Diageo N.A. puts advertising buy under purchasing lens

"A specter is stalking the advertising industry, one more fearsome than Freddy Krueger. It's corporate purchasing." That's the opening gambit in a recent Special Executive Report, sponsored by Business Partnering International, Glen Allen, Va., aimed at helping advertising agencies

cope with their client companies' growing emphasis on procurement-driven buying decisions. The paper continues: "At a growing number of client companies, the procurement officer is supplanting the chief marketing officer (CMO) when it comes to choosing an advertising or public relations agency. Why has this happened? What is to be done?"

Notwithstanding its clearly provocative intent, the paper's rhetoric illustrates the climate often encountered by people like Helen Clarke, senior vice president, Demand Procurement, Diageo North America, whose job it is to apply purchasing disciplines to spend areas—including advertising—not traditionally influenced by procurement and to industries not accustomed to objective cost opportunity reviews, competitive bidding, and so forth.

Diageo is the world's largest supplier of premium drinks—beverage alcohol brands including Smirnoff, Captain Morgan, Jose Cuervo, Tanqueray, Guinness, Johnnie Walker and Beaulieu Vineyards and Sterling Vineyards wines. At some $600 million, advertising and promotion is a big part of the company's annual spend.

But Clarke's no Freddy Krueger. She came to Diageo North America just over two years ago from the U.K. where she spent several years doing similar work for the parent company. Her task is to build a Demand Procurement organization—so named because it deals with the demand side of the business—that influences spend decisions and processes in all areas falling outside the company's cost of goods sold (cogs), which is managed from the supply operation. Aside from sales and marketing, Demand Procurement covers things like consulting services, packaging design, human resources, facilities management, office supplies, and travel.

Clarke reports to Diageo North America's chief financial officer, so her mandate is pretty clear. Nonetheless, she prefers to sell Demand Procurement's services and "to build a long-term rapport softly" with the company's internal budget holders.

"We are creating a new function in a mature business," Clarke says. "An initial reaction from budget holders is to ask how we are going to affect their established relationships with agencies/suppliers. They are also concerned about procurement changing relationships and affecting creativity."

Advertising agencies, meanwhile, used to see Demand Procurement as a function whose only intent is to reduce costs, Clarke notes. "The first time the agencies see us coming, they understand that the relationship is changing. Naturally, they're going resist the change."

In the end, Clarke says, "our goal is to be seen as 'honest brokers'—ones who add value to our supply relationships and who would win the business if we were competing against outside procurement organizations."

To do this, she emphasizes rapid establishment of organizational credibility as well as partner-style relationships with suppliers that collaboratively seek out key cost drivers in Diageo's nonmanufacturing operations.

A quick route into the hearts and minds of internal clients, she says, is to focus on specific problems they are experiencing that need immediate solutions. "There may be a quality issue or a program that is over budget. We start by conducting a brief opportunity analysis, and then doing a very good job in a small, focused area. It allows us to demonstrate our technical expertise and ability to add value. Word of mouth usually takes it from there."

In staffing the Demand Procurement organization, which, by now, comprises 25 people, Clarke also stresses category management more than sourcing expertise. That means she's more likely to hire a person from a technical or advertising agency than from a sourcing background. "In the spend categories we're becoming involved with, it's more difficult and takes longer to build technical expertise than it does to build sourcing expertise," she says. "Two of our directors, for example, have many years in the advertising business. They know exactly what they are looking for. We need people who already know about concepts like 'talent buyout'. The work is not simply about haggling for lower prices in certain areas."

It is, however, about bringing objective analysis to some very subjective spend areas, defining specifications (statements of work), associating appropriate costs, and mechanisms for measuring suppliers' performance over time. "This can be difficult in the early days," Clarke says. "You may be able to get 80% nailed down, but 20% remains ambiguous. To get to that 20%, you keep peeling back the onion, one layer at a time."

But going "one layer at a time" does not equate to going slowly.

Many new corporate strategic sourcing organizations focus on collecting easy wins across a broad spectrum of spend (the so-called low-lying fruit), but shy away from bigger, more politicized activities like standardization or process redesign. Diageo's isn't one of them. Clarke's strategy, in fact, is to "fast-track the first savings horizon." That means moving quickly through the more tactical sourcing activities—such as supplier rationalization and competitive bidding—that internal clients typically associate with procurement, and rapidly implementing supplier relationship management tools for pursuing deeper, long-term cost savings through end-to-end process evaluations and improvements.

Diageo deploys clear statements of work (SOWs) with the agencies and key performance indicators (KPIs) for tracking their performance. "We pay them a fee for doing their day jobs, but we also build in a bonus structure so we can reward them for exceptional performance."

That, according to Clarke, keeps the relationships on a more cooperative footing than ones that are simply focused on cutting agencies' margins. The dividend is in cost savings ideas from the agencies themselves. One process-reengineering initiative has improved supply chain performance while benefiting the companies that supply Diageo with such point-of-purchase promotional items as clothing, trinkets, signs, and printed materials that are often tied to particular seasons or holidays and, therefore, highly time sensitive. "We were experiencing significant problems in the handoff from creative suppliers to production suppliers," Clarke says. The creative people, for example, might design something that could not be manufactured as specified or would be cost prohibitive to do so, or might handoff the design with too little leadtime for cost-effective materials procurement. "By the time we were finding this out, it would be too late to change. We were blaming production suppliers, but our analysis showed our own process to be the culprit."

Clarke notes there is also a two-way evaluation process where agencies provide regular feedback on Diageo's performance in its supply relationships—without fear of being penalized for honesty.

Winning compliance

Where spend analysis and compliance is concerned, Clarke quips that her group has, so far, has been working in "in an information-free environment." But not for long. Starting on July 7, Diageo North America began a major SAP rollout. A component of that rollout is a new corporate requirement that all instances of spend be accompanied by purchase orders, which are captured in SAP. (Note: Some high volume, low value transactions are still managed using procurement cards, everything else will go through SAP).

The SAP implementation, according to Clarke, "will be a tremendous enabler for us. The ability to have information about our spending is going to be tremendous not only for our purchasing teams but also for our budget holders. They will have better insight into where they stand relative to budget at any given time in a year. This will help them to optimize their budgets."

As organizations like Clarke's continue to rack up successes, the problem becomes less about "How can we influence more spend?" and more about "How can we decide which projects are most worthy of our limited resources?" The solution, according to Clarke, is to stay focused on creating "toolkits" that transfer knowledge gained by the sourcing teams back into the company's budget-holding organizations. "It is difficult for many companies to do this well," she observes.

There's also the problem of converting soft cost savings into hard savings, where budgets track downward over time.

It's important, Clarke believes, to articulate budget-related goals very early in the process of working with a new department and to use processes for validating all added value achieved by the Demand Procurement group. "We conduct an opportunity analysis and develop strategic plans in which we include projections for the value we can bring," she says. "We also decide up front with the budget holder whether our goal is going to be to optimize the budget or to reinvest."

In certain cases, she notes, the group may also investigate the possibility of increasing spending. "Say we have a budget of $500,000. One of our jobs is to buy competitively but another job is to look at what we are getting for our money. We have to ask, 'If we spend $100,000 more does that give us the competitive advantage?' That is the effectiveness piece."