Extract: How to Tango with a Tiger — Sarah Ritchie on procurement | United States International Supply Chain Commission

MarkLives (@marklives) is running four extracts from New Zealand client and agency specialist Sarah Ritchie‘s second book, “How to Tango with a Tiger: a marketer’s guide to working with creative communications agencies“, over several weeks. Here’s the second, “Procurement is not the devil”.

Procurement is not the devil

They are the Devil. They aren’t the Devil. They are. They aren’t.

A company’s Procurement department exists to help its business acquire goods and services from the best suppliers at the best price. To do this, they may use a tender or competitive bidding process, which — in AgencyLand and MarketingLand — is affectionately referred to as a “pitch”.

Even a small decrease in purchasing costs can have a significant direct impact on profits and can make the difference between the success and failure of a company. Therefore, Procurement people take their job and responsibilities very seriously. Whilst this mandate sounds noble (and it is), the rub comes with the apparent gulf that exists between Procurement people and marketers (and their agencies).

Buying marketing services is quite different from buying toilet paper or stationery. In AgencyLand there is rarely ever any black or white, and if you try to put creativity in a box (or into a spreadsheet), it will immediately try to jump out again. The moment a Procurement team starts to turn the thumbscrews on an agency’s pricing, they are effectively squeezing the lifeblood out of the very thing their company needs to make their work successful. For marketers, the obvious dilemma here can be significant and often overwhelming.

Right/wrong. Good/bad.

Let’s look at some of the pros and cons of Procurement getting involved in a marketer’s world.

Pros

They can help to optimise your productivity and improve growth.
They will work with your shortlist of agencies.
They will help you to set the SOW (scope of work).
They will do the fee negotiation on your behalf.
They approach negotiation in a non-emotional way.
You can use their expertise to inform your decisions.
They can ensure benchmarking against your competitors.
They will assess market rates and determine the value for money.
They are useful for analysing the facts and numbers.
They can provide a framework for the selection process.
Their involvement shows that your company is serious.
They will develop the contract document and negotiate terms.
They can help with a retainer negotiation.
They will work with your legal department or legal advisor on your behalf.

Cons

Their primary focus is on cost, rather than on strategy or creative.
They may have a disproportionately large role and influence in a pitch process.
The procurement mandate can be challenging for a marketer to manage.
Agencies usually detest procurement’s involvement in a pitch.
Their influence can make the process lengthy.
Procurement-sourced pricing benchmarks may not be relevant to the local market or to the specific types of agencies involved.
They may like to have an opinion on the number of hours it will take to do a creative job.
Marketers and agencies can feel bullied or intimidated.
There is an expectation that an agency will submit an hourly rate, whereas some agencies operate under other charging methods (eg fixed fee).
They can come across as ‘hard’.
Their involvement adds an additional layer to the agency selection process.
Pitch processes with Procurement can be rigid.
They may not understand (or appreciate) marketing requirements.
They may not understand the multiple marketing scenarios (creative, digital, media, etc).
Marketing doesn’t always make the final decision in the selection process.
They may struggle with some of the ‘looser’ aspects of marketing that cannot be measured.
They will not be working with the agencies on a day-to-day basis, so they may not be vested in the final decision to a practical level.

The cost factor

If you follow recent industry surveys, Procurement involvement in the agency selection process seems to be on the rise. As the raison d’être of Procurement is to cut costs and buy more for less, you can see how agencies may shiver when they hear the word “procurement” — to the extent where some (excellent) agencies are now refusing to take part in Procurement-led pitches.

Companies choosing their agencies based on the cheapest rate is still a sad reality (whether they use a Procurement team or not). Cheap is cheap for a reason. The irony is that the short-term win of cost-saving may mean that your company suffers in the long term, as the agency will inevitably try to claw back the lost money wherever they can. This could result in the agency assigning junior staff to your work; outsourcing work from offshore; not spending as long on creative or strategy as they would like to (or as per the hours committed in your agreement); not being as committed to or emotionally/financially invested in your work, and so on. In this scenario, there are no winners.

