Wild Pitches

THE PITCH TEAM sent out for pizza in the middle of the review. Mind you, the clients weren’t in the building. They were on the other end of a computer, watching a handful of agencies bid against each other in a live auction — a sort of eBay in reverse, to award business to the lowest bidder. Bemused staffers clustered around a lone PC in each agency, watching their fees tick down the same way you’d watch a car wreck spill out in front of you on the highway.

“It’s like the NFL draft,” says one agency exec who participated in the bid last fall.

“It’s degrading,” says another.

Blame procurement.

These days, corporate buying experts are bargaining hard on marketing services, just as they always have on raw ingredients. It’s the thorniest of three trends that are influencing the way marketers choose promotion agencies. Procurement-driven reviews focus (too much?) on price. At the same time, consultants who are well-versed in ad agency searches are handling more promotion reviews. Lastly, reviews have gotten longer and more expensive for competing agencies, which fight harder than ever for less lucrative pieces of business.

These things are happening because emphasis on finance has snowballed. It started with general belt-tightening and concern for ROI — an especially potent measurement for consumer promotion, which has traditionally focused on numbers (the good numbers, like sales). Now marketers are bargaining over agency fees. Bigger below-the-line marketing budgets and a broader push for financial accountability have put marketing under the microscope. Marketing costs traditionally have been less scrutinized than other business expenses. But the CFO has become de facto manager at a lot of companies, says Northwestern University professor Don Schultz, and finance people historically have been at odds with marketing people. This new emphasis on money has agencies wondering if hard accounting will drive out creativity.

With promotion spending poised to increase in 2004 and 2005, marketers need to refine their agency review practices — and agencies need to learn how to operate in the newly competitive, cost-conscious environment.

About 35% to 40% of agency reviews are now managed by outside search consultants; another 35% are led by procurement departments (which are often involved in consultant-led reviews, too); and the remaining 25% to 30% fall to the marketing department. Procurement and search execs are doing detailed homework now on promotions. Procurement pros want to know how margins are set, and what each agency task costs; many consultants, too, want to understand the intricacies of promotion execution as they branch out beyond ad agency reviews.

Reviews are more formal at early stages, and often have three or four steps, from detailed RFP screening to case study presentation (sometimes coupled with a written opinion on a general business situation) and a site visit to finalist agency offices.

“It takes longer to turn a new-business lead into revenue than it has in the past,” says DVC Worldwide CMO Bill Donlin. “Clients are conservative; they check all references.” Deliberate, sophisticated pitches can run six to eight months; sometimes the objectives, or the marketplace, or even the client change mid-review.

Promo shops see fewer RFPs for agency-of-record work these days. “We usually have at least one or two big ones a year, but in 2002 and 2003 we’ve had very few AOR pitches,” says Kathy Leonard, president of Integer Group, Dallas. Having fewer reviews makes agencies more competitive (and less selective) about what they’ll pitch.

As the AOR pool shrinks, marketers host more project reviews — what Donlin calls “test runs” — to let recession-wary marketers build work gradually. But shops are reluctant to pick up only project work, because it’s tough to staff against projects. And it begs the question: Does more project work foster more procurement thinking, with an upfront focus on costs?

Procurement — or purchasing, or “strategic sourcing initiatives” — for marketing services began about four years ago and has accelerated in the last year. “Companies make their procurement department the money and process watchdog,” says Judy Neer, exec VP at Boston-based search consultancy Pile & Co. “It gives them comfort that someone is watching the bottom line and making sure the process adheres to corporate policies.”

Procurement staff provides ethics insurance to keep managers from hiring personal friends. At best, procurement departments impose an objective process, helping screen contenders methodically, not emotionally. They handle fee negotiation — sometimes upfront — so marketing pros can concentrate on the work. “They want to negotiate a fair price early so it isn’t an issue for the marketing department,” says Donlin.

At worst, procurement departments pinch pennies and limit access to marketing staffers.

