The forgotten hero of marketing excellence: Spend management

Spend management—the rigorous tracking and active management of the way marketing dollars are spent—is hardly the most glamorous component of marketing, but its impact can be game changing. When done well, we’ve seen spend management free up as much as 20 percent of a marketing budget (even more within specific areas) and serve as a catalyst for organizational growth.

But spend management means far more than trying to squeeze an additional 5 percent out of agency fees. Essential to unlocking the full power of a marketing budget, it represents a fundamental rethink about how a marketing organization works to maximize performance and drive growth.

Why it matters

Spend management is critical for several reasons. Operating more efficiently means that funds can be invested in areas that will generate value, without the need for incremental budget dollars. This affords CMOs a greater sense of empowerment and accountability in their relationship with CFOs and CEOs. With CMOs under increasing pressure to drive growth for the company and show clear returns for spending, marketers can’t simply overspend in one area and expect to maintain credibility or see budget increases.

Secondly, McKinsey research has found that companies that “trim the fat” before recessions begin perform best in downturns. They are far more likely to survive budget cuts and be in a position to invest during a recession, which can help boost company revenues and unlock higher performance once the economy starts improving. The current longest expansion in US history won’t last forever, and the time to start acting is now—before the downturn arrives.

Based on work with more than 100 companies across different industries, we’ve found that marketing organizations that got the most value from spend management did four things well. More importantly, their big leaps in efficiency came from embracing the full suite of changes.

In this article, we summarize these four pillars of marketing spend management. Additionally, within each section, we provide several “indicator statements” to help you assess how lean a marketer you are today.

1. Pay the right price

Spend management starts with knowing what you are paying for and that you are paying a fair price for the services your company uses, whether provided by an internal or external agency. Reviewing the quality of your spending and that you are getting the most out of your budget is the crucial first step when it comes to spend management.

Know exactly what you’re spending

There’s a good chance you have more agencies working for you than you think. The typical marketing organization maintains roughly 100 active partner contracts at any given time, including many of which marketing leaders aren’t even aware. In our experience, this sheer volume makes it difficult for organizations to track their spending; most have either incomplete or inaccurate data. But making smart decisions about spending requires transparency. To get better visibility, companies need both a robust spend taxonomy (often 60 different classifications of spending), a tech stack capable of tracking it, and disciplined operating models that ensure the accuracy and completeness of the data. While many marketing organizations choose to outsource this job to agencies, keeping spending data in-house is a better way to maintain clarity on everything you’re spending.

Arm yourself with comparable price data

You wouldn’t buy a house without knowing the price of other properties in the neighborhood. Similarly, you shouldn’t negotiate contracts with marketing partners unless you understand what other companies are paying for similar services. While such due diligence can feel overly detail oriented, when done rigorously it can yield millions of dollars that can be reinvested in high-priority initiatives. This can be done in a few ways. For media buying, it can mean hiring “mark-to-market” auditors or giving the task to a marketing operations or procurement manager who can help hold agencies accountable for their rates. For agency fees, understanding market rates for similar services and gaining insights on cost drivers via “should-cost” analyses can provide transparency about fees and leverage for obtaining better rates. One pharmaceutical company, for instance, worked with a benchmarking firm and found that its agency fees were 20 percent too high. It negotiated to cut this overage in half. Such due diligence not only frees additional funds but also signals to agencies that the client will be carefully managing costs on a detailed level.

Give agencies a reason to go the extra mile

On the flip side, agencies should know that rewards can be earned for superior performance. Without a link between performance and compensation, there is little incentive for outstanding service. At one financial-services company, for example, the primary creative agency was consistently earning margins of 18 to 20 percent, even though the company rated the agency’s performance as only “two out of five stars” in its year-end assessment. We believe the way to address this is through a reevaluation of agency compensation models. Where it makes sense, this involves basing as much as 20 to 50 percent of total fees on performance and offering an extra payment of 10 to 25 percent above the base rate for exceptional work. This provides incentives for the agency to listen to the client’s needs and perform above expectations. It can also facilitate robust conversations about both internal and external marketing performance, helping ensure that everyone is hyperfocused on the bottom line and not just going through the motions. In the case of the financial-services company, it moved its agency to a tiered pay-for-performance structure tied in part to a core business objective: opening new accounts. When the company, with the support of its agency partner, delivered on its new-account goals, the agency received an extra margin of 18 percent.

Launch frequent and robust pitches

Choices about agency partners are often the most important decisions a marketer will make.

