Analysis: Procurement's growing role in marketing pitches in times of budget crunch

The procurement team is an integral part of any pitch process. According to a whitepaper by R3 titled "Optimising procurement for marketing", there are seven value adds that procurement can bring - cost reduction, positive revenue impact, cash flow improvement, return on investment, risk mitigation, cost avoidance, and partnership.

There are also three common types of procurement activities - tactical procurement which focuses mainly on cost reduction; traditional procurement which focuses on cost reduction, cost avoidance and risk mitigation; and strategic procurement which includes the traditional areas and ROI, partnership, cash flow and revenue increase.

Although there are different critical aspects to procurement's role, in the marketing industry, stories about the department prioritising cost over quality during pitches are common water cooler talks. With the COVID-19 pandemic resulting in the tightening of marketing budgets, it is possible that procurement's authority during the decision making process of pitches become even more pronounced. Industry players told A+M that in general, the procurement team has been fairly involved in pitches over the past few years and not only as a result of the tightening of purse strings during the pandemic.

CEO of GroupM Malaysia, Chanchal Chakrabarty, said the procurement team began playing a bigger role as the softening economy brought about increasing cost pressures. "In fact we can probably draw an interesting correlation here - as the focus on brand building started declining, procurement started playing a bigger role. This reflects a change in mindset towards short-term business goals and hence also translating into short-term value extraction approach with agencies," he said.

When it comes to media pitches and media agency relationships in particular, Chakrabarty said procurement does have a large influence. According to him, many pitches now begin with a pricing template from procurement which becomes the mode to shortlist agencies for the next round. He added:

In about 75% to 80% of pitches we have been in the last couple of years, the decision was pivoted or strongly influenced by procurement. In many media pitches, the person in charge is from procurement and not marketing.

"And while almost all pitch presentations are about response to marketing briefs, most end up with procurement beating down on fee/commission and media pricing," he explained.

Who has the final say?

It would be impossible to definitively point out that procurement indeed has the final say for all pitches. According to Bala Pomaleh, CEO of Mediabrands Malaysia, this usually differs with organisations and depends on the level of involvement by the procurement team, 

"Depending on the client and their remit, procurement teams can be directly involved to manage pitches and cost considerations, or work with pitch consultants to help manage the cost process. If the procurement team is only involved in improving cost, then the marketing team may at times override them for qualitative reasons," he explained.

Based on his experience, Pomaleh said over the years, the involvement of procurement has been more pronounced with regional and global clients and large local clients, which have been relying extensively on their procurement teams to help manage pitches. It is also witnessing clients across all sizes which now have procurement teams getting actively involved in marketing communication spend decisions.

Likewise, the procurement team is also actively involved in the decision making process for some of McCann WorldGroup Malaysia's clients, especially those multinational and government-linked companies, said its CEO Sean Sim. In certain instances, procurement teams initiate the invitation to pitch and prepares the list of qualified agencies. They also sit in for the agency briefing process and handle all correspondence with agencies to ensure good corporate governance. In most cases, Sim said the marketing team selects the pitch winner before procurement gets in touch to start the negotiation process on agency fees and costs. 

Meanwhile, a strong organisation will be one where procurement has an equal role in the decision-making, Nizwani Shahar, chief executive of Ogilvy Malaysia, said.

Its role is to advise, counsel and recommend. The final say should still be with the project lead.

"I have had the good fortune to be in negotiations and pitches where procurement would review and provide feedback on agencies or suppliers based on effective pricing while marketing still has the final say on which agency is best suited for the task at hand," she added.

On the other hand, Prashant Kumar, founder and senior partner of Entropia, believes that in smart companies, business and marketing leadership has the final word on marketing cost cuts, even if they use procurement to help manage cost efficiency. In "disconnected retrograde organisations that lack big picture", however, Kumar explained that procurement is left alone without due guidance by the business leadership in appreciating the marketing value.

(Read also: Analysis: 1 pitch, many agencies: Marketers, we have a problem)

Going beyond the common perception of cost-cutting

With the procurement function becoming more involved in pitches, co-founder and principal of R3, Shufen Goh, told A+M that procurement professionals want to add strategic value to their marketing peers, beyond just the common perception of cost cutting. Goh said that procurement professionals can be a great partner to their marketing team by leading and facilitating all the contractual details, accountability framework to drive performance and transparency that is much needed in modern advertising landscape.

"However, if the role of procurement is purely as administrator of bidding or negotiation process, then it is unlikely that they have much influence on the decision. Agencies should do their homework to suss out the role of procurement in the process, understand that their objective may be different to what you have assumed," she added.

Similarly, Ogilvy's Nizwani also said that marketing and agencies must appreciate that procurement's role is to get the best value - service, outcome and price - for the business versus just haggling for the lowest price possible. 

"Likewise, good procurement teams invest the time to understand the nature of the work and the agencies recommendations. An elegant negotiation ensures that it is win-win for all parties versus a hatchet job on the price which could result in dissatisfaction or sub-optimal resources to effectively manage the business and deliver on the tasks," she added.

