There is a type of procurement professional I meet that can best be described as ‘hit and run’. They target marketing, aim for the ‘low hanging fruit’ or the ‘quick wins’ then hit the agency remuneration making massive cuts and then quickly move on to the next category leaving the devastation in their wake for the marketers and agencies to deal with.
This is not the majority of procurement professionals, according to CIPSA (Chartered institute of Purchasing and Supply Australia) who optimistically themed their 2007 annual conference “It’s not just about the cost”. Yet for these ‘hit and run’ procurement professionals the only meaningful measure of success is cost reduction.
So why is it that when they apply their tried and true cost reduction strategies to the marketing category do they often create poorer outcomes?
The three main areas of failure are:
1. Lack of cost metrics – not just what was spent, but what was purchased for the spend in volume, quality and complexity
2. Lack of performance metrics – what was achieved for the spend in terms of brand equity improvement, sales, margin, revenue, profit or anyone of the many metrics used in marketing track performance and calculate return on investment
3. Lack of efficiency metrics – without the first two there is no way of being able to then optimise the process to decrease costs and improve efficiencies within the marketing process
When faced with none of these metrics being available, the best approach would be to develop and implement process to capture the information required and then to develop strategies to improve efficiencies and effectiveness to deliver reduced costs. But this takes time and resources and so the more expedient ‘hit and run’ approach is to simply cut the cost, book the savings and move on.
So here is an example of the devastation this causes. A marketer was spending $20 million per year on media and paying the agency a retainer that was effectively 5% of the media spend. In return the agency was planning and buying all main media and optimising the $4 million on-line spend, delivering the client about $38 million in media value through discounts and added value. Then procurement came along with a benchmark for agency remuneration of 2.2% and reduced the agency retainer by $560,000 and reducing the media staff under the retainer by 50%. The agency could no longer afford the digital strategists, planning became more routine and the media value obtained fell to about $32 million.
So procurement hit a half million saving and ran away from a six million reduction in value.
Of course, the smart procurement professional would have made sure the metrics on media value were in place and perhaps reduced the fee slightly, with the opportunity for the media agency to earn a bigger bonus for driving audited media value above the existing level. That is smart marketing and smart procurement.
How do you pick a ‘hit and run’ procurement professional? Get them to articulate what their measurable objectives are and if it is savings or cost reduction or cost optimisation alone, run before you get hit.