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The Rise and Fall of Procurement

The Experiment in Procuring Marketing & Professional Services Has Failed

November 19, 2009 at 1:23 am by Blair

It's interesting to watch people who begin to sense a weakening in the oppressive powers that have lorded over them for so long. Change can come quickly and violently. The fall of Ceauşescu in Romania. The Islamic Revolution in Iran. One minute it's business as usual, and then next, bodies are swinging from ropes as years of suppressed anger explodes. 

I might be a little bit off on the timing (these things are hard to predict) and a little dramatic in my choice of metaphor, but I think these next few months are going to be interesting times for procurement departments around the world and their roles in purchasing creative, marketing and other professional services. The pot of frustration is about to boil over. 

The Pitch That Started it All

The procurement departments of the world's biggest companies moved in on their marketing departments a couple of years before I started my consulting practice in 2001. One event seemed to start it all. I initially learned of this seminal pitch through one of my earliest agency clients. (I've since heard the story from many others who were involved 10 years ago - some client-side, many from participating agencies - winners and losers - and some of the procurement people themselves.) 

The client company (a well-known CPG company - I won't name any names) had hired an outside consulting firm who claimed that through a strategic sourcing initiative that would apply standard procurement policies to the services of creative and marketing firms, the company would save millions of dollars. This was, to my knowledge, the first time that procurement breached the wall that separated the purchasing of commodities from the purchasing of marketing services on such a large scale. 

The strategy was to streamline the company's agencies down from a couple dozen to a small handful for all of the company's varied creative and marketing needs across their many brands. The selection process saw numerous firms contacted, 81 firms interviewed and 12 firms invited to pitch their proposals that included free thinking. My client, one of 12 invited to pitch, was at the time averaging $200k in time and hard costs per pitch. 

The story made waves initially but died quietly as the promised savings never materialized and the people responsible for marketing the brands found ways to end-run procurement to hire the right firms for the job. It was a failed experiment, but it breached the door into the marketing departments for the procurement people, and it changed everything. Procurement was now at the services table, even if from the beginning they struggled with how to add value. 

The Effect of Procurement on Marketing

While purporting to keep a selection process fair, procurement has skewed it. The winning firm, studies in the procurement of other professional services are now beginning to prove, is almost always the firm that affects or derails the procurement process. 

The firms that play by procurementís rules lose, and the rule-breakers win. Marketers have learned to hide behind the procurement people to keep the undifferentiated agencies away, while bending the rules for the truly qualified ones who are brave enough to try to affect the process. 

Once the firm is selected, procurementís role shifts to getting the services as cheaply as possible. A reasonable enough goal, as long as the pricing pressure doesnít inadvertently drive value out of the purchase while purporting to drive value in, which is almost always what happens. Procurement does not buy expertise, creativity or strategic guidance Ė just hours.

The formula for value is Value = Quality x Quantity / Price. With no understanding of how to measure the quality of creativity or advice, procurement is left trying to get more hours, cheaper. But in any thinking-based business thatís already run on tight margins, cheaper hours is achieved through deploying less-skilled people. The efficiencies derived from economies of scale in commodities manufacturing are not readily obtained in businesses of ideas and advice.

Ten Years Later

After ten years we are starting to see the frustration with procurement's involvement in marketing boil over. Whatís new however is that the calling out of procurement is now coming from within the client companies and not just the agencies. Marketers are now openly talking about how fed up they are with having to fight their own people to hire what they see as the right firm for the job, regardless of what the commodity purchasing scorecard says. 

Iíve never advocated that agencies should work with procurement or agree to play by their misplaced rules. But Iíve long believed that procurement departments can add value to their companies in the hiring of creative and other marketing firms. I also think agencies have some responsibility for the rise of procurementís role in hiring them. 

However, procurement departments around the world have so clearly made a mess of hiring agencies by blatantly applying the irrelevant practices of commodities purchasing to the acquiring of expertise and creativity that itís hard to muster any sympathy as the wrath of agencies, and now marketers, starts to fall on them. The more responsible marketers (responsible to the brand, not company policies) have found ways to work around procurement, but what has been missing until now has been marketing people saying publicly what they thought privately: procurement is hindering, not helping us. People are now speaking up. I expect that over the next few months, many more will add their voice. 

Itís Time to Talk

The buying and selling of ideas remains a tricky business fraught with risk to both sides. The rise of procurement was another attempt to drive efficiencies into an inefficient process. The failure of the experiment does not mean that procurement is going away. But maybe it means that we can now have a larger conversation between agencies, the marketers that hire them, and the trade associations of both procurement practitioners and creative professionals on the subject of how to buy creative services. Indeed, there are signs across the wider professions of a willingness among the parties to revisit roles and practices.