Meanwhile, it has been well established that the notion of procurement is built upon value versus cost. According to Kumar, while the cost aspect is better understood by most bona fide procurement departments, the value part is less well understood. This is especially critical for soft value - value of a great design team to the new product pipeline; value of an extraordinary team to the strength of the organisation; value of brand building and better organisational reputation to the total enterprise value.

Kumar believes that marketing leadership has an important role in conveying this value to the procurement, and the C-suite has an important role in protecting this value.

Where it is happening effectively, procurement is smart. Where it is not, procurement does what procurement 101 tells them to - cost cut is equal to final cost minus initial cost.

(Read also: Analysis: What's more (cost) efficient - project work or retainers?)

Be aware of quantitative and qualitative criteria

If procurement is the final port of call, marketers need to ensure that their procurement teams are fully aware of quantitative and qualitative criteria to ensure the best value is derived from the partnership, Pomaleh said. He explained that while getting the lowest cost is important, marketers should bear in mind that this can come at a significant compromise in quality.

"Some agencies easily promise rock bottom prices and in return put on an inexperienced team or only perform basic functions with everything else being charged out-of-scope. The determination of ‘best value’ may not always be offered by the cheapest service provider, and it is usually better to pay fair value for a more comprehensive delivery. Best decisions are ultimately made when procurement and marketing collaboratively decide who is the best partner for their business," he said.

He recommends clients share their KPIs with their agencies as part of the agency evaluation. While he believes it is fine to be aggressive on fees or remuneration, Pomaleh said clients should offer partners some remuneration upside if they can help the team over deliver on its marketing objectives. In that way, agencies are motivated and remunerated accordingly and can staff up appropriately.

"This is a big opportunity to move away from traditional resourcing to get the right team structure in place, for instance having data experts on the agency team to help clients deliver better marketing results," he explained.

Organisations that KPI the procurement process largely on cost savings are missing a big trick. It is equally important to have KPIs based on quality and overall business delivery.

According to Pomaleh, this will allow clients to secure the better, not necessarily the cheapest, service provider to work on their business, which in turn leads to a strong collaborative partnership.

While the lower cost will obviously benefit the clients when it comes to managing their budgets, the same cannot be said for agencies. Low agency renumeration could result in the agencies' inability to resource the team on the business with the right experience and quality of talent, GroupM's Chakrabarty said. 

Increased involvement of procurement could also result in difficulty in retaining talents, hence impacting continuity on the business as talents are more enthused with strategic brand and platform conversations than transactional conversations.

The involvement of procurement might also commoditise the agency's product and business, hence impacting the quality and of talent and product. Going back to the concept of agency being partners, he explained that marketers should keep in mind that agencies are an extension of their teams. Longer relationships would result in better understanding of the business and hence, better communication product and ideas, leading to better business outcomes.

On the other hand, agencies also have their part to play in demonstrating better effectiveness and quantify each value they are bringing to the table, he said. "Agencies must put their skin in the game, in the spirit of partnership and have a variable component to their remuneration linked to short-term business outcomes," he added.

Agreeing with Chakrabarty on the impact on quality of talent as a result of cost cuts was Entropia's Kumar, who said eventually, marketing  morphs and mimics roles such as sales, technology and finance rather than the true essence of marketing. This "vicious cycle and ever descending loop" might one day result in the "death of marketing" leading to a dramatic value erosion and a huge opportunity loss.

"Even if the organisation overall remains successful because of other elements of the value chain punching above their weight, it has still a big missed opportunity - that can hit hard one day. Because the right to command margins is, in its purest form, earned inside the consumer’s mind. And that requires sustained marketing investment," he explained.

(Read also: Analysis: Clients pitching in-house agencies against external admit to assessment by different KPIs)

High expectations versus reality

Having procurement involved in pitches has become the norm and at times, it has its benefits too. McCann's Sim said it is good that the procurement team sits in for the briefing process. According to him, the more professional ones will have a scope of work and budget prepared beforehand, providing a clearer view of the agency's job scope instead of getting participants to "waste time proposing a budget that likely ends up being unrealistic or unpalatable to the client". 

"You cannot deny the power of procurement. Especially in this day and age where marketing is under more pressure to deliver profits quickly - either through more sales or cost cutting. At the end of the day, it is a race to the bottom. For agencies as budgets shrink but the deliverables grow," he said.

There is a breaking point. You cannot expect top notch quality work, or the best people, at the lowest price. It becomes a matter of compromise.

The problem, however, is that despite this, some individuals will still have the same high expectations versus the actual reality, Sim added. Also weighing in on the conversation was Naga DDB Tribal's chief operating officer, who said it is critically important for clients to ensure that the agency renumeration is fair and sustainable for the agencies in a long run. Expecting agencies to do more work with a lot lesser money is not going to work for the long term.

"Procurement is definitely more involved now in both existing client relationships and also new business pitches, but they may not be dealing with the agencies directly. Marketing still plays a role in mediating the negotiations. The final decision is usually made with a balance between what the brand needs to do at a time like this and the cost savings that the client organisation is expecting," he added.

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