“We’ve had marketing people tell us, ‘You’ve got to be pre-approved by our purchasing department before we can even talk,’” says Integer Group Senior VP-Director of business development Mark McMullen. “To marketers, it’s a necessary evil. The good part is that it levels the playing field.”

“You need time and a forum to find out [the marketing staff’s] philosophy and needs,” says Upshot Exec VP-new business Larry Deutsch. “You can get that through the procurement department, but it’s better to have it directly from the marketing staff. Any good agency can develop ideas that are on-strategy, but you need to meet the CMO and know what kind of ideas will resonate with him.”

Agencies also worry that focusing on cost will make creativity a commodity. “This migration from relationship to transaction is very odd,” says Zipatoni President Jim Holbrook. “It’s like being a mail-order bride.”

But “sourcing departments distinguish between intellectual property, like marketing services, and raw materials,” argues Ralph Cutcher, principal of search consultancy Rojek Cutcher Group, Cleveland. “They value intellectual property differently.”

Some see procurement department involvement as a good sign. “It denotes that the company is serious about making a major commitment to a relationship and wants to work out the details,” says J. Brown/LMC Group VP-marketing Bernie Trueblood.

Procurement pros generally have a hand in the whole process, but may be more involved at the beginning, to vet finalists, or at the end, to negotiate compensation. Their early screening lets marketing staff focus on creative, not fees. But that runs the risk of showing marketers the cheapest finalists, not necessarily the best ones. “It’s like Survivor: They might not pick the best one, but you just want to be the last one standing,” says Holbrook. (Donlin contends that most shops price themselves comparably, and even if one shop lowballs a bid, its creative likely won’t be up to snuff.)

What most bothers agency execs is fee negotiation as a central piece of a review. Many RFPs don’t give enough information about the work to be done, so agencies have trouble accurately calculating fees and have trouble giving a realistic estimate on price.

“It keeps you on your left foot” to be asked how you’ll price a piece of business before you even know if you’ve won it, says Integer’s Leonard. “And procurement people negotiate every day; it’s their business. But we only do it once or twice a year, so we’re at a disadvantage.”

Plus, reviews often overlook “client adoption costs,” including senior-staff hours getting the agency up to speed on a new account. Either clients see that as the agency’s cost of doing business, or an agency risks pricing itself out of the running if it adds senior-staff costs to its bid.

Procurement is happening in all industries, but packaged goods marketers are especially keen negotiators. “They have a sense that Wal-Mart’s been pressuring them on price, so they’re turning around and pressuring their own suppliers,” says Catalina Marketing Corp. Exec VP David Diamond.

The best input comes from marketing-dedicated procurement pros, because they understand marketing and can match brands’ needs to agency capabilities. Big companies with broad portfolios — think Procter & Gamble, Kraft Foods, Campbell Soup Co. and Clorox Co. — have marketing specialists in their procurement departments. “It’s not just a filtering function,” says Deutsch. Procurement generalists, on the other hand, often aren’t as connected to marketing staff.

Big companies have brought their procurement expertise to agency reviews over the last four or five years, so their marketing staffs are comfortable with the process. Mid-tier companies are just getting on board, so most are still awkward about blending procurement processes with agency reviews, says Cutcher.

When there’s a good relationship between procurement and marketing staffs, procurement can do the nitty-gritty work and let marketing staffers choose between vetted finalists, based on quality, not price. “Our procurement managers are so used to negotiation that they can steer our conversations with agencies to be productive,” says one CPG promotions director. “They defer to us on marketing expertise but guide us in the process. It’s a big help.”

Campbell’s procurement group helps put marketing funds in the field, not on the bottom line. “They help us remove non-working dollars and re-deploy them, so we can spend more on actual marketing,” says Terry Atkins, director of consumer promotion and licensing at Camden, NJ-based Campbell. “Our goals [and theirs] are not mutually exclusive.”

A procurement-driven review typically results in a handful of finalists with a range of quality and price. Then marketers try to drive the best contender down to the lowest bid — “white tablecloth service at QSR prices,” says one agency president. Some resist cutting prices, but most are too hungry for work to say no.

