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July 7, 2004
How to Involve Procurement in Managing the Advertising Budget, Part 2 of 2

In part 1 of the article, we outlined the opportunity and detailed steps clients can take to make this work for both sides. Part 2 describes the detailed steps that both sides can take together.

1. Educate both sides: Although a great ad is the most visible result produced by an agency, this represents perhaps less than 5% of the effort that should be expended by agency to assure a successful campaign. Procurement needs to be educated on the entire process in order to properly value and evaluate an agency's services. Likewise, agencies need to understand how clients plan their business using the tools such as SCM and ERP. Smart agencies will be able to align their efforts more closely with a client's overall strategies, and uncover additional business opportunities in the process.

2. Be patient: A rush to judgment or taking precipitous action on either side is a recipe for failure. In addition to taking the time to educate both sides, we would also recommend introducing procurement on a phased approach. Starting with areas where traditional procurement methods would be easiest to apply such as production and talent costs would be beneficial to phasing in the approach. Early wins in these areas will create the momentum and the acceptance necessary to take on the larger and less easily defined areas.

3. Be flexible: It is natural to gravitate to the familiar and resist change (i.e. risk change). Both sides should view this time as a chance to test and to challenge the old ways of doing business. To this end, it is essential to have the right personalities on both sides that are willing to work together for change. Select a procurement executive with a strong strategic perspective and excellent communication skills who can appreciate the value of the marketing process. Agencies should be asked to identify a counterpart with complimentary skills. Ideally, this individual would come from a corporate development function and not be charged with short-term profit responsibility.

4. Ask for and provide performance data: We recently saw the results of a survey where Marketing VP's were asked the following question: "If your CEO suddenly said you have $1,000,000 more to spend but you must spend it on something that has the highest probability of driving sales: how would you spend that money?" The most frequent answer was email marketing followed by direct mail. The reason is obvious-you can measure the results. By introducing procurement into the process, this gives you the opportunity to put everything back on the table for hard-nosed evaluation by an independent third party with no axe to grind. But this can't be a one-way street. To make this work for both sides, agencies need information for their analysis so the best decision can be made looking at all sides of the issue. Right now agencies must request this data. We would recommend that sharing of data be institutionalized even to the point of having the agencies represented at regular brand financial reviews.

5. Value the long-term relationship in the equation: The 4A's recently reported that the average life span of a client was down to 5 years. Although this was viewed with alarm, most CRM/LTV models measure value over 5 years. Enlightened procurement is all about creating lasting vendor relationships with give and take. Agencies should measure client profitability over five years and expect to make an investment in the first year or two. Clients need to recognize that a longer relationship generates a greater experience capital and increases the cost of switching agencies. With procurement in the process, switching costs rather than politics may prevail, and we may actually see longer client life spans.

6. Manage expectations on both sides: Agencies believe that they are perceived by their clients as fat cats. On the other hand, agencies believe their fat cat days are well behind them and they are running a tight ship-and even taking on water. They complain that the present fee structure doesn't allow them to retain the best creative talent who would rather write for Hollywood, or hire top-tier MBA's who would prefer to get rich on Wall Street. For procurement to be successful in this area, clients must set realistic expectations that agencies will support. To do this, cut this down to a manageable task by trying the following logic. There is at least 20% waste built into every business and every operation. Waste can come in many forms - from errors to rework or inefficient use of people's time (meetings that never start on-time or never produce results). Or use Pareto's 80/20 rule. Set as a goal to merely recover 2 points of the 20 points each year. Beat the goal and share the rewards.

In the final analysis business is just about people and personalities. Companies may religiously apply the above rules and yet be disappointed in the results. If both agencies and clients approach this change with an open mind and trust each other to work for a common goal, chances are the results will exceed your expectations. And if you think about just how critical advertising is to the success of most brands, you realize there is truly no choice but to cooperate.

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The procurement issue may be the hottest topic facing agency search today. With over 12 years experience conducting agency searches and compensation development services, it is with little surprise that Alan Krinsky, along with Steven Marcus, want to discuss the explosive topic of agency procurement.

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