Cal Harrison is a sales consultant to management consultants and other professionals. After years of advising consultants, lawyers, architects and accountants on how to end-run procurement, he decided to reach out to the other side and bring procurement practitioners and professionals together in workshops across Canada to talk about the shortcomings of applying standard procurement practices to the professions. In the most recent written feedback he has collected from participants, 100% of procurement practitioners say these conversations will change the way they buy professional services or cause them to recommend changes to the way their companies buy professional services. Equally as encouraging is the rate at which procurement professionals are singing up for Harrisonís workshops. ďI thought I would struggle getting the procurement people interested, but that just has not been the case.Ē They seem to recognize there is a problem, and are willing to do something about it. 

I've spoken to sensible procurement people employing reasonable practices at a few large, well-known companies, and I'm always impressed with these people when I find them. But they're far too rare. As a whole, the experiment of procurement driving real efficiencies into marketing has failed spectacularly. But the tide is turning and itís going to get noisy as years of frustration pour forth in streams of angry rants. Looking past this cathartic venting, Iíve never been more optimistic about our ability to get this right than I am right now.


Comments RSS

Jon said:

Part of our pitch criteria is if procurement is involved. We almost never pitch companies who have chosen to run their agency selection through procurement.

In rare cases you find a procurement person who is a person and not a robot. Someone who understands nuance and that selecting an agency is a different process from buying toilet paper. In these cases we will consider pitching.

I don't mind purchasing residing inside a single group. For some companies this is what is needed for command and control. Its all about how where the values lie and how the process reflects those values.

Lulu Laidlaw-Smith said:

I couldn't agree more. I have started up a new company with an entirely new business model which is built on the back of these frustrations which antagonise both clients and agencies alike, albeit for different reasons.

I refuse to accept clients can ever quantify fairly between creative agencies - especially in a market which is over-run with such great talent. It's more about relationships & trust which has broken down when expectations haven't been met by one or other party. Clients have stepped in and used referees to select talent and they are asking them to make decisions with either the wrong tools, or not enough team support. Now the market is being driven by both technology & consumer behaviour - not by the marketeers. So business models need to adapt accordingly.

Ryan Brandt said:

I donít consider myself an expert on this subject, but I will say that I have seen a lot of procurement scenarios played out and only a rare few clients and procurement officials had the savvy to know what was important. And rarer few had the confidence to be willing to ask for help if they were not on solid ground.

I do believe in an expanded and on-going Ďdialogueí. We as communications professionals need to be the best at communicating our industry to the outside world. We have to be the Ďstandardí. We canít lay all the garbage at the feet of procurement professionals or our potential clients. We have plenty garbage of our own to pickup. This statement is not meant to throw blame on the industry. It is only meant to say that you can find incompetence and deficiencies anywhere.

But, at the end of the day our industry is changing. 'Price' and 'Value' are always issues within this industry and left to the devices of others, 'Price' is winning out.

Sheri Koetting said:

The best person I ever dealt with in procurement came from a printing background and as a result had a knowledge of design yet always claimed he knew nothing about the nitty gritty of how it got done.

What he really had was a respect for the process. He understood when to do his job, when to be the heavy and when to let marketing dictate what they needed to get the job done as well. That is efficient planning.

Afterall, hiring the lowest bidder and doing it wrong is more of a waste of money in the long run.

By the way this same team also paid for pitch competitions.

Blair Enns said:

Thanks for the comments, everyone. We've all heard the horrendous procurement stories and I love hearing the positive ones of good procurement people and experiences. It's proof that they can play a positive role, but as I said in the post, it's too rare. I think procurement has struggled at the trade association level in offering proper guidance to their people.

I also agree with Ryan's comments about agencies taking their share of responsibility. The rise of procurement is in some ways a natural response to the oversupply problem, just as search consultants, 99designs and Crowdspring are.

Ron Baker said:

Thought-provoking post. The only comment I have is that procurement is not the problem. The hourly billing practice of agencies is the problem, as it misaligns the incentives of client and agency.

If you align incentives, then procurement wouldn't need to bother with process, compliance, and efficiency, as the economic fate of both agency and client would be intertwined. You can't do that when your business models is "we sell time." It needs to be changed to "we sell intellectual capital." And IC cannot be measured in time units; it's like plunging a ruler into your oven to determine the temperature.

Coca-Cola and PG's agency compensation aligns incentives, so they don't bother looking at timesheets, costs, inputs, and activities, or even profit margins. Rather, they are focused (and compensated) for output, results, and value.

I've spoken to procurement people around the world on this differences between process and compliance and aligning incentives, and they get it. Agencies, however, have been slow to move away from the one practice that is hindering their ability to create and capture value: hourly billing.

Ron Baker, Founder
VeraSage Institute
Twitter @ronaldbaker

Blair Enns said:

Hi Ron; Thanks for the contribution. I agree that how agencies charge is a significant part of the issue, but I don;t see it as the whole issue. I'll still point the finger at procurement in most cases.

