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Expert tips for value-based procurement in marketing
February 23, 2023
J Francisco Escobar, founder of JFE International Consultants, takes a deep-dive into procurement's coming of age and offers insight around the impact on client-agency relationships.
In today's 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 optimise the value of all categories of spend.
Procurement’s coming of age has included an irreversible entry into the marketing services category. With this increased involvement comes a need for procurement teams to better understand the marketing business.
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:
- Share and understand each other's key "care-abouts", then seek alignment of same
- Meet in person - don't negotiate strictly via email, Zoom, or over the phone
- Eliminate all mystery and inefficiencies in your business processes before suggesting the other party do so
- Educate each other about specific industry norms in procurement and creative / marketing services
- Focus on long term gains and strategies and always "play for win-win"
- Talk about money last; don't allow it to interfere with the discussion of value
- Treat the other party with the same respect you would expect from them
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.
Enhanced profitability scenarios
Procurement best practices for the current decade include the use of enhanced profitability arrangements, also referred to as incentive compensation programs or bonuses.
Best-in-class enhanced profitability arrangements share some common characteristics, known as the three T's:
Trust: that the client allows the incentive to be meaningful, engages in the process as objectively as possible, and budgets for the maximum incentive payout.
Tools: in place that enable the parties to agree on all measurement objectives / specifics, capture quantifiable metrics, and properly evaluate qualitative criteria.
Teamwork: that ensures input from all relevant, engaged client stakeholders, promotes bilateral communication, and encourages collaboration to continually improve the process.
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, 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 organisation, 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.
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 is in the handling of payment terms, one of the most contentious situations affecting client-agency commercial relationships.
On the one hand, some clients are facing unprecedented financial and cash flow positions that have dictated a change in their normal payment cycles.
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.
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.
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.
Process is important
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.
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.
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, instill 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.
J. 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.