Keep Your Eye on the 'I'

Marketers are increasingly obsessed with measuring the ROI of their marketing programs, but many are focusing on the "R" at the expense of the "I." It's time to take a street-level view of the efficiency of your marketing investments-not only to increase your return but also to stop spending blindly. You can chart a path from smarter marketing stewardship to better marketing ROI.

Cynics will tell you that marketing is the world's second oldest profession, similar in many ways to the first, only lacking its moral integrity. But, like it or hate it, marketing is what makes the commercial world go 'round and it's increasingly becoming a very, very expensive rotation. The key to controlling this expense is as simple as it is generally overlooked: applying concepts developed in procurement to the marketing department.  Effective stewardship of marketing expenditures can easily save major advertisers between 10 and 15 percent of their total marketing budgets—and that's enough to fund a lot of exciting activities or make a healthy contribution to the bottom line.

As top management demands increased marketing effectiveness and accurate measurement of return on marketing investment, procurement can help. Indeed, the need for tangible, objective accountability has transformed procurement from a secondary marketing function into a potential linchpin of profitable marketing activity.

Frustrated executives have long focused on the "R" in ROI, the return, with its  amorphous parameters and subjective metrics. Savvy marketers, however, are beginning to focus their attention on the "I"—lowering the highly measurable, objective investment in marketing campaigns. Their bet: Spending smarter will trump spending blindly every time.

Focusing on marketing procurement costs—the investment—makes perfect sense. These are tangible, measurable, transparent and, above all, controllable. Instituting a program of informed, controlled, disciplined marketing stewardship can begin not only to lower total marketing investment and spend but also improve bottom-line returns quickly and significantly.

The Possibilities Are Endless

Is it possible that something as simple as controlling marketing costs can have this kind of dramatic impact? Of course it is (see figure). Companies have already made significant inroads in cost containment in areas or activities previously believed "unsourceable," such as legal services and human resources. Why not apply the same methodology to marketing and advertising?

Let's look at what's at stake. Television advertising (and associated agency compensation) typically consumes somewhere between one-half and two-thirds of an advertiser's total marketing spending. What happens if we take control of even part of this spend? Large U.S. advertisers could save and redeploy anywhere from $10 million to $100 million every year, without affecting audience reach.

The timing for a structured approach to marketing procurement couldn't be better. The fundamental laws of marketing supply and demand have been turned on their head. Network television ad rates are rising even as traditional television audiences continue to shrink and fragment in the face of more enticing offers from cable and satellite network providers. Print advertising has become a commodity characterized by ever-decreasing prices and ever-increasing "editorial considerations."

Rates for new media platforms from podcasts to Internet banner ads seem to be a function of hard bargaining skills rather than fact-based analysis. And increasingly sophisticated consumers are doing everything they can to tune out advertising efforts.

Adopting a disciplined approach to your marketing expenditure can build an emotion-free baseline—a benchmark for measurement that provides a fact-based vehicle for challenging conventional wisdom. Since it involves negotiation, a procurement approach to advertising can encourage joint-process improvements and can make agencies not just better partners, but better businesses as well.

The Light at the End of the Tunnel

The light at the end of the tunnel begins with establishing a new breed of cross-functional team, one that combines marketing and advertising experts with supply chain management and finance professionals. This team would apply a range of classic purchasing skills—establishing baseline metrics, relating price to volume, challenging conventional wisdom through analysis, improving joint processes, benchmarking and modeling supplier costs—to improve the efficiency and effectiveness of marketing and advertising spending. This holds enormous potential, especially in three critical areas: media spend, agency compensation and advertising production.

In an efficient business world, marketing leadership would initiate discussions with procurement and finance to begin maximizing the value of the marketing spend. In reality, the subject is more often brought up only after someone in finance or procurement searches for areas where costs might conceivably be reduced and zeroes in on the marketing and advertising spend as an easy target.

The following can help to develop a disciplined approach to marketing:

Analyze your media spending. Difficult as it is to believe, there are companies that will spend half a billion dollars on television advertising this year that have no idea of their baseline marketing spend. It's not because they enjoy losing money, but because their media buyers are using data and data analysis tools that are primitive at best when compared to the kind of in-depth analysis most procurement experts regard as routine. Most media buyers focus on collecting high-level data, the kind that displays simplified measurements of total spending at the expense of readily available data for television, radio and print media. This could—and should—change immediately.

Fact-based decision-making and the level of analysis that procurement experts commonly use to measure price and volume relationships in other spend categories can easily be applied to media. Even something as rudimentary as developing a central database of media buying performance can be used to understand current buying performance and highlight improvement opportunities.

Other relatively simple steps will offer immediate positive results. In the case of print advertising—or any other medium with unlimited inventory—a thorough understanding of a publisher's costs can often bring significant negotiating leverage. For example, we developed a cost model for one client's free-standing insert program that showed exactly how much profit the insert supplier was making on the client's weekly inserts. The results of that analysis were used to negotiate a 15 percent price reduction.

