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The cost of creativity

How can procurement measure the energy and skills that agencies put in to marketing activities?

A lightbulb drawn on a blackboard with chalk containing a £ sign in the middleThere has been an ongoing debate in some parts of marketing procurement about how organisations can measure the value of creativity. Some of the protagonists in the discussion have called for a new way to agree on the value of idea creation, as Ben Davies of Pan Advertising did in Value proposition (Pharmaceutical Marketing, March 2009).

While this is a fascinating debate, it is quite different from the argument for "efficiency" or "fair pricing". I agree wholeheartedly that creativity must be nurtured and protected, but that should not detract from the fact that the key question here, ie: "What is a fair price to pay for marketing services?" is a question that is entirely answerable.

While part of the fees paid by pharmaceutical brands clearly do go towards the generation of creative ideas, in the wider scheme of things this is just one element of overall cost. Valuing the effectiveness of the various creative elements of a campaign is not the same as asking what is a fair price to pay for that particular creative element.

Let me put it this way, let's say you are carrying out a leafleting and information campaign for your new anti-obesity drug. I can't tell you with any authority if featuring a rare white swan on the cover of your leaflet is going to make your communications more influential on your target market. Procurement should not be seeking to advise you on whether that swan could or should be replaced with the cheaper-to-source alternative of an ugly duckling in order to achieve the same results. What I can tell you (or rather it is knowable and thus possible to tell you) is precisely what would be a fair price to pay for the hiring of a swan, its handler, a photographer, the set or any other cost that should be necessarily incurred in the shoot. In addition, it is possible to agree a fair amount of time and resource needed to come up with and develop the creative idea.

Mutual understanding
I don't mean to imply that marketing procurement is simple, it isn't. Nor is good procurement solely about the nitty-gritty of costs and unaware of the wider strategic picture. Marketing, and the various supply chains that support it are complex. Its practices vary hugely in scope and application, and there is still a good deal of mystique attached to the process, particularly the creative elements. It's worth considering that there is an inevitable, and potentially productive, "tension" between marketing and procurement as they both seek to apply themselves to delivering great results. I believe every good procurement professional should have a high regard for the energy and skill his or her marketing colleagues have to develop and deliver effective marketing programmes. Likewise, every good marketer should have a high regard for his or her procurement colleague's energy and skill in securing price and cost efficiency.

This is why the best procurement advice tends to comes from those with the necessary understanding of how agencies work and what the reasonable benchmarks are for fair pricing. It is fair to say that there is a wide variation in pricing for similar services from different agencies and that the same agencies charge quite differently to different clients for the same work. Let's not forget also that all agencies (and the supply chains they manage on your behalf) are commercial enterprises and part of their considerations on price will involve an assessment of what price their clients will bear. While this is not a surprising conclusion, it often leads to quite different commercial outcomes (ie price and cost) than if you negotiated on the basis that all pricing should be a function of (say) cost and risk.

Agencies are aware that there is typically a reasonable choice of competitors that a client can utilise, which is probably a good reason for why agencies are masters at establishing and nurturing long-term retained relationships.

Establishing a fair price
Pharmaceutical marketing procurement (in fact, procurement in any area) is about best practice. The perceived difficulty in valuing creativity, for example, is indicative of the smoke and mirrors brought in to confuse and distract from what should be straight answers to straight questions – did it work and was it fairly priced?

As essential as the concept of best practice is, it's also something that must be delivered by all the parties involved. It applies just as equally to pharmaceutical clients as it does to the agencies whose services they employ and, of course, the procurement teams involved as well.

Agencies have a responsibility not to inflate claims of how long an activity takes, the reasonable price for resources, or even mark up (sometimes exorbitantly) production costs such as print that relates to the large number of sales presenters, leaflets, drug brochures, exhibition stands and so forth.

Procurement, for its part, must never suggest that simple cuts are the answer; any fool can slash a budget. Establishing a fair price is about examining costs forensically, with a good understanding of what good price or cost benchmarks exist. This could mean paying more for a particular service just as often as it results in paying less for others. This analysis should be impartial too, which means that your cost advisers (whether that means your agency or another intermediary such as a cost or procurement consultant) should have no form of financial agreement with any agencies whose fees or costs they are scrutinising (unfortunately this practice is more commonplace than you may think). Should a client turn out to have the best commercial deals available in the marketplace, its advisors have a duty to say so. Too often "cost" consultants are being given fees structured to pay them more the more they save, when the only thing that should be incentivised is objectivity.