Despite the effort required, agency pitches consistently yield value from both a price and capability perspective. Launching a request for proposal (RFP) for top agencies every three to five years keeps agency partners honest about rates and gives marketing organizations a chance to learn about cutting-edge capabilities that will help them evolve with the market. It gives agencies and clients a chance to develop a relationship while keeping their roster current. Importantly, this pitch process is more about building capability and selecting the right agency partner than it is about cost. In many cases, marketing organizations may keep their existing agency, challenging it (and being willing to let it go) pushes the agency to sharpen its offerings and keep up with changing needs. Although switching comes with inevitable onboarding costs, it is warranted when more attractive fees and greater advanced capabilities outweigh the costs. Choices about agency partners are often the most important decisions a marketer will make. Getting them right and ensuring they continue to be right is critical to the success of any marketing organization.

2. Pay only for the services you really need

Once you know what you are spending your money on and how much, you can identify what services are actually needed, what services should be prioritized, and what services can be eliminated. After this, making sure that the right people are working on the right projects can further cut any unnecessary spending.

Create a flexible and iterative statement of work

Although most marketers sit down annually with their agencies to review the statement of work (SOW), these documents often end up being a poor representation of the work that actually gets done. Throughout the year, as new business priorities emerge, additional work is added to the SOW. At the same time, work that no longer needs to be done is completed anyway because it was part of the original SOW, creating unnecessary spending. To address this, we recommend developing SOW blueprints on a rolling basis instead of annually, crafting the next-quarter SOW with a high degree of clarity and semiclarity for the quarter after that. This allows the scope to shift according to changing needs, but in a way that’s more organized, less wasteful, and aligned with broader marketing objectives.

Tailor your agency’s account team

Although an agency’s senior account personnel are invaluable for thought leadership, many CMOs say they rarely interact with these executives, who are often still billed to a client account. Typically, it is junior personnel who drive the day-to-day work on the account. The key is to engage the senior account personnel at the right moments. To address this imbalance, marketing organizations should adjust their staffing to match the right people with the right work, flexing senior staff up or down as needed. This should regularly be evaluated as part of the quarterly SOW process. For example, agency executives on a large pharmaceutical account were instrumental in setting the strategy for the launch campaign for a new drug. Then, when the campaign entered its second year and became increasingly tactical, the proportion of junior team members increased while senior account time ramped down. This helped manage costs and created an agency team better suited to the work at hand.

Double down on what works (and pay for it by eliminating what doesn’t)

Once marketing organizations understand exactly where their money is going, the next step is getting a clear picture of the impact this spending is having on the bottom line. To figure out what’s worthwhile, marketers have to commit to getting a granular understanding of where their target consumers are and whether the money they’re spending is really reaching them. Oftentimes it isn’t. Despite improvement, between 36 and 42 percent of digital ads still don’t meet basic “viewability standards,” either because they appear “below the fold” or aren’t visible long enough.1 And this is hardly just a digital problem. One large retailer, for instance, found that of those customers receiving its circulars, roughly 40 percent exhibited little behavior change as a result of the distribution. In fact, for this audience, the cost of distribution was greater than the incremental sales the circulars produced. The company used its granular data to drill down and identify both responsive and nonresponsive customers. By eliminating distribution to those it didn’t want to reach, the company freed up millions in cash to reinvest in more efficient channels (such as digital targeting) and to double down on customers most responsive to its circulars.

Truth in advertising: Achieving transparency with media rebates to fuel growth

Truth in advertising: Achieving transparency with media rebates to fuel growth

3. Optimize where the work is done

In 2018, 78 percent of companies reported having an in-house agency performing functions that normally would be outsourced, up from 42 percent in 2008.2 Marketers are clearly reevaluating how their capabilities are distributed across their organization and within their large ecosystem of agency partners. Still, many marketers remain unclear on what they should insource and what should remain with their agency partners. Cost shouldn’t be the only reason to shift work away from agencies. In our view, the primary goal of insourcing is the strengthening of marketing muscles.

Bring business-critical activities in-house

Although there is no single model dictating which functions a marketing organization should handle itself, it usually makes the most sense to perform in-house the activities that require a deep knowledge of the business, greatly accelerate the speed to market, or allow the business to leverage a specific capability for a competitive advantage. This could mean high-level work, such as the small marketing strategy team that helped the CMO of an apparel brand engineer a brand shift toward a more premium image. Or it could be high-volume, fast-turn activities, such as the programmatic digital media buying that a telecom company did cheaper, better, and faster in-house. Many companies have also chosen to do their own centralized development and maintenance of the tech stack so that they will have greater control over their customer data and a more direct connection with customers.

