The PR Council recently conducted a webinar with Thom Roose, a 20-year procurement veteran who has worked for some of the biggest names – and buyers – in business, IBM, Accenture and Proctor & Gamble.
Roose made the point that Procurement wants to move away from the traditional time and materials (T&M) billing model. Acknowledging the complexity that comes with performance-based billing, he said the concept starts with the agency accepting a lower base of compensation, but earning additional payment from hitting a set of KPIs that in combination with the base would exceed the T&M model.
It sounds good in theory. We all know that there’s no correlation between a consultancy’s time put toward a client and consultancy’s contribution to a client. Weirdly enough, the T&M model can actually reward a consultancy for being inefficient, which in turn causes it to take more time on an activity. This is why law firms were so slow to automate their workflow: “We’re going make this massive expenditure in technology which will lower our billable hours so we invoice less to our clients.”
Roose’s pronouncement that Procurement wants to align compensation with the consultancy’s contribution (not hours), inspired me to give this a try.
After broaching the concept of performance-based payment to Procurement on two occasions, I’ve concluded that Mr. Roose is an outlier. He knows his stuff. I’m sure he has put together agreements with consultancies that tie outstanding results to greater compensation upside.
Yet, the vast majority of his Procurement colleagues care about one thing and only one thing, saving money.
And it’s worse during a pandemic because Procurement figures consultancies, like most companies, are hurting. They can shave 20% off the budget and stretch payment terms out to 60 days, even 90 days … and what is the consultancy going to do?
A form of this vice grip happens in good economies because management from most companies continues to measure Procurement based on one question: How much money can you save?
I recognize that all companies want to save money. I really do. When our monthly invoice for sodas crept upward (pre-pandemic), we made the switch from machine to Costco.
The problem I see is Procurement views every vendor as “soda pop,” a commodity that can be easily replaced. A 12-ounce Coke can from Costco is exactly the same as a 12-ounce Coke can from a machine service.
In the spirit of being helpful — see, I’m not bitter — I’ve created a chart to help the Procurement profession figure out when a service or product is a commodity and how much of a premium to put on pricing.
If a product or service involves high-variable execution and the stakes are high, pricing should be a secondary consideration, not THE primary consideration.
Collecting RFPs for heart surgery and selecting the low-cost bidder is a sure-fire way to end up with a bad connection to the left ventricle. At the other end of the spectrum, only a few variables go into the soft-serve yogurt experience. The mixture goes into the machines. The server fills the cup, and voila! If I don’t care for new taro root yogurt, it lands in the trash. No big deal.
Most people would agree that the stakes are high for communications. An organization might allocate $100K, $500K or even $1M-plus for a campaign that shapes how people are going to perceive the company/brand, which in turn impacts the buying decision.
The disconnect comes from some organizations believing that communications involves low-variable (simple) execution; thus, they commoditize communications consultancies. It doesn’t really matter which one they choose, the thinking goes. They all essentially do the same things and will generate the same results; hence price drives the process.
While inspired by Mr. Roose and the promise of performance-based billing, educating Procurement that communications is not a commodity seems like a more realistic cause.