Pushing back

It’s not just agencies that can feel intimidated or overrun by Procurement; marketers can feel it, too — especially if you haven’t been in the business for long, or haven’t had much experience in the pitch process.

If you feel that Procurement is bullying you (and in many cases the use of the word “bullying” is not being exaggerated), then you need to find the courage to push back. You can do this on your own, or get your senior management to help you.

To push back successfully, and to be able to have a conversation that you can ‘win’, you need to have a firm grip on the ‘value’ conversation, as opposed to a ‘price’ conversation. Price should never be the criteria for choosing a creative agency, so you need to turn the focus around.

You should know — better than anyone — the potential negative effects of picking an agency based on price rather than on quality or creativity, but you need to be able to articulate the reality in a ‘numbers’ way that a Procurement person can understand. For example, in the past you might have chosen to produce the $50 000 TVC option over the $100 000 TVC option, but what were the results? What was your share? What were your sales? What was your Brand Health Score? Were your final stats worth the cost saving? Talk to Procurement in a way that transcends emotion and ‘fluffy’ ideas to try and ground your conversation in fiscal reality.

If the only differentiator (that Procurement can see) for the creative process is price, then you will get the lowest-price agency. The responsibility is on you, the marketer, to demonstrate the value of marketing and agencies to your company, and so you need to define what constitutes ‘value’ to you.

Procurement teams might focus on price and terms whilst you are focusing on creativity and results. Therefore, instead of looking for a cheaper way, could you try looking for a smarter way instead? You need to lock down a common ground before you begin, or the process is not likely to end well (for you).

Reverse auctions — the newest procurement scourge?

Imagine this scenario:

A global clothing brand (Brand X) wants to review the rates and capabilities of its agency roster, as well as explore a couple of new agency options.

Brand X’s procurement department decides to run a ‘reverse auction’, with the intent to then update its existing agency contracts with new pricing, or change agencies if necessary.

Brand X sets up an online bidding system and coaches the participating agencies on how the process will work. The agencies are informed that they will get an opportunity to ‘bid down’ on their rate card for various elements of their service (such as ‘Account Director’, ‘Junior Designer’ or ‘Copywriting’), stopping at the lowest $-per-hour amount that they are willing to drop to.

The agencies are informed that they will not be allowed to view the rates of other participants, but can only see where they rank in the auction. The two agencies with the lowest average rate cards will be chosen to join Brand X’s panel of vendors.

What is a reverse auction?

A ‘reverse auction’ is the same as a standard auction except instead of a group of buyers bidding UP the price of an item, a group of vendors are bidding DOWN the price. In a regular auction, the market value of an item is based on the highest price that a bidder is willing to pay for it. In a reverse auction, the value is decided by the lowest price that a vendor is willing to sell it for.

Reverse auctions are a by-product of the advent of enterprise purchasing technology, which helps procurement departments purchase products and services at an ‘optimal’ price. These systems are predominantly e-based and used by large corporations and government entities.

What is being auctioned is an agency or supplier’s rate card, and does not (usually) take into consideration elements such as relationship, value, quality, creative ability, ideas, return on investment or strategic thinking.

Why run a reverse auction?

“Buyers need to remember suppliers sell the same goods and services to different companies at different prices. Those companies with good procurement pay less.” (Gregg Brandyberry, President, RDPE Inc.)

The obvious benefits to a company would be:

If the company bases its business model around short-term planning, then price will be more important than quality or long-term relationship.
Agencies are encouraged to bid low and provide good terms to win the contract.
It is a low-cost, quicker method of finding new suppliers.
Negotiation costs are almost zero.

Why do agencies agree to participate?

No agency would willingly wish to participate in a reverse auction, but there are a few reasons why agencies agree to submit themselves to the process:

To acquire a particular brand in their portfolio of accounts, to use as bait to secure other accounts.
They are desperate to increase their revenue at any cost.
They think that even a small amount of profit is still profit.
If they want to work with a particular client, they will do whatever it takes to win the business.
If the business promised is of significant size, then they may be able to recoup some money over time.

The (hopefully obvious) dangers

“[Reverse auctions are] unsustainable. It is impossible for a partnership to exist if it is one-sided and based solely on price. Reverse auctioning is damaging for both parties, and I believe it’s time the respective client and agency industry bodies produced some guidelines around them.” (Richard Bleasdale, Regional Managing Partner, The Observatory)

If you are buying a commodity, where the quality of the product is standard (or similar), then a reverse auction starts to make sense. If you are buying services that are performed by trained experts, and where the output (or ‘product’) is never standard, then it is difficult to find any logical rationale in the reverse auction process. Any marketer or agency person that understands the value of building a strong, mutually-beneficial client/agency relationship should feel nauseous at the thought of running or participating in a reverse auction.

Here is one — hypothetical but very plausible — outcome of a reverse auction:

Unbeknownst to you, your agency submits its reverse-auction pricing based on using a junior or less-strong creative team.
You end up dissatisfied with the creative work and ask it to supply reworked artwork (at their cost).
The agency puts senior creatives on the account, to provide the level of output that will keep you happy.
The agency loses any small profit it had and begins to financially haemorrhage.
The agency resigns your account.
You have to go through the procurement process all over again.

What if you are still keen to run a reverse auction?

“The reverse auction could potentially help companies drive costs down, but it may not work out in the long run. Hiring the wrong agency or the wrong team simply because they were cheaper isn’t going to grow the brand or business. Chances are the relationship won’t last long, meaning the marketer will likely run another review and onboard another agency within a short period of time. At the end of the day, “chemistry” between a client and agency is far more important in the long term for a brand.” (Casey Burnett, The Burnett Collective, AdAge, 5 January 2018)

If your company is considering running a reverse auction event, and if you are willing to face the consequences that may ensue, then you should keep the following points in mind:

The scope of agency services and the benchmarks for media costs need to be standardised and clearly communicated to all participants.
Agencies must be supplied as much information as possible so they can decide if your account is worth bidding for, and then make a competitive offer.
Agencies selected to participate must have an equal likelihood of winning your business.
You should compare agencies on a like-for-like basis.

To make a relationship based on a reverse auction work for both parties, you will need to provide clear and timely briefs; offer simple projects; have a lower expectation around creative quality, ideation, and strategy; and have a simple chain of approval.

Always remember: participating agencies WILL discount quality for price. As the adage goes, “it’s cheap for a reason”.

Is there an alternative to price-based procurement?

Yes, there is. In February 2019, Cal Harrison, in conjunction with Leah Power and the Institute of Communications Agencies (theica.ca, Canada) released a comprehensive document titled “QBS: Agency Search Guide”. QBS is a “Qualification-Based Selection” system that helps companies and procurement teams to overcome the shortcomings of the price-based RFP and focus on finding the most-qualified provider of creative services (at a fair and negotiated price) instead of the least-qualified provider at an artificially low price.

“QBS is an agency selection process that requires no new technology, no new budgets, no new staff or policies, and very little new information. The only requirement is a commitment to implement a better way of finding and hiring the right agency. It’s a very simple concept but one that some will find hard to accept (“What do you mean we don’t ask them for a price!?”)” (Cal Harrison)

To investigate a new — and potentially better — agency procurement process, and to request a copy of the ICA’s QBS document, visit: theica.ca/qbs. [In South Africa, there is Marklives.com’s own Ramify.biz, which connects agencies to marketers as well as to agency service providers — ed.]

The good news

Not all Procurement people are a Devil’s fork in the ass. There are some excellent, knowledgeable, empathetic, open-minded Procurement people around, who understand marketing and creative requirements very, very well. It isn’t fair to pigeonhole all Procurement teams in a negative light.

If you feel that your Procurement team is a little too ‘remote’ from your work to understand your needs, then why don’t you involve them more? Invite them to agency briefings, pre-production meetings, or video shoots. Let them see and experience what you see, and then show them the finished work, sales reports, stats, and the like.

Procurement involvement can be extremely positive IF you know their role; IF there is an atmosphere of mutual respect; IF everyone is clear on what you are trying to achieve, and IF you are strong enough to have a voice in the process.