Chasing Savings at the Expense of Value...

If you work in the field of marketing procurement you will likely have faced a stakeholder who is reluctant to let you near their agency agreements because (in their opinion) ‘procurement don’t get marketing‘.

There are many accusations that get thrown at procurement folk and we’ve probably all learned ways to overcome these challenges to build strong relationships with our clients/stakeholders in order to help them get the best from their marketing investment.

The problem for many CMOs is that they have had their fingers burnt at some stage and they become ever more reluctant to open their arms and embrace procurement in their organizations. Recently I had the opportunity to experience one of these episodes first hand which helped me to better understand why CMOs are often nervous when procurement start ‘offering their help‘…

I’d been l engaged by a new client who was looking for someone to help them understand how they could improve their working relationship with their media agency. They had been working together for a few years with a good initial period but it had been slowly deteriorating over the last six months to the extent where the client was starting to look at other options. In order to avoid repeating past mistakes, the client wanted an independent view of their agency setup and I was fortunate enough to be approached to give my opinion, so I set to work…

The client is global, with a good sized budget so my initial thoughts were to focus on the client’s behaviors to see if they were creating the poor service issues through the usual channels (poor briefing, lack of clarity on objectives, unwillingness to share strategic details, too many touch points etc.). Having interviewed a number of key stakeholders it became clear that none of the above were obviously causing the problems.

My next step was to review the contract (once I got hold of it) to get an understanding of what the client was expecting and this started to shine a light on the likely cause of the problems…

When I looked at the commercial agreement it became obvious that the agency was making very little money on the account! The ‘deal’ had been negotiated so well by procurement that the agency had struggled to break even on the account over the last two years.

The key problems (as I could see them) were:

  • The team hours assigned to the account were significantly lower than required to deliver a level of acceptable service
  • The structure of the deal included an PBR that put all of the pressure on the agency to make it succeed
  • The value of the PBR was not significant enough to represent a viable incentive and the complexity of it’s structure wasted hours (for client and agency) in assessing whether it had been achieved

The result of all of this was poor service, as the agency could no longer afford to run the account in its current form. When the situation was discussed with the agency, they accepted that they had signed up to a deal (to win an account) which they had since discovered was unrealistic

So what lessons can we draw from this story…

  • As a marketing client you need to understand what you are buying – do not leave it to the procurement department entirely – you need to understand the impact of a smaller team, structured PBR, commission vs. fee model etc. – if the deal is too good to be true, it’s likely to come back to haunt you!
  • As a procurement department you need to educate yourselves to understand the impact of your actions. Comparing a $20m account to a $100m account and expecting the same commercial terms is insane…the ratio of planning costs to media spend is not directly related – they do not both rise (or fall) at the same rate
  • As an agency you need to be brave enough to turn away business that does not pay. I know this is easier said than done but the impact of this particular situation is that the agency is likely to lose the business and their reputation with the stakeholders is seriously damaged – surely this is not what they set out to achieve

As for me, one of the key lessons I draw from this experience is the need to ensure that any deal I create is structured in the right way so that all parties can make it succeed. I also see this episode as a great incentive to move to rewarding the agency based on value creation and move away from standard ‘input cost’ commercial agreements.

What do you think? Have you experienced similar challenges?

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