Too often we hear about marketers taking their agencies to tender on a regular basis. At the end of a typical three-year contract the advertiser goes to market to fulfil good corporate governance. Often this is mandated in the organisation as good procurement practice. But is this best practice for good governance when it comes to advertising and media agencies?
The evidence suggests that the tender process is a flawed approach for ensuring good governance. It is a way to select a new agency or supplier when the existing relationship is underperforming or broken. But taking an agency to tender when the agency relationship is healthy and performing well is a waste of time as it more often than not results in a poor outcome.
Defining good governance
The purpose of good governance is to ensure the commercial arrangements of the organisation are providing good value, minimise risk and deliver high performance. The assumption that the tender process delivers good governance assumes that if the incumbent is market best, then they will win the tender. The problem is the assumption requires that the tender process is based on measuring value and not just cost, assesses risk and determines performance.
But as we shall demonstrate, the typical pitch process for creative, content and media does not provide any of these evaluations. Instead of value the focus is on price. Rather than minimising risk, the process places the advertiser at risk. Instead of measuring performance over the contract period, it assesses one off responses.
Yes, the tender or pitch process can help you choose a new agency, but it is flawed for reviewing an existing relationship and here is why.
Anyone can do it cheaper
When it comes to the competitive tender, price may not be the driver initially, but it often ends up the deciding factor in the negotiations. In the absence of a defined scope of work for the agency, the evaluation and the negotiation will focus on the cost of the agency resources.
Agencies may under quote or succumb to the negotiation pressure. Other agencies are known to significantly underquote either on resources or cost of resources. This is especially true of the agency that perceives they are not the preferred option and they hope the strategy will ‘buy the business’. No matter if it is effective or not, it sets a discount price, which can be used to apply further pressure on the other agencies.
A recent media tender we managed had two of the three agencies, not the incumbent, significantly underquote the agency fee proposal. One simply offered all senior staff for free in the first year of a three-year contract. The other removed their overhead rate, proposing a direct salary cost and a 15% profit margin. In both cases we needed to actually negotiate with them to more realistically quote against the very detailed scope of work provided and the suggested resource plan that had been tested annually with the incumbent for the past five years.
The trouble is these low quotes can only be sustainable if the agency either significantly cuts corners or generates additional revenue from the client or other third parties. Neither of these practices are sustainable or transparent. Yet the competitive tender encourages this behaviour.
Anyone can overpromise
Customer satisfaction comes from overdelivering. But what happens when you overpromise and underdeliver? This is the situation many agencies find themselves in when tendering. Most competitive tenders ask not just for a proposal on providing the services, but what other services can the agency provide. Additional services are offered and then often negotiated as added value to the contract relationship.
But what happens if the agencies are making promises that they either cannot or will not deliver? You could capture these promises in the contract and then enforce the contract. But let’s consider how you could enforce this contract breach.
A media agency tender we supported for the advertiser included a media buying positioning requirement. This is where procurement asked the agencies to provide a buying positioning and discount level based on a predetermined media investment. Many of the agencies provided significantly low buying positions, with large discounts. We highlighted that those excessive discount positions were undeliverable, but the decision was made to go against our advice and select the agency with the most excessive promise.
Three months after appointment the advertiser contacted us to say the agency had informed the advertiser, they could not deliver these discounted buying positions. The advertiser asked our advice. There are three options in this case. Firstly, they could take the agency to court for breach of contract, but the agency could call them up on our advice about the fact that they were unachievable positions. Secondly, they could go to tender again and select a new agency and flag to the market they had made a mistake. Finally, they could get on with the relationship and have the agency work to maximise the value over the term of the contract.
No matter what they decided the fact is the tender process for due governance did not deliver a better outcome than they already had.
Anyone can appear better on the day
A three-year agency contract lasts 783 working days. Yet the pitch or tender process can be reduced to a number of days between the agency and the advertiser. The selection process is based on these few hours and days of meetings and presentations. You would think that this gives the incumbent an advantage. But the fact is the incumbent comes with the baggage of the past three years or longer.
For the other agencies, it is an opportunity to impress with new people, new ideas and new options. The attraction of the new is powerful, just like the fear of missing out. But what new can the incumbent offer? Perhaps a new team? But this would be counter-productive if the existing relationship was seen as performing well and of a high quality.
Of course, the other agencies will put their best team forward. One of the concerns for advertisers is the people pitching to them will not be the team working on their business. They know the incumbent team working on their business, but there is no way for those pitching to provide a like for like team for comparison.
This is a huge risk for the advertisers as they are making a decision based on a few days with a range of new agency teams in a contrived set of meetings and presentations. The TrinityP3 full-day strategy workshop goes some way to creating an environment of working together. But most tenders and pitches are just meetings and presentations.
The good governance alternative
We have been providing those advertisers who want to avoid the disruption of a pitch with an alternative approach. This approach is to undertake a commercial review of the existing advertiser / agency relationship. The review focuses on reviewing and assessing the performance, value, productivity and contractual arrangements to ensure market competitiveness and identify any areas for improvement.
It is called a Commercial Review and you can read more on this here
TrinityP3’s comprehensive Search & Selection process provides extensive market knowledge, tightly defined process and detailed evaluation and assessment. Find out more