to access them from anywhere via laptop.

Another potential source of marketing funds is production. Hard data on actual production expenses should provide the best foundation for driving production decisions and negotiating costs. It is an area for which many sourcing specialists are now developing benchmarks, given the rise of competent third-party publishing companies and production houses. Advertising production is one spending area where there are clear ways for sourcing to pick off the easy wins -- selling the case for further involvement in marketing sourcing. Production (including residuals) can account for 10% of the marketing budget, so even a 5% or 10% savings of that budget can be significant.

The current approach, which treats each commercial production distinctly, as if it were unconnected, is inefficient. Companies can save significantly through better planning. By developing an annual plan of production needs for multiple brands and bundling through competitive bids under one production roof, sourcing specialists can improve efficiencies while maintaining quality. Similarly, designating approved suppliers and assigning discounted production on test commercials can derive savings.

Companies used to compete through product advantage, but technology is the great equalizer in most sectors. Me-too products are easy to create, and it's easy to duplicate market leaders or innovators. It is up to marketing to create an advantage in parity categories in consumers' minds. And marketing has to rely on sourcing for replenishing their budgets, helping them stay competitive. Procurement's ability to generate additional savings that can be turned into marketing funds in a time of marketing austerity gives companies that are able to practice clever marketing sourcing a true competitive edge. As such, sourcing specialists are becoming the front-line soldiers in marketing wars. CMOs ought to embrace them and value their contribution.