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
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We recently stirred up some interesting debate over risks and legal contracts, specifically regarding balancing risk and whether or not companies are actually protecting against the right kind of risk (or introducing risk and losing opportunities in the process). But we truly touched a nerve with a post quoting a presentation where a procurement leader at a large corporation suggested starting with a supplier’s paper rather than their own for some types of purchases. Given the emotions and indeed risks around the topic of legal contracts, I found an anecdote by Tim Cummins during a roundtable at the Ariba LIVE event in London a few weeks ago to be very thought provoking.
Tim, the President and CEO of the International Association for Contract & Commercial Management (IACCM), told the story of an IACCM member company that decided to do an experiment with their buy and sell side contracts. They had their in-house legal teams do a blind review (the company name was concealed) of their own contracts to look for misplaced priorities and potential exposure. Their sell side legal team looked at their own company’s buy side contracts and vice-versa for the buy side team, who reviewed the sell side team’s paper. To quote Tim on the findings:
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In Part 1, we covered critical steps in the risk assessment process and guidelines for contingency planning. So now let’s move on to the ongoing, day-to-day process and approach that will help reduce risk AND prepare you for the inevitable challenges that arise in a global supply chain.
Manage your Suppliers. Managing a global supply base can be challenging. Many companies have large numbers of suppliers to contend with. Their data is fragmented and spread across multiple systems. And goals, metrics and measurements are inconsistent - if they exist at all. But there are steps that you can take to overcome these obstacles.
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I hate to add yet another risk to the long list you are already monitoring, but as Hurricane Andres reminded us this week (albeit quietly in the Pacific rather than in the Atlantic), hurricane season is upon us. The good news is, the ‘09 hurricane season is expected to be at or below average. But even with a relatively low 48% chance of a major storm making landfall on the US coastline, there’s still a considerable risk of transportation and/or supply chain disruptions for many companies. And of course, a storm impacting oil rigs or refineries in the Gulf impacts every business from a fuel perspective.
Last fall my colleague, transportation category manager Rachel Rutkoski, provided some excellent advice for companies looking to reduce the risks brought on by these powerful seasonal storms (or any natural disaster disruption).
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In the current market, it isn’t a question of if your suppliers may be at risk of failing. It’s a matter of which suppliers will fail and when? We all know the risks posed by the recession - bankruptcies are up (+75% in ‘08 & projected rise of 35% in ‘09), credit is hard to come by, and consumer/business spending is extremely soft. Couple that with risk management challenges - fragmented supply base with varying degree of supplier capability, currency and commodity volatility and intricate pricing and discounting structures - and you can see why many companies are struggling with where and how to start a true risk management strategy.
Since companies can’t afford a major supply chain interruption at a time when they’re already struggling with the recession, what concrete steps must be taken to reduce global supply risk?
Assess the Situation. In order to effectively manage supply risk, you must first understand your exposure. To get an accurate picture requires action on a number of fronts, including:
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