As the Financial Times reported last week (hat tip to ProcurementLeaders), hard bargaining spend management pros are beginning to make a significant dent in the profit margins of marketing agencies. FT said WPP CEO Sir Martin Sorrell “blamed the increasing involvement of clients’ procurement and finance functions for their more ‘aggressive’ approach to contract negotiation”, which resulted in the world’s largest marcom agency missing profit margin expectations.

Unfortunately with many creative and service categories, revenues alone do not tell the full story since there is no reporting on the value they delivered for their clients (as opposed to say the volume of cars sold by GM last quarter tells how much “value” their customers derived from them). But, as long as the clients are not solely focused on cost reductions AND don’t lose sight of the value a marketing agency provides, this high-spend, high-visibility category is certainly ripe with savings opportunities…if approached properly.

As the economy tightens, all aspects of the business are forced to carefully weigh how each dollar is spent, and be prepared to justify the expenditure. Marketing - a category that was previously protected from price conversations and pressures, in favor of the mindset that you have to pay for good creativity - is no longer exempt from justifying the value of each dollar spent.

Seeing a major marcom player, like WPP, actually complain publicly about the cost reduction strategies of their clients shows that indirect spend is (finally) being aggressively targeted by some large, best-in-class procurement departments. In fact, large multinational corporations like Colgate-Palmolive and McDonalds are stating that they plan to do more marketing and branding activities, but with less money. Companies like P&G and Unilever are stating that they are planning for the long-term and will be spending on marketing even through the economic downtown but, again, expectations are that the value gained from spending each marketing dollar will be high.

How do procurement departments drive cost savings while increasing the value delivered by marketing?

Clients need to make sure that the costs (hours) are truly matching up with their goals and objectives, and their expected outcomes, which is why a rigorous procurement process is essential. If the goals and objectives of the marketing firms and the customer were aligned tightly, there may be less need for up-front investigation and back and forth negotiations to drive down each individual cost component. Get on the same page early, with clearly defined expectations, cost-drivers, and definitions of “success” for both sides.

And a bit of unsolicited advice for marketing firms looking to adapt to this changing marketplace. You must align your goals and objectives with that of your customers! Clients leverage procurement to make sure that they are getting the desired behaviors and values for the price that they are paying while, traditionally, marketing firms approach customers with a price based on cost (which equals hours). Like law firms, the new landscape will require you to break away from your traditional billing models and look to align price with results. In the short-term, that approach can be a competitive advantage. And long-term, your firm will be better prepared to tackle a rapidly evolving marketing world that’s running away from print ads and towards “engagement” on platforms like Twitter, Facebook, etc.

Lynn Rideout is a Manager in Ariba’s Spend Management Services group. Lynn specializes in strategic sourcing projects for indirect spend and services categories.