By Avi Dan Published: January 26, 2011
Stop Blaming Procurement -- CMOs Can Help Matters By Demanding Focus Shift Away From Price
Most agencies are pretty much the same. They have the same basic capabilities. They all claim to have proprietary tools or processes. They may have different labels for what they do, but the approach and yield is essentially the same at any holding company, global agency or small agency. In an industry that exists on branding and selling an image, judging which agencies are truly "special", can be a challenge for Clients. Parity always breeds differentiation based on price. It also expedites procurement's involvement in client-agency relationships.
Procurement came late into agency relationships, and, tellingly, when relationships were experiencing a major transition. The last two decades of the 20th century saw the gradual commoditization of agencies, fueled by the rise of holding companies, which preempted individual brands and emphasized coordination over skill. The second detrimental event was the unbundling of media from creative agencies, resulting in the fragmentation of brand stewardship. Over time, brands gave way to parity. And differentiation by quality of ideas gave way to price differentiation.
When procurement started training their eye on advertising, they discovered a fairly undisciplined area, with huge amounts of money in one of the largest categories of indirect spend of the company, without the backing of solid data, measurement or ROI. Demanding a better process and transparency was a logical step. Calling for compensation to be linked to ROI was another. The trajectory of compensation, from commission on billings to fee, is now likely to evolve into another phase -- performance-based remuneration -- with agency compensation tied to results. Each evolution involved higher risks and reduced fees for agencies. At each stage agencies complained more vociferously. And at each stage they failed the challenge to develop ROI tools and dashboards to measure the outcome of investment in their ideas.
Neither can agency folk argue that the process is solely a penny-pinching exercise, where procurement is making huge corporate-wide decisions on their own. The squeeze in fees that the advertising industry is experiencing reflects the acquiescence of marketing. Agencies may disagree or protest their parity, but the uncomfortable truth is that the chief marketing officer shares this view. Otherwise they would not tolerate the cost cutting that their agencies had to undergo. CMOs are demanding proof that the advertising is working and that results can be attributed to it. The lack of measurement and ROI data, not procurement, changed the client-agency relationship over the past 20 years from a partnership to one akin to that of buyer-vendor.
Agencies argue that procurement focuses excessively on cutting their fees and not about what they should be doing: improving efficiency and benchmarking performance. They also argue that cutting agency fees is misguided, ignoring bigger efficiencies in media, production and research.
They point out that in recent years fees have been rolled back, and that significant fee reductions can have adverse implications for agencies. Cutting agency fees put limits on the quality the agencies hire and their ability to train the talent properly. It impairs the agency's ability to invest in up-to-date technology and stay competitive. All this, agencies say, can lead to a harmful effect on the quality of service. In fact, they argue, by cutting fees, procurement weakens not only the agencies, but indirectly their client's competitiveness in the marketplace as well.
While a valid concern, agencies are not helping themselves. There has been little innovation from legacy agencies around the new role of the consumer or the need to migrate away from the old model of advertising to technologies and platforms that compete effectively in the attention economy. Few agencies differentiate themselves on expertise in social media. Or putting data mining at the center of creative development. Or building apps and platforms.
As advertising agencies grapple with the constantly changing world of media and technology, the industry seems to have transformed into an echo chamber. Every agency is now a digital agency, their leaders proclaim, with digital and TV specialists working hand in glove. It is easy to see how the industry creates its own parity, and how price is the point of differentiation. If agencies want to charge higher rates, they need to start branding themselves as hothouses of innovation and develop ROI tools.
For their part, CMOs should expedite the rapprochement between agencies and procurement executives by demanding that the dialogue shifts from focusing on "price" to "value of services." This shift will come about briskly when procurement is invited to be involved in the process from inception, working together as partners with marketing and the agency.