And what about that online bid-cum-pizza party? “I’m not sure online bidding does what it’s intended to do when you insert it into an agency search,” says Cutcher. “It creates a swirl of negative reaction that can harm the potential relationship between client and agency. It leads some agencies to drop out.”

Bidding seeks the lowest price — fine for a straightforward materials order, but tricky for a marketing brief that agencies may interpret and staff differently. “It’s tough to force online bidding on a piece of business if it’s not configured exactly the same for all players,” Cutcher adds.

“If the procurement department makes the final decision, it tells us we’re not delivering a valued product,” says one agency exec. Donlin adds: “If the ultimate decision is based on price, you don’t want to work with that company anyway, because you won’t make any money.”

Agency execs complain privately about procurement departments that grind agencies down to the lowest price; some even demand rebates if they find a lower price for a similar service elsewhere. “They do more with less each year, and expect us to do that too,” says an agency exec. “But they’ve got factories, and I’ve got people — and people aren’t machines.”

Strategic sourcing isn’t about nickel-and-diming shops, argues Cutcher; the goal is to get agencies within an acceptable range of pricing. “We’ve never been involved in a review where pricing was at the point of the pin,” Cutcher says.

It all begs the question: Have promotion agencies lost their value to marketers?

“Value is historically about understanding clients’ business and proactively delivering relevant solutions,” says an agency president. “But that’s been wiped out by the drive for next-day volume and by the short time people stay in jobs. Relationships have fundamentally shifted, and we don’t understand each other’s business needs anymore.”

Search consultants have been handling more promo reviews the last two years for overworked marketers who want an unbiased opinion. Agencies like the formality and objectivity consultants bring. “It takes the personality out until the chemistry check at the end,” says J. Brown President Jon Kramer. “They get down to strategy and deliverables right away.”

Consultants have the expertise to cull finalists, but “if the client defaults to a consultant as a personal shopper, that’s dangerous,” says Deutsch. Consultants who block agencies’ access to clients make it difficult to pitch.

Critics say consultants use detailed RFPs to collect information for their own databases, asking questions not related to the pitch at hand. Most sensitive is detailed financial information: Search firms — like procurement departments — want to know an agency’s multiples (salary costs as percent of total fee) and how they’re calculated. Salary information has been very touchy stuff for ad agencies the last two years, but promo shops seem less concerned about sharing salary data. Still, it’s an important shift to negotiate by multiples, rather than the standard service-plus-commission model.

Some consultants are developing fee lists similar to a mechanic’s rate book, with standard rates for each task, no matter how long or laborious (or creative) the task really is. Integer is helping consultancy Morgan Anderson, New York City, create a fee sheet to use as a template for agency compensation for specific services. The model starts with salary costs and billable rates for each staff level, then estimates the number of staff hours by level for each service.

“It’s tougher to put a compensation package together, with longer time frames, more variables and more people involved,” says McMullen. “This helps set a compensation model to make clients happy, make agencies happy, and let agencies make money.”

A mechanic’s book would drive inefficiencies out, contends Donlin. “It puts the onus on agencies to work more efficiently. They may have to reconfigure how they go to market. The agency structure hasn’t changed much in 30 years, so it’s probably pretty an inefficient system.”

But more execs say hard bargaining makes creative a commodity, and distances shops from setting strategy.

“If we’re reduced to being tacticians, we’ll never be able to build brands,” says 141 Worldwide regional director Jay Farrell. “We need to get to a higher point, like with the CEO. But it’s tough to find heroes willing to say ‘I believe in long-term brands’ and stay the course.”

Desperate agencies are fighting over fewer accounts. That makes for cattle calls, with agencies throwing more resources behind each pitch. It’s a recipe for frustration.

“All the major reviews are getting ugly because too many people are involved,” grumbles one agency exec.

