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Three thoughts to help level the procurement playing field.

January 23, 2019

 

 

There’s a quote from Mark Twain at the beginning of the movie The Big Short that caught my attention yesterday.

 

“It ain’t what you don’t know that gets you into trouble; it’s what you know for sure that just ain’t so.”

 

Such profound insights aren’t uncommon with Twain (and I particularly favour his outlook on golf), but I found it particularly poignant because the season for agency contract renegotiation is upon us once again. If we were to ponder the plight of the creative agency market,[i]there are a few things that the market generally accepts as facts that, given another perspective, perhaps just ain’t so.

 

  1. There’s nothing wrong with making “cost savings”.

 

Well, that’s as maybe, but creative agencies are often struggling to make what they would describe as a reasonable profit margin already. Reportedly, negotiations with many clients over fees are regularly pretty hostile, and when faced with procurement’s argument of an oversupplied market (see below …) and the prospect of losing a client’s business, agencies frequently capitulate to their clients’ demands for more “savings” and they continue to be challenged to do more for less.

 

Aside from the powerful argument that brand advertising allows for brands’ price flexibility to the consumer and hence greater revenues and profitability for brand owners[ii], there is another perhaps simpler argument. Agency fees are not “costs”, they’re investments.[iii]

 

So, what’s the difference between a cost and investment? While I admit that there are some grey areas where something that could be described as a cost could also be an investment[iv]the key difference is that investments’ onlypurpose is to provide a return greater than the principal. And, like any other investment, if you reduce the principal and all else remains equal, you will also reduce your return.

 

All investments exist on a theoretical scale from critical mass at one end to a point of diminishing return at the other end (See figure 1below.) I think few, if any, agencies would be at the diminishing return end of the scale on the right, but many seem, year after year, to edge ever closer to the point of only just achieving critical mass – where their fees are little more than just enough to get somethingdone; creative agencies’ profitability are the most convincing indicator of this trend.

 

figure 1.

 

One might argue that making the agency do the same work in fewer hours is just making them work harder and therefore it’s a reasonable expectation of the buyer to insist on this kind of efficiency. 

 

Indeed, if I employed somebody to build a wall for me I don’t want to pay for the time his hands may be idling in his pockets – that’s fair enough. But the difference between an ad campaign and a brick wall, is that the wall’s needs are specific and the campaign solution could be anything. So reducing the fees means the you’re investing less in things like strategic planning to find consumer insights and develop a strategy; investing less in the creatives to develop ideas and to execute them. Furthermore, if my wall is built incorrectly I can demand it to be remedied for the same price, whereas if I buy a cheaper campaign from my agency, I won’t ever see the better campaign they could have produced if I had invested more appropriately. 

 

These reduced investment represents a risk of a poorer outcome from the agency and a lower return for the client. Indeed, as any fund manager or gambler will tell you, the only way to maintain a return on a lower investment is to increase your risk.

 

The only way to maintain a return on a lower investment is to increase your risk.

 

2. What risk?

 

As much as the procurement function is usually required to make savings or avoid unnecessary costs, its purpose is also to mitigate risk. But when reducing an investment in agency fees, where exactly is the risk? Besides, clients can always test the effectiveness of the advertising before they run it can’t they?

 

Well, the risks are many – a less persuasive creative idea therefore a greater reliance on high media spends, slower campaign development and more reworks reduces speed to market and there’s an opportunity cost, a better funded competitor might produce advertising with greater appeal to consumers … and so on. All of them are impossible to measure without an alternative history in which a better investment level was made. But the greatest risk, as I mentioned above, is that clients can’t test advertising they didn’t buy. So, as much as the campaign a client didbuy can be tested for its adequacy, you’ll never know if you could have bought better, more effective, more persuasive advertising that could have provided a greater return on investment.

 

Advertisers cannot pre-test ads they 

didn’t spend enough money to buy.

 

But what if the resource plans have stayed the same and the agency has just reduced its fees? That’s surely a legitimate saving? 

 

Not necessarily, there is always a range of ability and a range of salary for any given value-creating role in an agency. You may have just bought cheaper people, who frankly, are usually not quite as good, or at the very least there is a risk that they won’t be as good as others. Or you have simply made the account less valuable to the agency so you risk a reduction in discretionary effort from the agency’s team and management.

 

3. The creative agency market is oversupplied.

 

Lastly, the justification for going after agency fees and that agencies need to be more competitive usually stems from a claim that the creative agency market is vastly over-supplied.

 

It is indisputable that there is indeed a large number of creative agencies, both in the UK as in most other developed markets. But for a market to be over-supplied it means that there would need be a burden of choice for any given client, not that there are just lots of agencies of all shapes and sizes.

 

To illustrate, for a moment imagine rather than buying an agency you’re buying a car. While there are lots of makes and models from which to choose, if you’re only in the market for a smallcar, the choice of models is significantly diminished. And, as you specify more options, so the market of available, eligible cars decreases. But arguably this still leaves you with a reasonable choice of near enough like-for-like makes and models. But this is where the comparison falls down in a number of useful areas:

 

First, cars are cars. They have safety records, reliability statistics, buyers can make value judgments between price and quality quite easily. However, creative agency value is variable. If you don’t believe me, just watch any ad break on TV. Agency performance is variable. Agencies can solve their clients’ problems well or, frankly, not so well. It might be the same agency with a client at a different price that provides less value to one vs. another, or a different agency at a lower price – the risk of poorer performance is still there. And agencies can start off working well on a new account and then diminish their value over time. So how can clients judge the value difference between one agency and another?

 

To answer this question we must first agree how we can measure the value of something that has not yet been created. When inviting agencies to pitch, you can review their previous advertising but that is not something they’ve developed for youand only the last two or three agencies in the pitch process will show you what they can do with creative work. In reality, it is only an agency’s talent that determines their future value. There are no machines that solve clients strategic and creative problems – at least not yet there aren’t. And talent is different from one agency to another, so the agency market is only over supplied if you don’t care what kind of talent the agency has or assigns to the account.

 

The market is only over supplied if you don’t care the agency talent.

 

So, as a proxy for value, when compiling a long list of agencies for a pitch, we could use a measure of the agency’s perceived employer brand i.e. its ability to attract and retain great talent. Then we could compare that to different agency sizes as a second criterion. This segments the market very effectively - by agencies that have the best people (value) according to their size (the client’s relative importance to them).

 

The result looks like this:

figure 2

 

 

When we begin to populate this chart with agencies it starts to get more difficult to argue that the market is over supplied. And if your need is for a mid-sized agency with a really strong employer brand, demonstrable integration credentials and close ties with a media agency, what was a well populated segment reduces significantly. Then need to rule out all those agencies with accounts that are category conflicts.

 

So if we asked ourselves what gets us into trouble as Twain suggests, there are a few things that we think we “know for sure that just ain’t so.”

 

1. Fallacy: Agency fees are costs to be saved where possible.

No, they’re investments, which you cannot reduce without increasing risk or reducing your return.

 

2. Fallacy: we can test our ads for quality to reduce the risk of reducing costs.

Well, yes you can. But you can’t test the more effective ads you didn’t pay enough for the agency to develop in the first place.

 

3. Fallacy: the agency market is over-supplied. 

Parts of it might be more competitive than others, but it is nothing like as competitive as some might have us believe. The truth of a less competitive market is that suppliers can command better prices, it therefore becomes clear that it’s in procurement’s  interests to convince the market that it is over-supplied.

 

Importantly, none of this is to say it is necessarily wrong per seto reduce fees, but it needs to be consistent with the business problem the client is trying to solve. There are some circumstances when it makes sense, but they are far, far fewer than the instances in which the practice is applied. 

 

But for now, and in the interests of creating a better return on marketing expenditure, I hope that these thoughts might give sufficient cause for concern such that hard-nosed negotiators for clients might pause for thought band some agencies might have some more powerful counter arguments.

 

David Meikle

Author and Founder – How to Buy a Gorilla.

www.htbag.co.uk

 

[i]I should perhaps note here that I am referring in particular to the global creative agency networks and UK creative agency market, but I am confident my observations will keep most of their integrity if they travel to other developed markets.

 

[ii](see The Long and The Short of Itby Binet and Field, and The 1% Windfallby Rafi Mohammed, both on Amazon)

 

[iii]Many clients have fallen into the trap of “working vs non-working” assessments of marketing spend. This is well-trodden ground and if you’d like a perspective on that in particular you can find an earlier blog on the subject here: https://www.howtobuyagorilla.com/single-post/2016/11/30/“Working”-and-“non-working”-marketing-spend-are-dangerous-misnomers

 

[iv]Consider buying your business’s building for example, which could provide a healthy return on its eventual sale.

 

 

 

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