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By J Francisco Escobar
Marketing procurement must play their part in client-agency relationships to ensure mutual expectations of transparency, equity, and value are being properly met.
Procurement Best Practice
Enlightened procurement and strategic sourcing really do become about the BEST overall value and business impact, NOT about the lowest price.
This article first appeared on Aprais.com
In this age of ever-increasing technological advances and globalization, a significant evolution has taken place throughout the commercial world with respect to its organizational structures, operational priorities, and business practices. This evolution has been most significant and impactful in the area of managing a company’s expenditures with third parties.
In the beginning
The powerful multinational corporations emanating from the “baby-boom” years were vertically integrated and self-sufficient. Purchasing departments maintained arms-length relationships with internal customers and adversarial practices with external “vendors,” which were almost solely dictated by price.
By virtue of the quality revolution initiated in Japan in the early 1980’s, the strategic role of purchasing was established as companies drastically increased outsourcing activities and their approach to supplier relationships.
With the availability of electronic data and the focus on improving business processes, alignment and teamwork across corporate disciplines and its key stakeholders became a priority. Consolidating a larger amount of expenditure with fewer sources yielded pricing leverage and an emphasis on supplier delivery and performance.
Fast-forwarding to the digital era, in many major corporations, third-party expenditures now exceed the salary bill, thus becoming the largest overall cost component. Procurement, strategic sourcing, and supply chain management departments are firmly entrenched within multifunctional global teams to optimize the value of all categories of spend.
In developing long term supplier-partner alliances, these professionals have placed emphasis on simplifying processes, measuring continuous improvement, and generating quantifiable cost savings. Given the increased focus on corporate governance and financial transparency, procurement’s roles and responsibilities have expanded into an even greater control of cost parameters, assessment / mitigation of risk, supplier relationship management, and development of return-on-investment metrics.
Why Marketing Procurement?
Procurement’s coming of age has included an irreversible entry into the Marketing Services category, where relationships have historically been handled directly between marketing stakeholders and their supplier-partner counterparts.
Internal practitioners still have the “authority to commit” and in some cases, the “authority to spend” without procurement’s blessing; and the mandate of exercising corporate fiduciary responsibility and ensuring fairness in all business transactions has created a compelling argument for Marketing Procurement involvement.
In the past 40 years, cycle times have consistently been reduced in all aspects of corporations, especially with respect to core business processes, while the working environment has become increasingly flexible and competitive. With the pervasive involvement of procurement and strategic sourcing, the aforementioned arms-length relationships with internal customers and external suppliers have progressed to an arms-locked structure.
In effect, procurement now has the ability, and clear responsibility, to become the process integrators for both internal stakeholders (coordinating requirements of the demand chain) and external supplier partners (managing the supply chain), thereby enhancing the productivity of all concerned.
With this increased involvement comes a need for procurement teams to better understand the marketing business. Applying common sourcing practices without understanding the nuances of the marketing and agency world can stifle creativity to the detriment of a company’s long–term brand image..
Against this backdrop, the recent volatility brought on by the global pandemic, as well as focus on corporate governance and diversity, have forcibly increased the scrutiny of all company expenditures. Simultaneously, procurement and all other overhead departments at major corporations have been downsized.
The net result has been procurement and strategic sourcing staff under greater pressure to control costs, improve processes, and reduce corporate risk in an ever-evolving and challenging environment. In essence, we now have fewer people in the discipline managing different and higher levels of spend, with aggressive management targets for affecting their company’s bottom line.
Nowadays, the Marketing Procurement discipline may report to Corporate Services, Finance, general Procurement, Marketing or Sales. How this particular organization is perceived by its company’s upper management, as well as by the actual marketing budget owners it supports, is a critical factor in the organization’s ability to effect change, influence behavior, and build value for their respective constituencies.
Without appropriate “buy-in” from these key internal stakeholders, the discipline’s reporting structure becomes irrelevant to its ability to manage supplier relationships strategically and successfully. Ultimately, procurement’s role is to serve as architects of relationships, help define working partnerships, and then manage them for maximum efficiency and effectiveness.
