The challenge of procurement

While PepsiCo has abandoned procurement for marketing services, the industry is not confident that others will follow

Two decades ago, the hearts of PR agency executives would sink when they pitched for a major contract and found a procurement professional in the room. Now, they expect nothing less.

Procurement may still be an eleven-letter word loathed by many agency heads but it is part of business; ubiquitous at most quoted companies despite the inevitable grumbles that communications advice can’t be bought in the same way as stationery.

Snack foods and drinks group PepsiCo therefore caused quite a fizz last November when it confirmed that it has eliminated its global marketing procurement department, which oversaw agency relationships and media, and is shifting purchasing to its key brands.

After years of procurement teams getting increasingly involved in monitoring and controlling marketing services spending, could this be a sign that the discipline’s influence is finally waning?

Procurement, with its pre-qualification of agencies onto approved supplier lists, cost reduction targets and, increasingly, reverse auctions where agencies are asked to bargain down prices for given tasks, certainly seems here to stay.

PepsiCo explained its decision by saying that is part of evolving its operating model ‘to be more efficient and effective’, adding that the change is ‘necessary for us to stay competitive while meeting the future needs of our business’.

However, the company is not jettisoning procurement per se. ‘Not dealing with procurement at PepsiCo hasn’t been my experience,’ reports one senior PR agency executive who has been involved in pitches to the company since the news of its strategy change emerged.

‘Although we were briefed by PR and communications and brand managers, procurement has definitely been involved in the negotiations around money and is taking a keen interest.’

PepsiCo’s decision is still being seen as highly significant within the PR industry, however. ‘My first reaction is Hallelujah!’ says Angie Moxham, chief monkey at Zeno Europe.

‘Ultimately we’re a people business but procurement puts a process in place that distances you from people. You don’t get to engage with people in the run-up to a pitch in a way that means everybody gets the best out of the opportunity.

‘It just gets down to negotiation and money and we’ve had to walk away from so many pitches because you end up out of pocket, let alone making any money. When you get a brief, you need face-time or phone time really quickly to interrogate it. You then do your research but before you pitch you need a session to discuss your thinking with everybody who’s going to be in the room on the day of the pitch.

‘Most procurement operations stop that and then it’s just a faceless paper chase that’s no good for anybody. It’s over-governed. You just spend your life filling in forms.’

Jim Donaldson, chief executive for the UK and Middle East at Fleishman Hillard Fishburn, also feels that PepsiCo’s decision marks an important moment in procurement’s history in creative and marketing services. ‘If a company is spending $20 million on agency services, procurement’s job is to get that to $15 million in the same way as it is its job to hire the cheapest IT and buy the cheapest coffee,’ he says.

‘But in effect what PepsiCo is saying is that the marketing guys at PepsiCo didn’t feel that the company’s procurement operation was necessarily going to get them the best support to help the business so they’re trying to change the process.

‘PepsiCo’s decision might signal that companies are taking a new look at this. This is the first time I’ve come across a major global company saying that maybe this rigorous approach isn’t the right one and it’s happening at a group for whom marketing services is really central and crucial.’

On the procurement industry side of the equation, however, the move provoked splutters of indignation. ‘This is going far, far back to the past. It’s a huge backward step,’ Roland Verdon, vice-president for indirect procurement in Europe, the Middle East and Africa at Estée Lauder, told Procurement Leaders magazine.

‘There are far more than simple budget and financial decisions to take into account. There are processes, policy, compliance and risk issues as well. If you talk to marketing at Estée Lauder – and we have close to 30 brands we’re working with here, big brands – they’ll all tell you the value we’re bringing in supplier relationship management, risk control, financial savings; it’s huge.’

Some agency PR folk do recognise this value. At Brands2Life, about two-thirds of clients involve their procurement departments with their relationship with the PR agency, according to co-founder Giles Fraser.

‘A good procurement person is a good thing, particularly when you’re doing pitches because they make sure there’s a level playing field,’ he asserts. ‘But an over-zealous procurement person who’s more interested in the cost can often damage a relationship before it starts because they’re so heavy-handed about the negotiations that the agency starts to get nervous about the relationship before it has even kicked off.

‘It’s about having the right balance but overall, I think that having procurement involved in some form is, net, a good thing. When it is not involved, there’s a danger that favourite agencies can get an inside track and waste a lot of other agencies’ time.’

