AAAA Webinar Series. The Procurement Perspective. J. Francisco Escobar. Call #: Access Code:

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1 AAAA Webinar Series The Procurement Perspective J. Francisco Escobar Call #: Access Code:

2 J. Francisco Escobar 2 2

3 Agenda Introduction Marketing Services Industry Trends Evolution of Corporate Procurement Procurement Best and Worst Practices Core Procurement Types Getting to Value Based -- JFE s s Top Ten Agency Cost Modeling / Benchmarking Process / Relationship Stewardship Models Negotiating Tactics 3 3

4 Marketing Services Industry Trends Greater Variety of Client Orgs Involved in Relationships No Predominant Method of Managing Compensation Significant Move to Labor-Based Fees Continues Advertisers / Agencies Deviate on Acceptable Profit Use of Industry Benchmarking more Prevalent Fee Negotiations Becoming Shorter in Term 4 4

5 Marketing Services Industry Trends Increasing Use and Success of Performance Incentives Contractual / Electronic RFPs more Commonplace Agency-Provided Cost Information More Detailed More Focus on Efficiencies (e.g. Production Decoupling) Agency Financial Audits by Clients Creeping Back Up Major US Associations Publish Compensation Guide 5 5

6 Evolution of Agency Pricing Models Spend-Based Labor-Based Value-Based AGENCY COMPENSATION TRENDS (source - ANA) 100% 50% 0% 70% 74% 53% 30% 35% 16% 12% 0% 10% Spend Fee Other 6 6

Toward Strategic Procurement Old Way 1970s Transition 1980s Mid 1990s Present Late 1990s and Beyond 1) Many Sources 2) Adversarial

Information Interchange 8) Process Arbitrary 1) Fewer Sources 2) Suppliers are What You Make Them 3) Good Measures of Supplier Performance 4)

Data 8) Process Complex 1) Minimum Sources 2) Long-Term Supplier Teamwork / Involvement 3) Total Cost of Ownership and Six Sigma 4) Continuous

7 Toward Strategic Procurement Old Way 1970s Transition 1980s Mid 1990s Present Late 1990s and Beyond 1) Many Sources 2) Adversarial Relationships 3) Inspection and Verification 4) Price / Cost Emphasis 5) Mostly Local Sourcing 6) Purchasing Reacts, Customers Distant 7) Paper Information Interchange 8) Process Arbitrary 1) Fewer Sources 2) Suppliers are What You Make Them 3) Good Measures of Supplier Performance 4) Quality / Delivery Emphasis 5) Growing Global Sourcing 6) Increasing Teamwork Among Purchasing and other Internal Functions 7) Some Electronic Data 8) Process Complex 1) Minimum Sources 2) Long-Term Supplier Teamwork / Involvement 3) Total Cost of Ownership and Six Sigma 4) Continuous Improvement Emphasis 5) Extensive Global Sourcing 6) Categories Managed by Multifunctional Teams 7) Electronic Central Nervous System 8) Process Simplified 7 7

8 Supply Chain Segmentation Strategic or Technology Alliances (Partners) Direct Materials / Services (Commodity Suppliers) Indirect Materials / Services (Low-Dollar Acquisitions Vendors ) 8 8

9 Supply Chain Segmentation High Supplier Business Impact Low CRITICAL SUPPLIERS COMMODITY VENDORS STRATEGIC PARTNERS UNDIFFERENTIATED SUPPLIERS Low Relative Spend for Services High 9 9

10 Procurement Strategies High Supplier Business Impact Low Longer term contracts Obtain price guarantees Quality/delivery emphasis Basic performance metrics Shared Business Processes Minimize involvement Select solely on price Empower end-users Bundle services Automate processes Development of alliances Risk / reward remuneration Ensure supplier viability Performance stewardship Continuous process improvements Limit term of contract Seek volume discounts Negotiate aggressively Identify multiple sources Improve working processes Low Relative Spend for Services High 10 10

11 Polling Question #1 Procurement's key care-abouts abouts are: (Select only one) Cost & Transparency Quality execution & on-time delivery Supplier development & productivity Being viewed as a value-added added team member 11 11

12 Procurement Key Care-Abouts Optimal Mix: Quality Service Price: Defensible cost savings On-time service delivery / completion Quality with flawless execution Customer-focused: internal & external stakeholders Financial transparency Supplier diversity initiatives 12 12

13 Procurement Key Care-Abouts Contract terms Cost / compensation Educated stakeholders Productivity -- Continuous Improvement... To be viewed as a WELCOMED, VALUE To be viewed as a WELCOMED, VALUE-ADDED ADDED TEAM MEMBER in the agency / client mix 13 13

14 Procurement s Role in Value Creation Simple ABC: Aligned with overall company and stakeholder objectives; using Best-in-class suppliers and service providers; for a clear and measurable Competitive advantage 14 14

15 Total Cost of Ownership PRICE Conscious selection based upon lowest price versus VALUE Conscious selection based upon best overall perceived value (including value of relationship) 15 15