So, for pharmaceutical brands looking to get value from your agencies, simple things like providing full and detailed briefings and not wasting their time on low-priority or low-return processes will help your marketing budget go further.

Best practice procurement
Best practice marketing procurement starts with a process of discovery. In-depth research is required to pinpoint the size and nature of the commercial opportunity available for marketers. It is simply not good enough to take a broad, top-line sweep across key expenditure and predict an approximate savings opportunity of say, 10 per cent (you'd be surprised how often this happens). 

A thorough and robust analysis should continue with comparisons against a suite of benchmark data that can be applied to modelling costs and pricing in detail. Only then can pharmaceutical brands be specific and clear about where the opportunities for increased fee or production efficiencies reside.

There is a poor tradition in marketing generally where brands assume the price to pay this year will, or should be, the same as the one they paid last year. When you allow this assumption to roll on year after year, price and cost can become wildly out of date and inaccurate. Technology changes, the economy shifts, so any costs should be reviewed at least annually.

Once analysis is complete, focus should shift to delivering the efficiency opportunities that have been identified. All negotiations that occur at this stage must be based on fair pricing; looking to squeeze every cent from every deal is a wholly unsustainable approach.

I fully appreciate the value of the client/agency relationship, and pharmaceutical brands will find they can get the most positive response from their agencies by following a thorough and logical approach that honours all the characteristics of what a good relationship should be. Also, clients will benefit from having an objective expert on agency costs in the room if and when the time comes to challenge them.

I strongly recommend that brands don't consider procurement a stop-start process that occurs only when there is an issue or during the annual negotiating rounds (often brought in to be the "bad guy") or when a new agency is being selected. One of the central challenges for marketing directors is that procurement experts can do 'too good a job', should they come in and immediately find the company has been overpaying across the whole spend by 30 per cent. In truth though, marketing procurement done well will be empowering to pharmaceutical brands. This is best achieved by establishing a common agenda and continuing to support and develop all staff's understanding of what good commercial outcomes are and how to achieve them.

Procurement isn't about destroying an agency's business or reducing a marketer's budgets. If those carrying out the function really understand the agency business model, they will find opportunities for re-investment. When more work can be delivered at a fair price, businesses, and arguably the economy as a whole, will benefit from more marketing activity that drives more sales and business performance, more efficiently.

By taking a frank look at what is really going on, the shared aim of consistently fair pricing and fair commercial practices can be achieved. This is sustained though continuous procurement and marketing best practice that includes staff training, pitch management, tight agency and roster management, and regular and objective agency appraisals and reviews.

More for your money
Ultimately, if a pharmaceutical brand really wants to get the most from its marketing budget, its confidence and capability in delivering good price and cost outcomes is vital.

Pharmaceutical clients often ask where the most common agency overcharging blackspots are, and while every situation must be analysed closely and on its own merits, there are some general trends visible in marketing procurement. Too many marketers fail to realise that when they engage an agency, they are often handing over control of a proportion of the marketing supply chain. Although this can be well managed, care should be taken to ensure good commercial practice, like fair pricing, has as high a priority as the pursuit of effective creative or operational marketing goals.

In today's pharma environment, agencies are under increasing pressure to be more transparent. I am seeing more "third tier" suppliers seeking to cut out the middle man and building relationships with the client. While this "decoupling" of the supply chain can have potential merit, it needs to be balanced with the additional management time required in-house and the fact that your agency is generally best placed to manage these suppliers, if only they would charge a fair price for the service.

A part of the root cause and responsibility here again lies within the broader pharmaceutical organisation. For example, do your people really understand the business models of the agencies you are working with? "Where and how do you make your money?" is a fair question to ask any supplier. Having a view on the answer and its implications is simply applying the same level of energy and expertise to the marketing supply chain as has been applied to almost all other supply chains within the pharmaceutical business.

Best practice marketing procurement isn't simple, but the potential shared benefits for all involved are huge. Any money saved creates funds for re-reinvestment, or allows budgets to go further. With the proper staff training, analytic and delivery processes in place, budgets can be set up and managed more efficiently. The relationship can be strengthened with more work being commissioned for the agency and more activity that drives more sales for the client, delivering commercially savvy pharmaceutical brands with a competitive edge and the insight to be demanding, but fair, with their marketing services providers.

With these shared goals and mutual benefits in mind it should be entirely possible to have frank debates, ask straight questions and get straight answers, without damaging the agency-client relationship that is so essential for long-term sustainable marketing and business success.

The Author
Richard Davis is a member of the Chartered Institute of Purchasing and Supply and is co-founder of RD Squared

To comment on this article, email pm@pmlive.com

21st January 2010

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