Getting to value-based procurement
Much has been said since the turn of the millennium about Marketing Procurement moving from a predominant focus on cost savings toward more around value creation. Some handy tips for moving client / agency discussions, especially with regard to compensation and performance evaluations, to a more strategic value-based level are as follows:
Achieving value-based procurement requires early involvement to layout expectations, teamwork that gives each party a chance to succeed, operating with a thoughtful strategy, representing the long-term interest of shareholders and of course, a large enough team to have more informed discussions.
Taken in this way, enlightened procurement and strategic sourcing really do become about the BEST overall value and business impact, NOT about the lowest price.
Enhanced profitability scenarios
Procurement best practices for the current decade includes the use of enhanced profitability arrangements, also referred to as incentive compensation programs or bonuses. In essence, it is application of risk / reward methodology, whereby the total amount of compensation is contingent upon achievement of mutually agreed-upon objectives and goals.
“Best-in-Class” enhanced profitability arrangements share some common characteristics (the 3 T’s) as follows:
Trust. Tool. Teamwork.
This level of trust builds over time and is challenging with a new relationship. It is recommended that these arrangements not be initiated in the first year of compensation negotiations.
The key is that the process for developing and deploying tools be collaborative, simple to administer, and subject to modification. The tool MUST reflect an alignment with business objectives.
There must be commitment to the process – clients are responsible for fair assessments and suppliers are obliged to address improvement areas with prompt, deliberate action plans.
Categories and criteria for performance measurement can vary widely, depending on the client’s inclination. When such arrangements are properly deployed, the benefits are obvious in that they enhance agency performance by linking results with compensation, improve the client / agency relationship by promoting dialogue and building trust, and thus creating a “Win-Win” scenario.
Who should hold the ultimate stewardship responsibility for the client / agency relationship? As has often been said, “Clients get the agencies they deserve.” So in the broadest terms, the responsibility lies with the client and not the agency.
However, there are two schools of thought about who should own the relationship within the client organization, marketing or procurement?
A Case for Marketing
Marketing should be responsible for the relationship management, in so far as they are aligned in advance with agreed metrics and are also aware of the financial implications for the suppliers in their day-to-day activities. The final calculations of the bonus lies with procurement, yet not in managing the relationship, which is an interaction between the two relevant parties over time.
Without day-to-day involvement in the marketing process, it is difficult for procurement teams to judge how the relationship is working. However, they can facilitate a framework to encourage healthy relationships.
A Case for Procurement
By relinquishing relationship management responsibilities to the appropriate “process owners” in procurement, the immediate benefit to the client is more time for these same stakeholders, the “turf owners,” to concentrate on executing great marketing programs with their supplier counterparts. Additionally, procurement is in a position to consolidate requirements of diverse, and sometimes competing, business units or brands within their client company, thereby appearing as one face to the supplier, whether in negotiations or relationship management practices.
The role of stewardship may be naturally filled by procurement. With easy access to all of the pertinent functional departments within a client organization, they are best positioned to work with internal audit, environmental, facilities, finance, human resources, information technology, legal, and security to ensure the client is obtaining best value from its supplier relationships while mitigating any inherent risk.
Ultimately, this a management decision for each company. In any case, both marketing and procurement must be involved in some way in supplier relationship management, with roles and responsibilities clearly defined and communicated.
A commercial area where Marketing Procurement absolutely needs to come of age in this decade is in the handling of payment terms, one of the most contentious and polarizing situations affecting client/agency commercial relationships where ”Cash is King.” On the one hand, some clients are facing unprecedented financial and cash flow positions that have dictated a change in their normal payment cycles to all 3rd parties.
On the other hand, some better faring clients are taking advantage of their cash power position, as well as the current climate of improving balance sheets no matter the consequences, to arbitrarily raise payment terms beyond previously acceptable 30 to 60 day norms. This practice is placing an undue burden on suppliers and causing a damaging rippling effect throughout the industry putting pressure on the whole supply chain.
Unfortunately for the supplier side of the industry, the impact of procurement and finance departments’ involvement in supplier relationships, coupled with the prevailing credit crunch, has been to standardize practices such as payment terms and early payment discounts across a corporation’s supply base. If we take the largest marketing budget item as an example, paid media expenses, one can readily see the fallacy of extending payment terms and applying early payment discounts to this type of expenditure. There is not a single agency that handles such expenditures that could stay in business if they were not able to achieve cash flow neutrality and receive full payment on the media placed for their clients. To a lesser degree, the same principles apply to agency fees, production and other significant client-billable expenses. Agencies are not in the banking business. Although clients may push back and expect their partner agencies to be successful enough to possess sufficient working capital, it is unrealistic to think that they are adequately capitalized for everybody. Anything over 45-day payment terms clearly becomes a burden.
