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Pragmatic procurement at WPP (part 1)

Jul 27, 2011 10:15:00 AM

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Tom Kinnaird [TK], Head of Commercial and Procurement Service at WPP discusses how applying a pragmatic approach to procurement can achieve high levels of compliance and improve stakeholder engagement.

CG: Thanks for joining me today Tom, can you please tell me a little bit more about WPP, and your role within?

TK:WPP is the world leader in communications services. We have approximately 107,000 employees globally (excluding associate companies), in 2,400 offices and 107 countries. We have around $15 billion dollars in revenues.

We are very decentralised. We have a relatively small centre at WPP; out of the 107,000 employees, there are only 400 or so at the centre. We have hundreds of independent companies within the Group, each of which has its own brand. Each of the brands has its own strategy, its own leadership, direction, culture, and values – WPP parent company is the gel that binds it all together. All of this complexity and diversity presents a big challenge when it comes to doing effective procurement.

I head up a global procurement team of around 40, based in 18 markets, and they are mostly experienced procurement professionals – they need to be experienced and resilient, to cope with the complexity. We don’t do transactional procurement at the centre of WPP, that’s done in the operating companies, although this is changing slowly as we increasingly move towards a shared service environment. In the past, we mainly focussed on traditional indirect spend areas, but we are now getting involved in the full breadth of spend within the business, including client pass-through costs such as advertising production, and research operations spend for Kantar, our consumer insight division.

CG: Great. Now, 2010 saw a record profit for WPP – hitting £1bn (all during a very tough economic climate). However 2011 has been a different story. Would you mind giving me an overview of the fast paced world of media and advertising (looking at both consumer behaviours as well as supply chain issues) – highlighting some trends from the last twelve months, and some predictions for the next twelve months?

TK: WPP had a brutal 2009, as had the whole sector. Marketing communications tends to be hit early when the economy goes into recession, and clients cut back on discretionary spending. However, we also tend to lead out of recession as happened in 2010.

During 2009, our revenues were down over 8% on a like-for-like basis and we lost close to 14,000 people from within the group. Just to put that in context, this was around 12% of the total workforce.

We budgeted flat like-for-like revenue growth into 2010. Remarkably, the market bounced back a lot faster than we had predicted and certainly faster than most of the industry and analysts had predicted.

This was largely driven by the US, which accounts for around 35% of our Group revenues.  Our CEO is on record saying, that in his + 25 years in the industry, he’s never seen a mature market such as the US drop as fast and bounce back as quickly, as happened in 2010. Traditional media, like free-to-air television, was also surprisingly strong.

Another interesting point here is that we’ve been investing strategically in the faster growing markets of the world for many years – Asia Pacific, Latin America, Africa, Middle East and Central & Eastern Europe. In fact, our goal is to have the faster growing markets as 35% to 40% of Group revenues, whereas they are currently around 28%, so we are seeing a major shift in the shape of the business.

We ended 2010 with over 7% revenue growth, which was an excellent result, particularly after the tough times of 2009.  2011 has so far started quite positively, and we saw revenue growth of over 6% for the first four months of the year, despite a challenging and uncertain economic environment. We are cautiously optimistic about the prospects for the remainder of 2011.

Rising commodity prices don’t affect us as badly as they would a manufacturing business, although rising energy costs are clearly a concern given our vast office portfolio. However, rising commodity pricing will hit some of our clients’ profitability, particularly in areas with high cost of goods as a percentage of revenues, such as package-goods or fast-moving consumer goods companies.

CG:  An interesting point you brought up was the impact of price hikes on your customers. Obviously you are dependent on your clients and their ability to generate cash, so I guess it’s in your interest to help your clients generate cash so they spend more money with you or if they save cash they spend money with you. How does procurement fit into this challenge?

TK: In principle, yes – helping our clients save money should in turn benefit us, but only if they choose to re-invest instead of taking the savings to the bottom line.

There are two elements to this challenge for WPP agencies and the procurement team. Clearly, when selling to clients, our agencies need to be competitive on pricing, and we can help them do that by leveraging WPP’s buying scale in an effective way. Bear in mind however, that we work in an added value services environment, so pricing is never going to be the number one factor in a client’s decision making process when selecting an agency. It’s really about our agencies delivering the creative services that the clients want, while demonstrating that they represent value for money.

Some of our clients have a sizeable element of pass-through costs with our agencies, for example where clients are commissioning TV advertising or printed brochures or billboard posters. In this case, clients want our agencies to be spending their money wisely and effectively. This is a difficult area to leverage scale in a traditional procurement sense, as many of the decisions are creatively led and clients, as well as agencies, like to have an element of choice in the supplier sourcing decision. Just because procurement can do a volume deal with a TV production company for example, doesn’t mean that it’s the right thing to do for the client and the efficacy of the output.

We’ve responded to the challenge by negotiating a number of Group deals in the more commoditised production areas where it makes sense to do so. In 2009, we were also heavily involved in the formation of a new joint venture production implementation agency for WPP in London called Hogarth, which is now being rolled-out in the USA and in Asia Pacific. Our work with Hogarth is a good example of procurement adding strategic value beyond traditional supplier deals, as it changed the way that our agency networks thought about advertising production.

CG: So I assume your stakeholder engagement capabilities are second to none?

TK: Well, we certainly work hard at it. WPP is what I would describe as the ultimate relationship environment, so it’s an ongoing challenge. Of course, we have procurement policies, as you would expect in a business of this size, but relatively little is mandated. WPP’s role is generally not to tell the agencies what to do. It’s more to advise, guide and encourage. WPP calls itself a parent company, and the term has been deliberately chosen to describe the role that we aspire to do.

In our procurement world, if you can’t work relationships, you won’t get anything done, it’s that simple. When I came into this business 10 years ago, I took the view that I can teach my team how to do procurement, but I can’t teach them how to get on with people. They either can, or they can’t. Sure, you can send your staff on a course to enhance their soft skills, but they have to have some basic skills competence to begin with. This is the first thing that I look for when I’m interviewing someone for the procurement team.

CG: The talent management piece is quite an interesting one. What do you look for and what are the key characteristics of a candidate coming into the procurement team at WPP?

TK: Interestingly I don’t have a major problem in terms of talent retention or acquisition, although admittedly we are a small team. We have had remarkable longevity of tenure in the team, and marketing services is an environment that procurement people clearly enjoy working in.

A creative environment like this is full of very bright people - very challenging, but very intellectually bright people. It is a fun environment to work in and that’s part of the reason people stay here quite a while. In terms of the types of people that we recruit, I look for someone I can have a conversation with and I look for someone who sees themselves as a business person first and a procurement person second, not the other way around.

If you look at the percentage of revenue spent on staff costs within WPP, it’s around 55%. So we’re not so dissimilar to you (Proxima) or any other professional services type organisation. Taking into account our property costs and our margin, what’s left is, in theory, mine to look after – something in the region of 25% of revenues.

So with bought-out spend as low as 25% of revenue, procurement is never going to be as important as it would be in, say, a manufacturing company, where spend can be as high as 80% of revenues. World class procurement is a meaningless concept in WPP, because we’re never going to try to be famous for doing procurement.

However, that said, it’s my responsibility to ensure that we do procurement outstandingly well, in the context of the business environment we are in, within the constraints that we have to deal with.

Many of our biggest challenges are structural and a consequence of the way that WPP is organised. For example, many of our agencies are competitors, so today they will be competing aggressively for a major client contract, and tomorrow I might be talking to them about working together on a procurement project. That’s not going to change, so I need to find a way to engage the agencies in a way that encourages collaboration with both WPP and with each other. If we get the value message right, it will happen, if not then it won’t.

We try to do all of the sorts of things you would expect from a procurement organisation within a company of our size. For example, we have a category management and strategic sourcing approach to our work, and we were the first in our sector to implement eSourcing and spend management software. However, we don’t make a big song and dance of process – it’s not something that our businesses respond well to, so I see no need to push it. Most of the procurement led sourcing teams working in WPP would be unaware that they were working through a process, but they are, and in my view that’s the way it should be.

We do what I call “pragmatic procurement” at WPP. We bring sourcing teams together from across the various agencies, helping them feel that they are making the sourcing decisions, with procurement leading the process, supplier negotiation and ongoing and supplier management. Through this approach, we get very high levels of compliance to Group contracts. In fact, our whole approach is geared to maximise compliance rather than achieve best price. I would always rather get 90% compliance to a value added supplier deal, than get 20% compliance to the best priced deal in the world, and then procurement end up being a policing function to enforce compliance. It doesn’t have to be that way.

I also use the words pragmatic procurement because I firmly believe procurement shouldn’t just have a single playbook, but multiple ways to achieve the end goal. I’m very sceptical of consultants who prescribe that their process is the best process and that there’s only this one way to do things. I agree that Procurement is about trying to get from the beginning to the end of a defined commercial process, but the true skill of the procurement professional is getting to that end-point while keeping the team, the business and the suppliers on-side. You don’t learn that skill by picking up a text book, nor do you get it from looking up a process tool on the intranet. Success comes by having fully competent procurement professionals who can shape, mould and adjust their strategy and their approach depending on the environment they are in, the categories they are working on and the stakeholders (and their personalities) they are dealing with. A good procurement person shouldn’t need to be ticking process boxes.

Proxima Group

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