Create the right ecosystem of agencies

Most CMOs we speak to don’t believe they are getting best-in-class capabilities from their agencies, whether it’s media buying, segmentation, analytics, or marketing technology. These poor performance assessments can often be traced back to the pitch process. RFPs that are too vague or are conceived in a vacuum can result in a misalignment of client expectations and agency capabilities. The solution is to create a detailed view of the overall agency ecosystem and establish clarity on how each agency fits together in a cohesive model. Detailing this overall vision allows marketers to select the right agency to fill a specific role and integrate it seamlessly into the broader agency ecosystem. High-quality output does not require exorbitant cost, and filling these roles in a “fit to purpose” manner allows marketers to manage their spending without sacrificing the quality of their marketing.

Defining the overall ecosystem vision not only facilitates a high level of agency performance but also cuts down on waste. Especially at larger companies, it’s not uncommon to find multiple contracts existing with the same agency, or for multiple agencies to all be doing the same work. One leading telecommunications company, for instance, had 13 separate agencies all working on email marketing across only three business units. Consolidating these activities at one agency not only produced savings but also led to a more cohesive execution, with fewer handoffs and a more consistent quality of work.

Eliminate agency overlap

This may sound like an obvious point, but it’s crucial to establish a model that defines the terms of the client–agency relationship, such as who will make the decisions at each step of the process and how the agency and client will interact. There should be a process or system that allows anyone at an agency or within the marketing organization to step into the account to see who is doing what, what progress has been made, and what outcome is expected. Designating a lead agency to serve as the coordinating body across the ecosystem and an internal leader to steer the integration efforts not only creates accountability but also eliminates infighting among agencies and wards off overlap.

4. Change the way the work is done

From reforming budget practices to moving toward a decentralized, agile model for decision making, changing the way work is done can dramatically improve spend management. Speeding up and creating more efficient workflows reduce the amount of time wasted and unnecessary spending.

Embrace faster decision making

People who work at agencies have all heard the stories: the commercial that’s finally gotten everyone’s approval after months of work, only to face 11th-hour feedback from the CMO; or the online campaign that gets ping-ponged back and forth as everyone at the agency tries to satisfy the competing visions of different marketing leaders. Not only does this “difficult client” behavior cost more money, but it also slows down creativity and marketing output at a time when everything needs to speed up.

One important way to speed up decision making is to move from a linear hierarchy to a decentralized, agile model in which cross-functional teams are given highly focused tasks and clear KPIs, such as click-throughs or open rates. Instead of waiting for approvals and input, these agile squads, which should include agency partners, have the ability to make their own decisions. An agile model is ideal for marketing that will benefit from multiple iterations of testing and learning, such as display ads and email promotions. Adopting agile can be bumpy at first—companies have to let go of top-down decision making—but it’s important to stick with it, since it can dramatically shorten time to market.

Create an anti-redundancy culture

There’s not much glory in rerunning last year’s successful back-to-school promotion or repurposing photos from shoots done three years ago. But there should be.

Marketing organizations need to have a robust asset-management platform for managing and reusing photos, videos, and other content. Just as important, they need a culture that rewards people, both internally and externally, who use it. To promote this anti-redundancy culture, marketing leaders should champion responsible spending decisions and highlight them as a valuable part of an ROI mind-set.

Work with finance to reform the annual budget process

Instead of letting finance dictate spending based on the previous year, CMOs need to effectively articulate their strategy and objectives for the coming year and let that guide the budgeting process. Budgets set purely on previous-year spending create incentives for inefficient behaviors, such as instructions for agencies to spend millions of dollars so that funds won’t be “taken away” in next year’s budget. Resetting the way money is allocated and moving toward a fit-to-purpose budget prevents wasteful spending and empowers CMOs to set their own agendas.

Continuously demonstrate the value of marketing

For CMOs to have these kinds of empowering discussions with finance, it helps if they are what we call “‘unifiers.” These CMOs forge collaborative bonds across the C-suite and have the trust and support of other leaders. This is, in part, because they are obsessed with “impact”—tracking and communicating the value of every marketing investment—and because they make sure everyone has a crystal-clear view of the value marketing dollars generate. Instead of using marketing-specific benchmarks such as reach and frequency, they speak in a language other members of the C-suite can understand, using common metrics such as ROI, customer lifetime value (CLV), and net promoter score (NPS), to name a few. In doing so, they help win support for marketing’s agenda and produce better decisions about where marketing dollars are spent.

Most of these levers for becoming a lean marketer are not complex or new, yet they are often sidelined amid the myriad complex challenges marketers now face. Taken together and in conjunction with a renewed focus on rigor and transparency, they represent a powerful approach to enabling marketing organizations to achieve their broader marketing vision. We believe CMOs and other marketing leaders would be well served by undertaking a deep evaluation of where their organizations currently stand as lean marketers and to let these principles provide the foundation for change.

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