Even project reviews get special attention. “We got an RFP last week that said, ‘We’re looking for a group of creative vendors to pitch our project- (not retainer-) based business,’” Leonard recalls. “Take the words ‘group,’ ‘vendor’ and ‘project,’ and a year or two ago we’d have thrown it away so fast. But today we can’t afford to.” A project can get an agency on the marketer’s Master Service Agreement — a foot in the door to get to know brand managers and pick up more work.

The occasional high-profile chase still gets the industry buzzing. Last year Campbell Soup Co. undertook a nine-month ordeal that started with a corporate-wide evaluation of all resources, including nearly 100 marketing shops, and ended with some changes to Campbell’s roster but no AOR assignment for full-service promotion (see sidebar).

Still, unresolved reviews can open the door for later assignments, once marketers see what shops can do. Even incumbents can showcase new expertise.

Clorox Co. put a lot of thought into its own agency selection process, researching CPG best practices to set its two-part system. The company approaches agencies that have a good reputation among CPG colleagues and asks a handful of shops for three to five concepts. “It’s an opportunity to see how well an agency thinks,” says Clorox Director of consumer promotions Peter Lund. Then shops fill out a grid showing how they’d staff three hypothetical projects: a strategic initiative with senior-management input; a creative-reliant campaign; and an execution-heavy assignment. “Most of our projects fit these three frames,” Lund explains. The grid shows estimated hours (and hourly rate) at each level of the agency. Once shops are chosen, Clorox uses each agency’s grid as a guideline — but not a commitment — for compensation on that shop’s assignments. “We get an idea of how, and how efficiently, an agency will work before figuring their workload for the year,” Lund says.

Spec work has become common again after agencies fought it 10 years ago. One PROMO 100 agency CFO suggested at a recent American Association for Advertising Agencies financial conference that agencies should agree not to do spec work, but shops wouldn’t band together for fear that a hungry little startup would proffer ideas, and so win the business.

“I’ve had agencies offer to do spec work and I won’t take it,” says Lund. “I want absolutely no confusion, and if I pay for something, it’s clear that it’s mine. The easiest way to avoid hard feelings is to pay for what you want.”

Agencies partly bring problems on themselves by being too competitive. “It’s not that reviews are demanding more — the process has been similar the last five years — but agencies are pouring more into it because they need to win business,” says Pile & Co.’s Neer. “Once business is robust again, we won’t see that same competitiveness. Agencies will be more selective” about what they pitch.

Meanwhile, agency execs should recognize that marketers are trying to be fair. And marketers should recognize that agencies want to — and can — build business.

“The goal is to have more money in clients’ pockets at the end of the day,” says Kramer. “The question is, do you want more money because I charged you less, or because I helped you sell more?”

TOO MANY COOKS?

Campbell Soup Co.’s strategic sourcing initiative began in 2001, led by the procurement department under then-new CEO Doug Conant in order to cut costs. Marketing staff wanted to use its spring 2002 agency review (part of the second wave of the corporate initiative) to identify best resources, improve the quality of its work and analytical thinking, and “raise the bar on a whole checklist of things,” says Terry Atkins, director of consumer promotion and licensing. Campbell sent an extremely detailed RFP to 130 agencies in five disciplines: full-service promotion, account-specific marketing, event marketing, p.r. and design. “We told agencies we were looking to develop strategic relationships with a select number of agencies,” Atkins says. “We wanted to partner with them to give them the opportunity to get a scalable piece of business inside Campbell. It was the first step to shift from [Campbell’s standard] project work to agencies of record.”

About 100 shops returned the RFP, and a 15-member team (including reps from Pepperidge Farm, Campbell’s Canada and consultancy A.T. Kearney & Co.) spent a month reviewing them. Staffers ranked finalists in their own disciplines, then the whole group met again to agree on the list: 10 full-service shops, five account-specific, four each for events and design, and six p.r. shops. “We wanted a broad enough range to choose from, but not so large a list that we were spinning people’s wheels,” Atkins explains.