16 Supply Chain Continuum Cost (Manufacturing) Revenue (Marketing Services) General Procurement Value for $ Procurement Lowest Cost Providers Cost On-time Supply Quality Best Value Providers Quality Service Delivery Cost 16 16

17 A Discipline by Many Names Strategic Relationship Optimization Marketing Development Organization Supplier / Supply Chain Management Business / Marketing Services Strategic or Smart Sourcing Procurement Purchasing 17 17

18 Procurement Best Practices Assesses reasonableness of service provider s s cost Demonstrates value-add add to management Promotes stewardship and on-going dialogue Integrators of demand and supply chains Ambassadors of ethical behavior Positive and constructive manipulation of ALL parties Demand fairness and equity QUID PRO QUO 18 18

19 Procurement Best Practices Minimum Sources Early Involvement Teamwork Continuous Improvement 19 Total Cost of Ownership 19

20 Procurement Myths versus Reality Myth - Procurement can t t help me, I m m the expert - Procurement will make me use an agency I don t t want - My agencies don t t want to deal with Procurement - Procurement will slow the process down - Procurement cuts the budget - Procurement can t t evaluate creative Reality - You re the marketing expert, but they can still add value - They will make sure the selected agency is justifiable - Agencies prefer the unbiased approach they bring - They will find more process inefficiencies than they create - They won t t (but finance might) - OK, this one might be true, but they can help value it 20 20

21 Procurement Worst Practices Cost is the only factor Not aligned with stakeholders objectives Trying to tell an agency how to run their business Unknowledgeable about marketing services category Inappropriate direct material sourcing practices Win-Lose contract terms / single term contract Treating strategic partner like a commodity 21 21

22 Core Procurement Types Expertise Low High 22 III. IV. Strategic Cost-Cutter Relationship Optimizer Corporate Hero Enlightened Procurement CONSULTANTS I. The Obstacle Box Checker Adversarial II. Personality Rubber-Stamper Amiable Simpleton Relationship 22

23 JFE s TOP 10 10) Treat procurement like real people rather than viewing them as the enemy. Be inclusive. 9) Identify and understand procurement s s key care- abouts. Be open to audit and measurement. 8) Meet in person -- Don t t negotiate agreements purely over the phone or electronically 7) Ensure that pricing is 100% defensible. No bait and switch. Single revenue stream. 6) Eliminate all mystery and inefficiencies in your business processes 5) Represent your company s s interests and position with conviction 23 23

24 JFE s TOP 10 (cont.) 4) Educate procurement about advertising/media services and industry norms. Be proactive. 3) Elevate any inappropriate practices to client stakeholders or their senior management 2) Walk away from business/clients that don't mix with your culture or overextend your range of fairness 1) Focus on long term gains and strategies and always Play to Win-Win! Win! 24 24

25 Polling Question #2 When is the best time to talk about money with an existing client? (Select only one) Up front Need to frame expectations At the end Don t t prematurely negotiate After discussing Value 25 25

26 JFE s TOP 10 (cont.) AAAA Seminar Special: If at all possible, talk about money last. Don t t allow it to interfere with communicating your value

27 Typical Agency Response Scenarios Innovation Low High III. I. Make It The Creators Fake It The Impostors IV. II. Collaborate It The Team Players Borrow or Buy It The Outsourcers Low Business Savvy High 27 27

28 Agency Financial Model Agency Professional Service Purchasing Agent Commercial Enterprise Direct (Client-Related) Expense Indirect (Business-Related) Expense Total Client Cost 28 28

29 Agency Expenses DIRECT (Client Related) People Related Account Service Creative / Production Media Research Public Relations Non-People Related Media/Production Pass-thru Travel & Entertainment Postage / Delivery Telephone / Fax INDIRECT (Business Related) People Related Financial Management Facility Management Human Resources Information Services Executive Management Non-People Related New Business / Growth Occupancy Administration Cost of Money 29 29

30 Agency Cost Salary * $50,000 Payroll-Related Expenses (taxes + benefits) * 10,000 Total including Payroll Related Expenses $60, % * 60,000 Total Cost $120,000 * For example only 30 30

31 Agency Time 52 weeks x 35 hours 1,820 Less: 6 weeks x 35 hours (vacation, holiday, sick leave) 210 Available hours 1,610 Available hours rounded 1, weeks x 40 hours 2,080 Less: 6 weeks x 40 hours (vacation, holiday, sick leave) 240 Available hours 1,840 Available hours rounded 1, hrs/yr 10% % % % % % % % % %

32 Agency Cost Billing Rates Agency Professional Service Purchasing Agent Commercial Enterprise Direct Expense (Client-Related) $60,000 Indirect Expense (Business-Related) $60, Total Client Cost $120,000 $120,000 / 1,600 hrs = $75.00 per hour $120,000 / 1,800 hrs = $66.67 per hour 32

33 Agency Profit Profit Before Tax Taxing Entities Incentive Bonuses to Employees Employee Retention Employee Mindset Profit Retained by Owners Capital Investment Facilities Technology 33 33

