Confessions of a procurement director: ‘We don’t want to overpay our agencies’
This article is part of our Confessions series, in which we trade anonymity for candor to get an unvarnished look at the people, processes and problems inside the industry. More from the series →
Procurement executives are often feared as the agency bogeyman driving down prices. For the latest installment in our Confessions series, in which we trade anonymity for candor, we spoke to a procurement director who admitted those fears are real and believe the practice has pushed agencies to make money behind their backs.
Excerpts lightly edited for clarity and flow.
If procurement executives are to blame for the current woes of agencies, how can they help them?
It’s procurement’s fault to a degree that agencies have shifted their income model. That’s basically a result of forcing down margins. It shouldn’t be that way. The team I work in is more advertising and marketing-focused than others I’ve worked at, so we’re able to draw up contracts with partners that aren’t always trying to secure the cheapest price and are more about how we get value and better return on investment. We don’t want to overpay our agencies and ad tech vendors, but we really don’t want to do the opposite because we see them as partners and if those businesses aren’t profitable then they will not work with us.
Does that mean you’re looking at different remuneration models?
No one jumps straight from paying the more traditional commission-based remuneration models to the more progressive outcome-based models. There’s a bit in the middle you have to adopt first called full-time equivalent payments, which is where we are. It’s one way of approaching a fair remuneration — at least when it’s done right. Ideally, we want to work with our agencies on a performance-based plan to give them the margin they need and a bonus.
How have agencies responded to the plan?
It took me three months to get our agency to give me access to the demand-side platform they used. I brought it up every time we went through negotiation periods with the business. Our legal team was involved. When the agency did relent they only gave me access to new campaigns that were set up and ready to go. I had no access to the previous campaigns. I still don’t have that transparency into all of those campaigns now. Transparency isn’t fully lived by the agency despite the fact that I have the contractual rights to get it.
How has your procurement role adapted to ad tech?
There’s the politics between agencies and ad tech vendors that, while doesn’t directly impact me, is something I have to be aware of to manage the category within my business. We joke about the politics in ad tech but these are things you can’t ignore when you operate in a market where traders that pre-buy inventory, stick into an exchange to be traded programmatically with three levels of commissions
Can you expand on that point?
Advertisers usually pay for a DSP on a commission model but that incentivizes them to buy cheaper media. To avoid this, we’re thinking about changing the way we remunerate programmatic bids. The first option is to pay for the DSP as a SaaS (software as a service) model. The advantage here is the DSP gets fixed revenues and so its income is no longer tied to the investment made. For advertisers, the approach works because it gets the cheaper to use the tech the more they spend, which doesn’t happen with the commission model. The second approach is to look at a fee that remunerates an auction that’s won. It would mean that you incentivize the transaction and no longer the investment taken into the supply chain. We’re speaking to vendors about this now.
Would it help your role if more media buying was done in-house?
There’s no value in an agency grading their own homework. It’s not our intention to buy everything — at least not yet. When you try and set up to buy everything, there will be times when you don’t need all those fixed costs in-house because it might be outside of campaign season, for example. You’re then faced with all these traders that don’t have anything to do.
We license a DSP that’s managed by a trader internally but we also have an internal team for performance marketing. That means our retargeting is all done internally but search is split between our team and the agency. The plan is that more of our performance marketing will be taken in-house. There are six people in that performance team and seven who work on our media team which works directly with the agency. I want to take ownership of the verification software our agency owns the contract to.
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