Although several industry groups have been working to address the issue directly, there has been little concerted effort to denounce this practice. This has the potential to reflect poorly on the procurement community and negatively impact the overall Marketing Services ecosystem.
A beverage company recently announcing 360-day payment terms as a condition of working with them, is an undeniable wake-up call for the industry to establish reasonable commercial payments standards.
Using cash flow as a negotiating leverage goes against published research that shows marketers who adopt more considerate financial practices with their suppliers get better value.
Dialogue and process
There is a need for both parties to trust, open-up the dialogue, and embrace difficult matters together.
Clarity of communications by way of a defined and disciplined scope of work is an essential first step in the journey. A critical part of the ongoing dialogue is an educational process that enables learning about each other and looking for solutions on both sides. And finally, a semi-annual relationship review, whether through a formal evaluation process or an informal gathering of key stakeholders, provides the necessary two-way feedback to engender a continuous improvement mindset. Suppliers have a vested interest to insist that formal performance evaluations be routinely conducted, as they provide the quantitative and qualitative historical data to support keeping a vibrant relationship alive.
“Honest dialogue about the most important issues at hand can typically keep small challenges from becoming major problems that lead to irreconcilable differences”.
Nevertheless, procurement and strategic sourcing continue to be measured based on their cost initiatives, be they savings, cost avoidance, containment, or cost improvement. All of this terminology is synonymous with the “added value” that is the primary justification for the involvement of these organizations. However, procurement is not truly on a “witch hunt” for savings. It is their fiduciary responsibility to manage client business transactions and ensure that limited resources are expended in the most efficient manner possible. By spearheading joint process improvements which help both parties become more efficient and effective, resources can be freed up on either side and reduce unnecessary cost.
In the final analysis, a continuous and honest dialogue about the most important issues at hand can typically keep small challenges from becoming major problems that lead to irreconcilable differences.
The host of extra responsibilities with finite resources, place new and extraordinary pressures on procurement. Third party consultancies stand ready to support the process and bring mutual benefit to the client and agency.
The advent of the “Procurement Era” at the dawn of the new millennium, closely followed by a series of severe economic shocks – the dot-com bust, the “Great Recession,” and most recently the global pandemic – have taken a toll on the most important component of Marketing Services relationships: the element of trust. Three major areas have been responsible for the evident erosion of trust between marketing clients and their agency supplier-partners — transparency, equity, and the connotation of value. Without agreement on standards and guidelines in these vital areas, individual marketers have been left to their own devices, while individual agencies have been somewhat defenceless against a hodge-podge of business practices and interpretation of value that threaten the very fabric of commerce.
With respect to transparency, what our industry clearly needs are rules of the road for what is acceptable and unacceptable, in what may be called “limited full disclosure.” Secondly, there is no greater enemy to trust than the lack of equity in a relationship. Value, like transparency and equity, has to become a two-way street with respect to who defines it and, more importantly, who determines it.
Nothing could be more productive in client / agency relationships than the dialogue that is created between the parties when mutually defining success and value for their unique “marriage.” And even more interesting is when actual monetary value can be tied to the accomplishment of collaboratively devised objectives. When a client and agency can agree to a scope of services that relate to realistically achievable objectives, and the agency is able to exceed them, then you have true incremental value that should be rewarded accordingly. It’s not rocket science, but it does require a commitment by both parties to put in the necessary effort, energy, and time to ensure a fair and honest playing field. Doing so can only serve to encourage, instil and reinforce trust.
To truly lead the future, Marketing Procurement must push the industry into collaboratively developing standards and guidelines for the critical commercial issues governing client / agency relationships. Only then will they have truly come of age as the enlightened professionals that ensure mutual expectations of transparency, equity, and value are being properly met.
About the Author
Francisco Escobar, founder of JFE International Consultants, is a business management advisor to global advertisers and agencies in the Marketing Services industry. He has restructured and stewarded major agreements from both sides of the negotiation table. He speaks internationally on issues surrounding Marketing Procurement and optimizing business relationships.
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