Benjamin Graham famously wrote ‘Price is what you pay. Value is what you get.’ He was a smart guy, and one of Warren Buffet’s favourite teachers.
(No doubt though, twenty far less smart people will still be posting his quote as a LinkedIn meme five or six times over the next ten days. Probably alongside yet another fake picture of a pack of wolves, with a trite exhortation to vote or breathe deeply or something. Jeez. What did they do to LinkedIn?)
Anyway. Back to price and value.
Some procurement people, most marketers and almost all agencies prefer to say they concentrate on value over price. Quite right too. Price is pretty useless without knowing what value is being acquired.
Yet so often, the methods clients and agencies use to assess and defend value are, in reality, only measuring price – and not even doing that very well.
Here are five of the pitfalls we come across most often.
1. Assessing one dimension and believing you’ve assessed value
So often – especially when we’re working across extended agency rosters – marketers and agencies will hold up an agreed agency rate card and claim that they are receiving or delivering unbeatable value.
The trouble is that hourly rate is just one dimension of several to be considered when assessing value. It’s one thing paying a competitive rate per hour for resource, but quite another if the number of hours required to deliver the scope or project is twice what it should be.
Or if the CEO and MD of the agency is heavily involved in tasks that would normally be performed by an account manager. Or if the agency multiple is way ahead of the market. Or if the assumed number of hours worked per year is adrift of industry standards.
Or if there is no properly established timesheet system to record even the broadest of information as a basis for on-going comparison. Or if there is no recognition of the commercial value (or otherwise) to the marketer of what is actually being delivered.
2. Mistaking observations for benchmarks
Robust marketing benchmarks are hard to come by, and hard to maintain.
We’ve spent more than fifteen years building ours globally across categories, outputs, marketer size, agency type, geographies and disciplines. We update them constantly because we’re in the market constantly, and we supplement them with all the third party data sources we can.
Knowing what you paid or were paid last year is not a benchmark. It’s an observation.
With work it might become a comparison point – but you’ll at least need to know exactly what you bought or sold for that price, and then compare it to this year. And when you’ve done that, it’s still only one comparison point. If it was wrong then, it’ll be wrong again.
Thinking something is expensive or cheap is not a benchmark either. It’s a price perception. It’s not even an observation yet.
Yet every year we see professional procurement teams, marketers and agencies basing negotiations, remuneration agreements and sometimes whole businesses on foundations no more secure than a rough idea of ‘what we paid last time’, or a feeling that ‘we’re paying too much’ or that ‘we’re being ripped off’.
Or, perhaps even worse than any of those, that old procurement saw – ‘we need 10% reduction on last year’.
3. Misusing benchmarks
A benchmark is an indication, for any given dimension, of where the market sits. It is not an average or a median. It is certainly not a rule. It doesn’t even guarantee value on its own – only when you combine it with output will you be able to assess that.
There can be a hundred commercially sound reasons to pay above benchmark and below benchmark – it really does all depend.
What a benchmark does tell you is where the market sits, and therefore if you base your commercial arrangements around a benchmark you will know that both sides of the deal are achieving some sort of sustainable result.
And a sustainable, mutually beneficial result is what marketers and agencies should be working to attain and – vitally – defend on behalf of their respective businesses.
Yet so often we come across procurement teams or marketers who insist on using benchmarks as sticks with which to beat agencies down to unsustainable remuneration levels.
Or agencies ignoring benchmarks to low-ball large pieces of business at pitch stage, only to claw back the profit levels later on through under-resourcing or over-charging elsewhere in the remuneration mix.
Or, as we’ve seen recently, much worse than that…
4. Assuming all spend is assessable
There are some really brilliant procurement teams working with marketing, with lots to offer marketers and agencies in terms of structure, process and commercial acumen.
And then there are some other procurement teams, who are rather less knowledgeable about marketing spending, and try to treat it like any other area of procurement.
One of the great ways to identify the guys in the second group is to throw them a simple question. One that’ll whet their appetites. Like this: if we’re spending $20m with our agency roster, and you ask me for a 10% efficiency improvement year-on-year, how much money will you save?
If your procurement friend tells you the answer is obviously $2m, then my advice is to run for the hills.
The simple concept of addressable and non-addressable spend is something everyone in procurement gets taught but often forgets (or doesn’t know how) to apply to marketing budgets.
Within this hypothetical $20 million media budget, an organisation is likely to be paying around 4% in media agency fee on traditional media and 7% on digital. So in fact, depending on the mix across the two kinds of spend, only about 5% – or $1 million – in agency fee is directly addressable.
The remaining $19 million is more difficult to address, since doing so depends on up-front negotiations, media selection, trading strategies and more. Therefore a 10% reduction on addressable spend may be just $100,000 in this case, well short of the $2 million they originally targeted.
Of course, different benchmarks for addressable spend can be applied across all the communications disciplines, not just for bought media – but very few of them identify 100% of the spend in question as addressable.
Our procurement friend is going to struggle.
Simple, isn’t it? And obvious too, you’d think. Yet procurement teams and marketers often jump into efficiency quests without understanding this basic concept – and agencies try to defend themselves without recourse to it either.
5. Forgetting the hidden cost of marketing FTE
Large or fragmented rosters can be justified by marketers and procurement teams in so many good ways – specialist capabilities, tiered roles and responsibilities, differently managed expectations, technical skill sets – but usually most of them tend to centre around cost.
If the rate card feels like good value, or the retainer seems reasonable, or the project fee looks competitive or is at least less than the main rostered agencies, then most of the real-world barriers to appointing an additional agency have just been overcome.
Marketers then feel free to build up rosters and trumpet what look like reduced costs to procurement teams.
But the hidden costs – never taken into account until the inevitable processes of rationalisation or re-modelling start – are to be found in marketing FTEs.
It’s the time taken up for the marketing team in contracting, briefing, reviewing, managing, debriefing and co-ordinating the additional agency that never gets added back in to the perceived cost benefits of roster expansion.
***
So next time you’re dealing with remuneration – whether on the procurement, marketing or agency team – make sure you’re not falling into one of these common traps, and allowing the conversation to focus solely on price when you all thought you were actually focusing on value.
TrinityP3’s Agency Remuneration and Negotiation service ensures that the way in which you pay your agency is optimal.
Why do you need this service? Click here to learn more
