CMOs need to work with their finance and procurement counterparts to understand the factors driving marketing costs and identify efficiencies.
There was a time when marketing spend was able to keep pace with market needs. Not anymore.
With customer demands increasing, technologies evolving, and the number of marketing channels proliferating, it has become very difficult for marketing to meet its operational goals while staying on budget.
It hasn’t helped that marketing budget growth has stalled. Marketing spend fell from a high of 11 percent of company revenue in 2012 to 7.3 percent in 2018. The decline is expected to deepen in 2019, just as outsourcing of marketing activities is poised to increase by 5 percent.
This is all happening during a period when firms are focusing on market penetration strategies to drive growth, making maintaining a consistent, relevant presence and voice in the market even more critical and challenging.
This perfect storm of events—declining marketing budgets, increased reliance on external partners, the need for a consistent brand presence—means CMOs need to extract maximum value from every dollar of marketing spend.
While CMOs understand and actively manage the intricacies of customer-facing or working marketing spend, they often do not focus enough attention on vendor and material management activities, which\ can significantly inflate marketing costs. To manage marketing spend more efficiently, CMOs need to work collaboratively with their finance and procurement counterparts to understand the factors driving marketing costs and where they can become more efficient. By working together, they can ensure the firm gets the most from its marketing budget.
Managing marketing spend can be a highly complex task. Often, there are multiple buyers within a marketing organization who deal with dozens of different vendors and agencies over the course of the year. Global firms can deal with hundreds of different vendors and agencies each year. Additionally, agencies of record can subcontract specialty vendors on behalf of their clients.
With so many vendors providing services, transparency of spend decreases, which can and has led to abuse by disreputable suppliers. For example, the Association of National Advertisers (ANA) reported finding agencies getting kickbacks and nontransparent rebates from media companies. Even with reputable vendors, there are always questions as to whether marketing got what it paid for with media and creative purchases (reach, frequency, hits, etc.). Surprisingly, despite the current complexity and opacity of today’s media markets, there are still firms that do not conduct regular audits of media to ensure the schedules and contractual performance standards are met.
Just as concerning, most marketing organizations have not documented performance standards for their vendors. If standards do exist, they are often different by brand or geography. Global marketing vendors can be held to multiple performance standards for similar work within the same firm. All of these lead to confusion and increased vendor administrative costs, which get passed on to clients.
When the global financial crisis hit, many firms turned marketing sourcing over to the procurement group to drive cost efficiency. This singular focus on cost cutting led to poor quality work and complex, slow negotiation processes, which delayed decision making. The result: a negative impact on performance. This led many organizations to return marketing sourcing back to brand teams. PepsiCo did just that when it found that global procurement did not allow its marketers the agility to react in a fast-moving and ever-changing digital environment. The entire experience has left many marketers uneasy when it comes to working with procurement — further complicating the collaboration necessary to best manage marketing spend.
Many finance processes also create challenges for marketing. For example, the purchase order/ purchase requisition process in many firms is slow and cumbersome. This has led many marketers to establish blanket purchase orders, which make identifying costs by campaign or tactic difficult.
By working together, the CMO and the CFO can ensure that decisions related to marketing spend reflect both good fiscal management practices and the unique needs of a function that must be responsive to changing customer and market demands.
A survey of 200 marketers to benchmark the industry’s performance linked collaboration between marketing and finance as a key driver of growth. For example, 57 percent of companies that expect to grow by 25 percent or more reported frequent or ongoing collaboration between the two functions.
By working collaboratively with their CFO, finance, and procurement departments, a CMO can identify and better leverage internal knowledge and best practices related to procurement, vendor management, and contracts management. For example, the CFO can help the CMO assess whether they are paying competitive rates for specific services and set up processes to better track delivery of services against a contract to ensure terms are completely fulfilled. As primary steward of overall performance (balancing revenue and cost), the CFO is in a position to help marketing and procurement find the balance necessary to work together effectively.
Tighter management of marketing spending doesn’t mean falling behind the competition. In today’s world, customer expectations are changing rapidly.
If a company wants to remain relevant, its marketing function must be flexible, agile, and able to respond quickly to shifting trends. Collaborating with their CFO, finance and procurement functions can help CMOs manage budgets to ensure effectiveness and efficiency.
Increasingly, CMOs will be required to do more for less. Collaborating with finance and procurement will be critical if marketing is to drive optimum value from marketing spend and deliver on strategic objectives.
This collaboration begins by understanding what each function brings to the table.
1. Repair the marketing and procurement relationship
The CFO has a role to play in helping to set the right KPIs for measuring marketing procurement and performance. These metrics need to strike the right balance between cost containment and revenue generation. While establishing shared metrics have been shown to improve marketing sourcing effectiveness, only 49 percent of firms report closely matched KPIs.
Once a balanced scorecard of marketing procurement metrics has been established, they need to be tracked and reported. This may require finance, marketing, and procurement to work together to establish new data capture and measurement processes that ensure the value of marketing procurement beyond cost reduction can be identified.
2. Create a plan to source marketing services strategically
Once marketing identifies what should be done in house and what should be outsourced to marketing services suppliers, marketing, finance, and procurement should come together to establish an external sourcing strategy. This will involve identifying the right supplier for specific tasks. For example, less complex and lower impact creative could be sourced to lower cost offshore vendors. The overall strategy should be designed to reduce the complexity and number of agencies and vendors while not sacrificing creative quality.
3. Decide on the right marketing procurement structure
There is no one-size-fits-all strategy. Unilever recently restructured to three separate marketing procurement teams that will serve different divisions of the business in order to “drive long-term shareholder value and provide increased flexibility, strengthen corporate governance and enable our divisions to better serve consumers by balancing scale and agility.”
The best marketing sourcing structure should consider spend efficiency/effectiveness, marketing impact, the agility and speed required by marketing, while also taking advantage of scale to reduce supplier prices. Clearly defined roles and responsibilities for procurement and marketing are required to achieve these goals. Once the right structure is identified, the CFO should review finance processes to ensure they assist in effective, transparent purchase and management of marketing suppliers.
4. Establish a robust yet balanced process for evaluating vendors
To be most effective, this evaluation methodology should balance marketing’s desire for creativity, agility, and flexibility with business essentials, such as competitive rates, contractual fulfillment, and measurable market impact. If procurement is managed separately from finance, a CMO should work collaboratively with both the CFO and procurement to embed best practices for vendor management in day-to-day marketing practices. For example, performance standards should be set enterprise-wide based on the responsibility of the marketing services vendor and shared with the supplier before contracting, not after the fact.
5. Ensure supplier compliance
Audits should include contract compliance as well as price benchmarking. Companies that have established regular audits of media and marketing contracts report finding the process very valuable. This is particularly true of digital and social media buys, where the veracity of reported performance is in question.
The CFO’s experience with financial and internal audits places him or her in the best position to manage the marketing/media audit process and confirm that marketing suppliers are meeting performance agreements while also observing all relevant regulations, such as GDPR and Sarbanes-Oxley.
In today’s business world, marketing functions need to get the most from every dollar they spend. By working collaboratively, CFOs and CMOs can ensure they are managing their marketing spend in ways that are more efficient without compromising on the need to be agile, creative, and responsive. This will only lead to a more successful company overall.
To learn more about this topic and how KPMG can help your business, please contact Jason Galloway.