When I mentioned in the post that I've had some great discussions with good procurement people applying reasonable practices, in every case they brought up your point: they want the agency to quote a price for the final deliverables, and the agencies want to bill time and materials. I know you've been an advocate of this approach for years, and I expect your experience is the same as mine when preaching to agencies the sins of billing thinking by the hour: they think the client will never go for flat fee billing. Well, the better ones go for it, and the better procurement departments demand it.

I also don't mean to make the claim that procurement departments are solely to blame for commoditizing agency thinking by selling it by the hour - that starts with the agency, but procurement has perpetuated it. The examples you cite (P&G, Coca-Cola) are the exceptions, not the rule.

Thanks again for your comment. I appreciate getting other perspectives and I hope we can her from some procurement folks, too.

Ron Baker said:

Hi Blair, I don't disagree with you about procurement perpetuating this dysfunctional buying process, but I do believe that dysfunctional buying behavior is a result of dysfunctional selling behavior. Hourly billing is not transparent, doesn't provide certainty in price, misaligns incentives, etc. Since agencies don't communicate value, procurement is forced to look at hours and inputs. What else can they do?

Blair Enns said:

(Thanks again for your comments, Ron, and I apologize to you and others who are getting their comments cut off. We're working on fixing this now. It might help to not use ampersands for now as they appear to be the culprit.)

I appreciate your perspective on this issue and agree with you in part but disagree that responsibility lies solely with the agency.

Lots of agencies flat fee for the strategic portions of their engagements (almost all of my clients do when I'm done with them), and there are innumerable stories of procurement departments coming back to the agency (typically after a year of working together) saying, 'fill out these forms that tell us what hourly rates you charge us for what services.' I deal with this issue once or twice a month.

The agency pushes back and says, 'we don't charge by the hour for strategic parts of the engagement'. Procurement pushes back and demands a rate to go in the box. They want a rate so they can find a way to make it smaller. I advocate standing your ground and escalating the discussion back to the client, out of procurement. Some firms cave in and give a rate and this is the beginning of the end. Others lose the business. A small number win this battle.

If you are a procurement practitioner and you see your responsibility as getting more for less, it's in your interest to try to move the agency to price its service (price per unit) in a way that you are experienced in lowering unit costs. My experience is hourly rates are pushed on the agency by procurement as much as they are pushed on the client by the agency. My estimation is the majority of the time BOTH parties prefer an hourly rate, but one wants it higher than the other. :)

Thanks again for your comments.

Blair Enns said:

The comment function is now working again. Thanks for your patience, everyone.

Cal said:

Hi folks,

It's great to see discussion on this subject. My two cents is that procurement used to be admin folks promoted into a "management" position. Now it's people with masters degrees choosing procurement as a profession. The procurement department will be wildly different in 5 years. To quote the head of a very big procurement group...

"One thing that we've talked about for many years is the idea that we're going to run out of steam in terms of leverage," Santiago remarks. "So we want to shift our focus to making processes better as opposed to making bad processes cheaper," he says.

- Anthony Santiago, vice president of global strategic sourcing and financial shared services at Bristol-Myers Squibb

I wonder if he's pointing at any industry in particular when he says "bad processes"...my guess is that it's professional services.

But all I really know is that for 20 years Blair and I have been bitching about RFP's and procurement - but suddenly, procurement is listening and interested.

It's almost scary...

uncle sam said:

I find the article quite interesting and wish to receive future comments.

Tony Dagnery said:

This is a very insightful piece. I have been marginally exposed to the trials and tribulations of dealing with client procurement divisions from my work on the agency side of smaller shops in the U.S. Hispanic & multicultural space (both independent and multinationals). I suppose because budgets are smaller maybe the challenges are a bit less. But still, I relate to much of what the article states. I have now created and a launched a Latino-owned consultancy and look forward to learning more. Thank you for sharing.
Tony Dagnery
President
Simbiosis Consulting Inc.

Sally Roberts said:

Hi All, a very interesting peice indeed. I am a procurement professional and it is now 2011, 2 years since you first wrote this article. I am not sure if your views have changed or altered? What I have seen personally is that procurement professionals that do not have a deep understanidng of marketing will flounder and damage relationships, which is your experience to-date.

Organisations have seen a rise is category management of marketing from a purchasing point of view. These people including me work long and hard to understand and deepen our knowledge of marketing and how it adds value and lets be honest understanding agency pricing models. One of the key aspects to any quantifying professional services in any business case is quantifying value.

On a positive and proactive note, there are agencies out there which invite procurement to meetings (as part of the ongoing relationship) to enhance understanding and developments within marketing. Being inclusive works.

What would you propose in addtion to this?

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