Areas where there is considerable friction between agencies and their clients’ procurement departments include the process of pre-qualifying, which effectively means that all parties invited to bid are assumed to be of similar quality, allowing price alone to be a major determining factor.

‘It’s quite difficult to be a pre-qualified agency,’ adds Donaldson, ‘because what are you pre-qualifying for: crisis management, reputation management, corporate communications or digital work? It’s quite difficult. You’re not comparing like with like and you can’t pre-select or pre-qualify ideas.

‘When you’re in a situation where a procurement department is involved, even if you’re the winning agency, there’s also always the threat that they’ll go to the number two agency if you don’t deliver the appropriate financial discount.’

It is also increasingly common for PR agency contracts to be put out to tender every three years or so, making agencies re-pitch for the business. This can lead to agencies pitching for work that they are pretty certain will not actually be switched from the incumbent with companies more interested in surveying the marketplace to force down their fees.

Elsewhere, agencies cite clients who ask every year for the same amount of work to be delivered in the next year for less money – at the same time as the best agency staff are asking for pay rises.

Then there are reverse auction processes, a practice particularly prevalent in the pharmaceuticals sector where agencies are invited to beat a given billing rate per person. One communications executive recalls bidding £25,000 a month on a project for a global group that ended up paying £4,000 a month. ‘Reverse auctions have shown that there are people prepared to do a lot of work for very little money,’ he says. ‘But I don’t think the organisation gets the result or service they want.’

Tony Langham, chief executive of PR agency Lansons, is also strongly opposed to the reverse auction process. ‘Any organisation that uses a reverse auction for reputation management work doesn’t value its reputation enough,’ he says. ‘Reputation is crucial to a business and that’s not the way to go about managing it.’

Other PR agency heads warn that the logical consequence of such an approach is that there’s a temptation to allocate more junior staff to account director roles so that their lower billing rates make the agency competitive – even though there are other more expensive candidates who know the business better.

They also fear that procurement departments simply steer contracts to the lowest bidder, irrespective of their know-how, contacts and strategies.

Donaldson believes that the agency PR industry needs to develop a smart, unified response to such challenges. ‘I don’t think the PR agency communications community has been particularly good at engaging with procurement people in a broader way,’ he says.

‘PR is all about relationships. If you have a sensible procurement process and a sensible procurement person, they’ll get that. Most of us on the agency side know that the PepsiCo decision isn’t going to start a tsunami of companies saying procurement doesn’t work. Procurement is going to be with us forever. Procurement departments are never going to go away because clients are under cost pressures. We need to have a position as a PR agency here.’

Moxham, who says she had experienced fantastic procurement processes that help both sides of the relationship at her clients Microsoft and United Biscuits, agrees. ‘We need to have a debate about whether procurement is killing our industry or helping it,’ she says.

Langham sees a divergence between regular PR work, where he says procurement is being used increasingly, and highly-sensitive and valuable work in crisis and issues management, where he says procurement has less or no involvement.

‘Less than half of our work involves procurement but I do see the use of it growing by companies for the simple reason that margins are under pressure across Western European businesses,’ he says. ‘Procurement has become a part of business. I can’t get emotional about it but I do think it is slightly misguided in its application to corporate communications and reputation management because by and large we’re not a high margin industry.

‘Procurement is about getting best value for money and making sure that organisations only pay for things that they use but it’s also about corporations identifying where suppliers make unfair profits and this is not an industry that does.

‘This is a relatively low-margin sector compared to management consultancy and lawyers. This industry’s margins are close to 15 per cent while many in those sectors have margins closer to 50 per cent.’

As for PepsiCo, the full ramifications of its decision may take time to percolate through. ‘The procurement process will continue to exist in Pepsi,’ says Donaldson. ‘You won’t be able to just randomly charge what you want. There will still be negotiation.’

Verdon, meanwhile, is unrelenting. ‘A lot of people within the agency environment will be licking their lips,’ he warns. ‘They’ll be saying Let’s go and work with PepsiCo. They’ll come with a creative budget and PepsiCo will say Oh I want to negotiate. They’ll end up taking off ten per cent but they [the supplier] will have added 25 per cent in the first place.’

Until the two sides of this debate develop common ground, such polarisation of views is likely to continue. In the meantime, communicators are watching what happens next. PepsiCo has decided to ‘taste the difference’ in ways of procuring agency PR. Will any other company of PepsiCo’s stature dare to accept this Pepsi challenge?