Full-service finalists got a brief — come up with concepts for two time periods for the red and white line — then presented to the 15-member team in New York City in October-December last year. “All the agencies impressed me with their insights,” says Atkins. “The way they understood our business and delivered solutions was fantastic.”

But not fantastic enough to win the big AOR contract that full-service shops were chasing. “No one hit it out of the ballpark for us,” Atkins says. “No single group could do a portfolio-wide idea for the soup business.” So Campbell handed a nine-month project to Ryan Partnership, Wilton, CT, (new to Campbell’s roster) and smaller projects to four other finalists (two of them incumbents). Atkins expects to name at least one full-service promotion AOR this fall.

Campbell also delayed the decision because of operational changes — including new recipes, product launches and new advertising. Still, the review netted seven AOR contracts: one for account-specific, two for events, and four for design.

But full-service promotion contenders were stung to get a letter in January saying the decision was on hold. Shops spent up to $200,000 (in time and cash) to compete. A phone conference with a Campbell procurement staffer gave little detail but left many thinking red and white was up for grabs. Incumbents felt especially pressured to participate.

“We didn’t specifically say there would be an immediate assignment,” says Atkins. “This was part of a corporate process to evaluate the marketplace to make long-term decisions.”

The experience has got agencies looking more critically at RFPs before jumping in.

PLAYING FAIR

MARKETERS

• Know what you want. “Nothing drives agencies crazier than the rules changing halfway through,” says Judy Neer, exec VP at search consultancy Pile & Co., Boston.

• Make sure your colleagues agree. Get all participants on the same page before issuing an RFP.

• Be sensitive about what you ask agencies to do for the review. If you want too much now, how demanding would you be as a client?

• Give enough detail in your hypothetical case study that agencies can accurately estimate the workload and cost.

• Pay for creative so there’s no doubt ideas belong to you — and no hard feelings.

• Use sealed bids. Ask agencies to submit RFP financials in a separate, sealed envelope. Evaluate strategy and creative before unsealing.

• If you click, take a leap of faith. Airline Virgin Atlantic halted its ad review in May after one meeting with Crispin Porter + Bogusky, Miami. Virgin VP-marketing John Riordan called it “love at first sight.” Sure, other agencies didn’t get to strut their stuff — but they didn’t have to jump through hoops, either.

• Cultivate at least one marketing expert in the procurement department. Specialists who understand marketing — especially promotions — better match agency capabilities to brands’ needs.

• Consider pay for performance. Top-notch agencies would be happy to share in your sales success. If it’s good enough for Procter & Gamble, it’s good enough for you.

• Issue report cards. Grade agencies on quality and results, then give them either money or additional assignments for a job well done.

• Buy on service, not just price. If you like an agency outside the procurement department’s price range, ask the two to negotiate.

AGENCIES

• Be selective about what you pitch, and be honest about what you can do.

• Meet the chief marketing officer, your ultimate client. You’ll know best how to pitch an individual you’ve met — and have a sense of what it would be like to work together.

• Follow the rules. Procurement pros design the process to eliminate contenders, so stick with the system. “You can’t win a pitch in the early stages, but you can lose it,” says DVC Worldwide CMO Bill Donlin.

• Watch for red flags. Did more than a dozen shops get past the first round? The marketer has cast too broad a net and is unsure what it wants. (See Guest Room, p. 98).

• Use marketers’ focus on ROI to discuss the money they will make, not what they’ll pay agencies. Propose a bonus based on performance. The trick may be structuring a fair measurement, since so many factors can affect sales.

• Know your fee structure and don’t be shy discussing it. “It’s not so much a matter of what your price is, but whether you can discuss it intelligently,” says Donlin.

• Make sure your rates really are competitive. One CPG asked an agency to give its RFP another look, since the agency’s estimate was triple the man-hours of other finalists. The shop came down 20%, but still double the cost of competitors. The agency didn’t win, but the CPG invited it back for a separate review — and the agency overshot again. (It hasn’t been asked back.)