Speaking at the opening of WPP-owned Brand Union’s offices earlier this week (12 November), Sorrell said the cost squeeze was driven by procurement’s growing influence over the marketing function. He cited a client that has recently slashed their media spend with the group by half as an example of how “the balance of power” was shifting.
“Procurement has too much power. There’s too much short term thinking and we’re falling into this trap,” he added. “Because the average term of CEOs is five years now, companies have almost become political in the sense of electoral. The thinking is around five years rather than thinking about the longer-term and so the pressure is on not to step out of line and keep on the straight and narrow.”
Procurement has become a hot topic for the industry as advertisers debate its role in a landscape becoming increasingly driven by the need to adopt cheaper, more targeted strategies. Marketing is losing its role in securing agreements to procurement, according to the World Federation Advertisers, which found more than half of its members (51 per cent) have ceded the negotiations and implementation of contracts to procurement over the last decade.
No pricing power and the Lehman collapse has meant the procurement and finance function have more [influence]
The impact of procurement’s growing influence has been suggested as a key factor in recent disputes between advertisers and agencies. Media agency Starcom Mediavest resigned its Premier Food media account in 2013 after the Oxo owner asked it to pay an “investment payment” fee to remain on its roster. In the same year, WPP client Procter & Gamble along with other big spending advertisers such as Mondelez and GSK extended the period it takes to pay agencies
Cost-control measures have also served as a security blanket of sorts to advertisers shaken by civil unrest in China and the rise of terrorist cell Isis that are part of several headwinds stunting the global economy. The fear from advertisers fed a slowdown in WPP’s revenue in the three months to September, which was up 3% to £2.76bn in comparison to 4.1% in the first half of the year.
Sir Martin said there needed to be a “few failures” where axed marketing budgets had no real impact on the business to free marketers to take more risks.
Despite the financial stresses the shift is heaping on agencies, companies are looking toward more sophisticated cost-control models in order to boost marketing spend in the long-term.
Cost control out of control
WPP client Coca-Cola plans to increase media spending and brand building initiatives by up to $1bn by 2016, while Mondelez has said it will boost investments for key brands through cheaper digital channels. Both companies are using zero-based budgeting, whereby marketers pull funds from costs that have no direct impact on sales to feed into areas such as packaging and innovation.
It is a process championed and refined by venture capitalists 3G Capital, which applied its own version to Heinz after acquiring the business in 2012, along with Warren Buffett’s Berkshire Hathaway.
Sir Martin acknowledged the approach was “sophisticated” but said it had been “taken too far” and that Heinz needed to start investing in its brands. The food maker has restructured its marketing team since introducing the tougher cost control measures as well as consolidated its media planning business.
“I know I’m talking my own book but it’s not a long-term solution.’ he said. “No pricing power and the Lehman collapse has meant the procurement and finance function have more [influence]. If you look at the quarter that we’ve just gone through, most companies are not hitting the top line. They are hitting the bottom line but not the top and are getting there by cutting costs.”
Concerns over IP breaches
Separately, Sorrell said he was “seriously” worried by the rising number of clients asking its agencies to agree to unlimited liability in relation to IP breaches. In other words, advertisers want their agencies not to serve another brand in a non-conflicting category because they do not want them to contribute to a competitor’s success.
It echoes a wider conflict happening across the industry that has seen agencies argue that potential conflicts can be addressed through solutions such as separate management and separate teams. Google, Facebook and Twitter have all set up in similar ways to treat rivalries such as Nike and Adidas fairly and confidentially.