Procurement: The New Reality?

In a world of rising costs and heightened corporate scrutiny, interactive agencies are increasingly being forced to negotiate with a potential client’s procurement officer to land a contract. Like it or not, it has become the new reality — but agency executives say it doesn’t have to be a painful process.

“There’s absolutely no question that when an agency goes out to pitch any sizeable company, they will engage with the procurement department. This is the new reality,” said Mark Kingdon, CEO of Organic. “Sometimes they’ll lead the process, and other times they’ll come in at the end to negotiate the contract after an agency is selected.”

Since marketing often makes up one of the biggest line items of a company’s budget, it’s a prime target for cuts. While procurement officers have been scrutinizing other departments for years, Kingdon and others said the impact on marketing budgets has grown in the last four years, and only in the last two years has it become the norm. This is partly due to the Sarbanes-Oxley Act of 2002, a federal law which puts tighter controls on the financial reporting and accounting practices of publicly traded companies.

The goals and strategies of procurement officers vary from company to company. While all are focused on cutting costs, the extent to which they are willing to sacrifice quality will vary.

“I have actually met procurement people who know marketing services so well that they would give most marketing folks a run for their money. In this case the procurement people do their company a service by extracting a well priced deal for their company with key metrics for accountability of the services delivered,” said one executive at a top interactive agency who asked to remain anonymous.

“I’ve also seen the bad and the ugly,” the same exec said. “Sometimes procurement departments are compensated on savings, and their objective is to drive down fees at any cost to the agency — which will drive down the quality of service received by their own company.”

This kind of cost-focused procurement reduces marketing services to a commodity, and can lead to game-playing on both sides. The client can try to drive down its costs to a point where the agency is barely breaking even, exerting pressure to take the deal or lose the account. Or the agency can create the illusion of cost savings by initially inflating its pricing and then giving some back during negotiations.

To avoid situations like this, some execs say they simply look for smarter clients. But some agencies don’t have that luxury. Others try to make deals at the holding-company level, so that clients are less likely to make line-item cuts in the contract.

Most agency executives that spoke with ClickZ News said the majority of procurement officers weighed the quality of the service against the costs. They agreed the best procurement teams take the time to educate themselves about the landscape, and if the agency does an equally good job of determining what it will take to deliver the job — understanding where it can give and where it can’t — negotiations are more likely to be successful.

“Yes, there is much more scrutiny on contracts than in the past. However, in our experience, it’s not leading to bad decisions,” said Clark Kokich, president of Avenue A/Razorfish’s west region. “It creates extra work for the agency to satisfy the demands of procurement departments, but for the most part the business people are making the decision in the end.”

With creative thinking, agencies and procurement teams can often make trade-offs that work for both sides. Kingdon said Organic has been successful in using payment terms, consistent use of agency resources, and permission to publicize the work as leverage when negotiating past contracts.

“All parties need to take a balanced view and approach the discussion in a spirit of partnership,” Kingdon said. “It’s very important to separate the emotion from the business aspects. Agencies need to understand that the client needs to get the best value for the price. Even when you go out to buy a Mercedes, you still want to get the best price.”

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