Today’s guest post is from Dalip Raheja, President and CEO of The Mpower Group, and is reprinted with permission (as it originally appeared on The Mpower Group Blog. (Dalip provides us guests posts as well.)
Obviously that’s a rhetorical question and not one that I’m asking but it was in an article that stated: ”Any idiot should be able to work out that publicly-quoted advertising holding companies (whose margins are public knowledge) have to make their money somewhere…..” (Stephen Foster) and I’m pretty sure that the idiots he was referring to are the procurement departments of various advertising agency’s clients. What the author is referring to is the practice of extremely low priced contracts from the agencies but who then get compensated from the media owners (where ads are bought) in the form of rebates. Think of it as the rebate that car dealers get from auto companies thus muddying up the price you actually pay for your car.
Almost all the major advertising holding companies and reportedly a few others are under investigation by the Department of Justice for taking rebates (kickbacks?). Stephen points out that this is a result of overzealous procurement departments squeezing the last penny out of contracts thus forcing the agencies to make up margins through rebates. Another article goes on to say, ”Procurement has triumphed in commoditizing marketing, and its tentacles are deepest in media. Blind e-auctions and a general policy of letting agencies know the cheapest bid will win have stripped out nearly all the visible profit from media.” Not only has this led to the rebate conundrum but also in agencies directing business to sister companies within the family and also led to the recent scandal of getting third parties to submit high bids so that in-house production units would end up winning the business (also under investigation and resulted in jail time in 2002).
For those that have followed this blog and our work over the years, this should sound a bit familiar – all the way from “Strategic Sourcing is Dead” to the more recent “Back to the Future – Strategic Sourcing is Dead – or It Should Be… ”. We have long argued that the over-the-top focus on lowest price by procurement was actually destroying value and this would be a perfect illustration of that. While procurement drives results that deliver to their own metrics, the marketing department suffers as they are not getting the service levels they need and are still paying higher prices – except on a different set of invoices. Here are some additional comments from different authors: “If brands continue to turn everything into price, if they continue to screw cost so tightly ….then they would be stupid not to realize there will be mission (scope) creep.” “If brands can’t see how reducing everything to cost at first saps the big agencies….. then they are dumber than anyone could have ever thought.” Seems like everyone wants to call us idiots, stupid and dumb!!!
Google recently announced a formal “rebate” program where they are paying the agencies for placing ads with them accompanied by this gem, “If you hit certain thresholds and depending on the market, a check is paid back to the agency, which the agency should theoretically pass back to the client,” said a Google source with detailed knowledge of the program. “The agency will then divvy it up by client. P&G gets X and Visa gets Y.” So procurement feels great that they negotiated a great contract with their agency but are willing to pay more for the actual ads and let marketing then fight to get some share of the rebate from the agency!! Only in Strategic Sourcing does that make sense . It’s almost similar to buying lots of things in a store because they are on sale and you can document huge savings – even though you don’t need half the stuff you bought?
The good news is that more and more of the conversation at various conferences is starting to get away from cost and much more into value(TCO=Value Destruction??). Unfortunately, the relentless focus on price/cost is not losing a lot of steam with procurement in most companies. In the above example, it has changed the way the entire industry operates and is in fact lessening the options and competition for procurement by forcing a lot of independent agencies out of business – all brought upon by strategic sourcing practices. Perhaps those calling us idiots, dumb and stupid may have a valid point? I leave that up to you to decide.