You Can't Hire An Agency Based on "Specs"
LinkedIn Article by Tim Williams
July 22, 2015
When procurement professionals source chemicals or other commodities, its a matter of defining specifications and then finding the best price from the available suppliers that can meet the list of requirements. The plastic required to build a smart phone can be fabricated by a wide variety of suppliers, all manufacturing to the same exact specifications. In this case, the job of procurement professionals is to find and hire the most cost-efficient supplier; the one who can meet the required specs at the lowest cost.
None of this applies to the procurement of professional services, such as evaluating an advertising agency or a law firm. While materials manufacturers can work to “spec,” knowledge workers are engaged for completely different reasons. Even the most talented procurement professional cannot write a complete set of specs for a marketing program. Marketing is by nature variable and adaptable. Attempting to define a marketing program by simply listing desired inputs (hours or time of staff) is an incredibly incomplete and ineffective way to buy the talent and capabilities of marketing professionals. Even the laborers who work for raw materials suppliers are not held to a standard of hours worked; that would be irrelevant. This idea is even less relevant in knowledge work.
Writing in the book, Buying Less for Less, my friends Gerry Preece (formerly P&G procurement) and Russel Wohlwerth (career agency professional turned consultant), contrast the difference between what they call Direct Materials Procurement and Marketing Procurement:
To effectively buy professional services it's critical to look beyond inputs. It's a step in the right direction to buy “outputs,” sometimes framed as “deliverables.” In a marketing environment, procurement will sometimes present interested agencies with a fairly long list of deliverables; so many TV spots, online banner ads, web pages, etc. But as every business professional knows, not all TV spots are created equal. Some can literally reverse a company’s fortunes (like TBWA/Chiat/Day’s disruptive “1984” commercial for Apple), while others run an unremarkable course and land on the ever-growing heap of mediocre marketing.
If one marketing campaign can produce 100 times the results of another (which is quite literally true; examples abound in the marketing literature), why exactly do major corporations persist in attempting to “source” advertising like they would copper? As long as it meets the specs, copper is copper. Marketing is not marketing. The “1984” commercial, which is still talked about more than 30 years later and is often referenced as the best TV commercial ever created, ran exactly once. There’s no better example of how paying a great agency to do great work can actually cost a company less to build their brand, not more.
Knowledge work like marketing (or law, accounting, or consulting) is not about efficiency, but rather effectiveness. What marketers should be “spec’ing” in their search for marketing partners is not inputs (hours, time of staff) or even outputs, but rather outcomes. It’s unfortunately true, however, that many marketers lack a deep understanding of which outcomes matter most. They know their sales and market share (lagging indicators), but are much less cognizant about the drivers that cause sales and market share (leading indicators). Leading indicators are in effect predictors of success; correctly identified, they correlate directly to revenues and profits.
For example, a car manufacturer certainly wants more sales, and would likely consider this lagging indicator to be their major metric of success. But what are the key factors that cause sales in their category? Brands like Toyota have answered this question: test drives, online search results, and website visits – all leading indicators – reliably predict product sales. These leading indicators also represent specific outcomes that car manufacturers should be buying from their agencies instead of hours, efforts, or percent of staff.
UNDERSTANDING WHAT YOU’RE REALLY BUYING
If procurement and marketing professionals adopted the view that they’re purchasing desired results for their company, they might be inclined to actually pay their agency partners more, not less. Back in the days of Mad Men, this is precisely how things worked. Because agencies made their revenues exclusively from media and production commissions (not fees or hourly rates), their clients were inclined to spend more with the agency as long as the results were being produced. Effective campaigns = increased brand sales = increased media budgets = increased agency compensation. Don Draper and his colleagues were spared the nonsensical demands to trim their hourly rates because they didn’t have hourly rates. They were in the results business. So are agencies today, itt’s just that somewhere along the way (credit David Ogilvy, the father of the hourly fee system), agencies lost sight of what they’re really selling, and clients understandably got confused about what they’re really buying.
Of course not every agency is equally capable of producing meaningful results for their clients. The best 20% of agencies are exponentially more effective than the remaining 80%. A similar phenomenon occurs in the brand world. Interbrand’s annual brand study unswervingly shows that of the thousands of brands on the planet, the top 100 produce over 90% of all the brand equity that exists in the world. In ad agencies, law firms, accounting and consulting firms, there is an incredibly wide gap between the best and all the rest.
WHEN LESS IS MORE
So consider how insensible it is for buyers of agencies services to plot agency rates on spreadsheets as though these are purchases of equal value. It makes perfect sense to do this when sourcing paper clips. But it’s ineffectual nonsense to use this methodology when deciding to engage a provider of professional services. To make this practice even harder to fathom, generally the only information that appears on procurements’ spreadsheets is related to costs – hourly rates, salary costs, overhead, etc. Nowhere is there any indication of the fact that the agencies represented are actually selling different abilities. It would be like listing the costs of various brands of race cars without noting how fast they can go.
Finally, from a big picture budgeting perspective, it could be argued that businesses should spend more money in the areas where their company is (or has the potential to be) different, and spend less money where they’re not. Advertising agencies exist to help differentiate companies and their brands, and differentiation enables one brand to earn a price premium over another. This phenomenon is verified year after year by research firms like Millward Brown, which demonstrates that in virtually every category, the more differentiated the brand the higher the price customers will pay for it.
The right agency partners, compensated in the right way, can create tremendous brand value for their clients. They can also help companies improve their business all along the value chain, not just in the phase labeled “marketing.” When companies are willing to align economic incentives with their agencies – meaning paying them for something the company wants more of (results) instead of something it wants less of (hours) – the best agencies will invest their best energies to meet the challenge, proactively contributing ideas ranging from product development to improving the customer service experience. When their profits are tied in some way to your profits, you can be certain they will care about your revenues – and your costs – as much as you do.