34 Agency Profit Calculation FEE % Amount % Total Cost $120,000 Profit 17.65% 21, % Total $141,180 Mark-up % (% of Total Cost) Agency Profit (% of Total Cost + Profit) 11.11% 10% 17.65% 15% 25.00% 20% 33.33% 25% 34 34

35 Polling Question #3 Which benchmarks are most relevant in a compensation negotiation? (Select only one) Salaries & payroll related costs Overhead Profit percentage All of the above None of the above 35 35

36 Industry Benchmarking Cost Factors Subject to Benchmarking - Salaries & Payroll-Related Expenses - Overhead Ratio - Profit Percentage - Available Hours per Year - Media, Production & Other OOP Pass-Thru Sources of Client Benchmark Data - Client Owned from other Relationships - Client Generated with other Corporations - Industry Associations and Publications - Compensation Consultants Databases - Internet Labor Sites 36 36

37 Process Management Model Data Gathering and Sharing Agency Execution Approval and Closure 37 37

38 Polling Question #4 Are any of your largest clients decoupling production from creative development? (Select only one) Yes No Not yet, but it is being discussed 38 38

39 Production Decoupling Most recent trend in next generation of driving efficiencies Separate business production from creative development Take ownership of space traditionally managed by Agencies Centralize / manage certain categories of non-creative spend - Print Production Pre-press - Talent Negotiations / Music Licensing - Digital asset management & distribution - Transportation / Freight / Travel - Potential Synergies across Client and Agency Supply Base Benefits include: centralized management/reporting process; global brand consistency; and leverage total spend 39 39

40 Relationship Management Model Review and Renegotiation Return to the way things used to be Sharing Information and Negotiating Expectations Commitment (Role Definitions) Planned Renegotiation Termination Anxiety Stability and Productivity Change Factors or Pinch 40 Uncertainty Disruption of Shared Expectations 40

41 Enhanced Profitability Arrangements The 3 T s: T Trust that Client allows the incentive to be meaningful, engages in the process objectively, and budgets for the maximum payout Tool in place that enables the parties to agree on all measurement objectives, capture quantifiable metrics, and properly evaluate qualitative criteria Teamwork that ensures input from all engaged Client stakeholders, promotes bilateral dialogue, and provides collaborative involvement that continually improve the process 41 41

42 ANA / AAAA Compensation Guide Joint industry task force mission was to eliminate confusion, misunderstanding and conflict between advertisers and agencies - Established specific compensation guidelines - Recommended four-step dialogue process - Suggested best practices to improve relationships - Established common set of definitions for components of agency cost and compensation Task force had significant agency representation and the published guide is fully endorsed by major agency executive management and finance communities

43 TOP 10 Tactics for Effective Negotiations 10) In business, as in life, people who EXPECT more, ASK and DEMAND more, will GET more 9) Negotiate in person, face-to to-face, matching numbers of attendees and functional roles 8) Make the best use of body language, reflecting self-confidence and a winning attitude 7) Elevate the other party s s ego and be careful NOT to lower their ego 6) Talk about money last, initiating the dialogue toward value, partnership and the meeting of mutual expectations 5) Be stingy with concessions 43 43

44 TOP 10 Tactics for Effective Negotiations 4) SHUT-UP, UP, or risk giving away negotiating power 3) Negotiate on your front foot by representing your agency s s interests with conviction 2) Say NO one more time, just when you are ready to concede a major negotiating point 1) Walking away, or demonstrating a willingness to walk, can sometimes be the best course of action. AAAA Webinar Special: Early in the discussions, be sure to win a minor negotiating point, so that the other party understands your tenacity. From then on, ensure that you provide alternatives on major sticking points

45 Q&A Thank You! J. Francisco Escobar

46 AAAA Business Development Blog

47 JFE Backgrounder 20+ years client-side experience in finance, marketing and procurement management for a Fortune 100 advertiser Consultancy founded in 2003 focusing on all aspects of proper agency / client relationship management Customer base includes marketing services providers, major marketers and other intermediaries in the industry Under the auspices of the ANA, authored Marketing Communications Procurement Best Practices booklet Released industry White Paper on agency compensation best practices for the Council of PR Firms

48 Ways to Utilize JFE as a Resource Onsite training of agency personnel on dealing effectively with Client Procurement Backroom consulting in preparation for discussions / meetings with Procurement Recommendations on responding to RFI, RFP and RFQs (particularly Procurement-driven processes) Review and provide input on new business pitches from a Client perspective and viewpoint Live participation in presentations to existing or prospective clients as resident category expert 48 48

49 Ways to Utilize JFE (cont.) Hands-on involvement in contractual and compensation negotiations Assist in scheduled contractual / compensation renegotiations and relationship process reviews Help develop and evaluate internal Agency processes that increase efficiencies to client Provide counsel on best practices, collaboration, and coordination across worldwide networks Bring consistency to Client interface when multiple agencies or geographies are involved 49 49

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