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By: Hubert Lachance, Author & Corporate Buyer
Historically, procurement’s main focus has been on reducing raw material and component prices. And given the high volume of components associated with manufacturing production, the impact of price reductions has been known to directly influence companies’ bottom lines. In this context, the contribution of purchasers specialized in direct procurement is well recognized.
In response to the increased importance of the service sector in industrialized economies and the challenges of continually reducing prices for direct goods, large companies are gradually putting more emphasis on indirect spending.
Procurement has managed to get involved in most indirect categories, but is still struggling to influence marketing spend. As per the following chart from Proxima, a leading procurement services provider, procurement influences 90% of office consumables spending, but only influences 50% of marketing spending.
Why is Marketing an Important Indirect Spend?
Given the impact that well managed marketing campaigns can have on sales, it is a known fact that the marketing function of large companies is recognized as the sales enabler. Large CPG (consumer packaged goods) companies often have huge marketing budgets that introduce their products and services to millions of potential customers. Given the high spend and strategic function of marketing, it is worth understanding why procurement has struggled at covering this spend in the past, and the potential benefits of getting them more involved.
The main challenge with supporting indirect spending, particularly marketing, is the difficulty that budget holders and procurement professionals face when defining business requirements. Unlike with direct material, where precise specifications can be obtained, procurement cannot rely on an engineer to provide specific requirements during the needs identification phase. This means that indirect purchasers need to enquire on the services that are available, and help the internal client describe requirements without limiting competition by being too specific.
As an example, describing requirements when tendering a marketing agency contract or a loyalty program requires an array of expertise that will involve other departments, such as finance and IT. This is more complicated than sourcing office consumables.
In many CPG companies, employees will often start in a sales representative position before moving into marketing. While this background provides a good understanding of consumers’ needs, it does not necessarily offer opportunities to learn how to best brief suppliers and manage a sourcing process.
The specific expertise needed, coupled with the short timelines that often come with marketing projects, means that it becomes easier to develop custom solutions in collaboration with a preferred supplier rather than tendering marketing projects — think ad campaigns, promotional packaging, online contests, trade booths and promotional brochures.
There are some problems with this approach though, mainly due to limitations to competition and an inability to forecast costs due to constantly evolving needs.
Benefits of Supporting Marketing Spending
Like with any other indirect category, there are a number of benefits that come with procurement’s support of marketing, including:
- Paying the right price — I have experienced prices inflated by up to twenty times normal cost when a budget has been provided by marketing to a supplier
- An increase in reach (additional products or services are usually purchased when pricing is reduced)
- More options for budget holders to choose from
- The opportunity to work with superior suppliers
- Smoother delivery of services
- Higher chance of costs not exceeding estimates
- Improvements to internal processes
When considering how to approach the purchasing process for marketing and other indirect spend categories, buyers will benefit from managerial support through the establishment and endorsement of a sourcing policy.
The sourcing policy will include a reasonable sourcing limit — a threshold for procurement to get involved — that allows procurement to focus on targeted, high-value initiatives. Although marketing budgets vary between companies, I would recommend establishing sourcing limits for large organizations of at least $50,000, but ideally over $100,000. Additionally, the potential for savings and added value of getting various quotes, versus just one, needs to be justified.
When an indirect procurement department has been supporting marketing for a short period of time, typically under two years, monitoring and reporting on sourcing compliance (% of marketing spend supported by procurement) should encourage budget holders to inform procurement of upcoming initiatives. I also recommend that purchasers be proactive when enquiring about budgets so that upcoming initiatives can be discussed as soon as possible.
To further their expertise, purchasers are advised to spend time with current and potential suppliers to gain knowledge about their services, to understand their added value and to learn how services are rendered and customized.
In addition to leveraging suppliers’ expertise, purchasers can gain insight from budget holders’ knowledge by enquiring about the marketing services required. I also recommend conducting external research, including using IBISWorld procurement reports, to bolster discussions with budget holders.
Even when purchasers know what is required, it will most likely be necessary to reassure new budget holders that procurement’s role is to support the sourcing process, and that their role is to make the final decision. Budget holders can often be reluctant to tender their projects, so providing assurances that they will maintain control should improve your collaboration.
A New Approach
In my experience, it is imperative that procurement be highly involved when supporting their internal clients during the needs identification phase. During my 10 years supporting marketing, I often provided the final written description of what was required, based on discussions and enquiries, so that the budget holder simply had to approve and make minor adjustments.
When budget holders meet with well-prepared buyers that ask questions and make good recommendations, the reaction is likely to be positive. For a tender process to occur, procurement must come up with a complete description of what is required and the desired outcomes. Procurement’s involvement is important, as the easy route for budget holders is to gradually establish requirements with the support of a supplier. However, this approach makes it inappropriate for tendering projects when a supplier has already started to work on the initiative.
The recommendation to actively support the needs identification phase is aligned with an ANA survey on procurement–marketing relationships, stating that RFI/RFP facilitation was listed as the top benefit procurement can bring to marketing.
Hubert Lachance worked for a well-known multinational CPG company for over 10 years. His past position, as a Sourcing Associate, involved acquiring indirect goods and services for marketing, IT, and corporate affairs.
Hubert obtained an MBA in International Business in 2004 and a BAA in 2002 from Laval University and participated in two student exchange programs, one in the United States and one in Mexico. In 2016, Hubert was awarded an ExcelcieArt award for his contribution through his book, called ‘’Confessions of a professional buyer, the secrets about selling and purchasing service’’ to the development of the procurement profession.
More information on leading indirect sourcing initiatives and achieving higher benefits can be found in the author’s book.