A baseline analysis must also consider emerging media. Widespread consumer adoption of broadband connections presents additional advertising opportunities. Want to watch your favorite television show or music video for free online? No problem, as long as you are prepared to sit through an advertisement. Want to enjoy podcasts on your MP3 player? Great, but the content you want will be right back after this commercial.

Given the unknowns around how many eyes and ears actually take in ads through emerging media, pricing for placements is arbitrary at best. This climate of uncertainty ought to be enough to convince all advertisers to enter every media purchase equipped with the strong negotiation skills and fact-based analyses needed to secure the lowest possible upfront rates and minimize increases over time. Experience from other service sourcing efforts disproves the idea that doing something for less automatically leads to a reduction in quality. Often such efficiency efforts build stronger vendor relationships and reduce the time needed to manage the relationship.

Work with your agency. In recent years, most large-scale advertisers have become more aggressive in their advertising agency compensation agreements—with significant results. Today, agencies no longer routinely enjoy their historic 15 percent commissions on media purchases or overall profit margins of 20 percent. Sadly, advertisers have focused solely on the price of their agency services, without understanding the dynamics of the advertiser-agency relationship. Such price-only negotiations have often frayed relationships and caused mistrust between the advertiser and the agency. Surely this is no way to reach your customers effectively.

So how are world-class marketing stewards managing their agency relationships? By working with their agencies to understand the process of creating and delivering great advertising—and identifying where their current processes might be falling short. By committing to fix their process shortfalls, advertisers and their agencies can get more work done with fewer resources. A procurement professional would see this as focusing on the "volume" rather than price. A marketing professional, by contrast, would simply see it as better advertising output with fewer resources.

Resource modeling can identify the best level of agency staffing based on the agency's actual workload from its client. In our experience, the biggest driver of agency staffing levels on most accounts is having to redo work. Frequent reworking of ad storyboards—usually caused by an advertiser's disorganized approach to the creative process—requires significant numbers of agency personnel. Obviously, you can't blame the agency for a client's lack of discipline. Companies that model and measure the impact of rework on the agency's cost have the leverage to manage more effectively the agency headcount on their account. They can also arrive at mutually satisfactory metrics and procedures that streamline the creative process and reduce cycle time and the number of agency person-hours required to complete a project.

Advertisers must also learn to discriminate between core and noncore services, both in agency selection and compensation strategy. Typically, the core services of large agencies include strategic planning; creative strategy creative development and production of TV, radio and print ads; and global and regional stewardship of messaging and branding. For core services the endgame involves compensating an agency based on its performance. The idea is to provide incentives to an agency such that your company receives a greater share of its top talent.

When it comes to noncore areas, the most effective strategy is to unbundle services such as new product development, packaging development, sports marketing and interactive marketing, and to work with best-in-class specialists. Although many large agencies tout their broad ability to provide all services, it has been our experience that large agencies tend to "over spec" these noncore services, resulting in higher costs and lower quality.

Enhance your advertising production. Naturally, agencies tend to be sensitive when clients begin to rein in advertising production spending. Many agencies regard this as their core competency, arguing that nobody can possibly understand creative costs better than the creative team that conceptualizes and executes a campaign.

In working with clients to reduce advertising costs, we have learned that hard data on actual commercial production expenses provides the best foundation for driving production decisions and negotiating costs. In one case, we built a database for a client  that detailed 10 years of TV production activity associated with 150 different commercials. Analysis of this data led to the development of several joint-process improvement strategies between the advertiser and its agency. Among our findings: Increasing agency preproduction lead times and planning minimized costly last-minute surprises and dramatically lowered total production costs. We also found that streamlining basic processes, such as approvals and rework, can significantly reduce total production costs, sometimes by 30 to 40 percent, without sacrificing production quality.

Become an active steward. Agencies are more inclined to avoid "accidental" overcharges when they are aware that their client understands the competitive landscape, is familiar with the ins and outs of production work, and is scrutinizing every invoice, estimate and third-party production cost. In the world of hard goods and commodity procurement, this degree of oversight is common practice, but it is still rare with the types of service-provider relationships overseen by other corporate functions.

You get what you manage, and in the case of agency relationships, rigorous management of estimates combined with tight invoicing controls, helps capture significant savings.

Cracking the Whip

Marketing methodologies are changing daily as are media platforms and audiences.  Slower to move—but certain to change in the near future—are the behind-the-scenes processes that make it all happen. Media buying, the economics of agency relationships, and the cost drivers around ad production are all pushing this change. This doesn't mean costs need to spiral out of control or that the process of managing the creative supply chain is impossible. Companies that transcend traditional silos and work effectively across functions will make their marketing investment work harder than those that don't. By applying sourcing methodologies and discipline that drive savings and quality in other areas, smart advertisers will increase the value of their marketing programs without paying more.

For the record, that bang for your buck is usually just an echo that follows the cracking of a whip.

Consulting Author

Jim Singer is a partner in the firm's consumer goods and retail practice and is based in the New York office. He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .