The TRUTH ABOUT DIGITAL PROCUREMENT
Procurement has its heritage in identifying the benchmark price of volumes of commodities and applying the economic forces of supply and demand to arrive at the “right price”.
The application of procurement principles into service industries is, however, not so straightforward as there is a level of interpretation as to the “value” of the services provided.
Over-time, as a service industry becomes well-established, it becomes easier to set the benchmarks that the Procurement Industry strives for. The repeated experiences, commoditisation of its constituent parts and the ability to predict outcomes combine to form something akin to services as commodities.
THE ETERNAL QUESTION OF CREATIVITY
The Creative Industry, however, has always been a particular challenge as it is very difficult to define the value of an idea or creative execution. This conundrum is receding very slowly as the ability to measure results via technology and evaluate return on investment is improving. But, until that loop is entirely closed, the purchaser can often only rely on instinct or vanity to pay what they think it is worth in the context of the marketplace – in much the same way as an art collector might buy a Monet.
The newest entrant into the services market is the Digital Industry, which, with its unprecedentedly rapid rise into the very fabric of business and personal life, has brought a new set of dynamics that defy commoditisation.
But, it is not just the immaturity of the Digital Industry that sets it apart. It uniquely sits at a cross roads between creativity and technology or what the late Steve Jobs referred to as “humanities and science”.
It inherits all the time-old issues with valuing creativity and adds the complexity of technological development.
For example, five thousand lines of the coding language PHP that is took to create Social Media Campaign One is not the same in value as another five thousand lines of PHP code it took to create Social Media Campaign Two.
The value of either set of code, depends on both the quality of the physical representation of the creative to the user and the functional experience they have when interacting with it. Thus technology is a work of “art” as much as its creative counterpart, and both are inextricably and simultaneously linked.
So, while it is probably true that Social Media Campaign One looks remarkably similar to Social Media Campaign Two and thus should, in theory, be roughly the same price, what is actually under the bonnet may tell a different story.
Certain dynamics exist whether a campaign utilises technology or not. How the campaign was conceived and how long and difficult a process was it to get there? How many times did the client change their mind? It is the role of good process, management and procurement to understand how these dynamics affect price.
But technologically, there may be things that are more difficult to identify.
Was the technology coded from scratch or was it wholly/partially re-purposed, licensed or stolen? Is the code any good? Could a third-party take it on and work with it? Will it naturally perform well on search engines, was that explicitly excluded or tacitly implied in the remit? Was it the right choice of technology and what is its shelf-life?
Then, add to that the fact that PHP itself evolves and the products it powers such as the open source Content Management System (CMS) Drupal also evolves. Then someone invents a new CMS, and then someone events a new language and all the time people are inventing new devices for users to interact with it.
And so on and so on, and meanwhile Social Media Campaign Three comes along, deploying a new technology and with different aims, objectives functions and features and any attempt at benchmarking is back to square one.
ARE WE BEING TAKEN FOR A RIDE BY THE DIGITAL FOLK?
But let’s STOP for a moment. Isn’t this inability to benchmark and commodtise just a self-serving ruse by the Industry to keep everyone outside it guessing?
The truth is, well YES. Knowledge is power. The I.T. Industry always was and is guilty of it and the Digital Industry is no different. But, that does not alter the fact that anything that constantly changes and has infinite hues and variants is always going to naturally defy becoming a commodity.
In the Professions, a Lawyer or Private Doctor, spends years studying and practicing their craft in order to be able to charge high-rates for their expertise. Their services and price are however, driven by constant demand and are not optional as anything provided from within the Service Industries almost always is.
So, if we can’t practically benchmark output and agencies can’t reasonably charge a price attached to specialism but not market forces, how can digital spend be best evaluated?
One favoured Procurement approach is to benchmark the resource and rate mix. This process is tortuous and ultimately open to subjectivity.
Here are some home truths:
the amount of hours an agency says it spends rarely bares little relation to the agreement made. They either work twice as much to satisfy the client and seek other ways to recoup the loss or juggle multiple accounts and do just enough keep them all afloat.
hourly rates are as often based on what can be billed, as any economic calculation
hourly rates and hours billed are simply multipliers that affect each other in different ways and can and are manipulated to arrive at the “right” value that the agency wants to charge.
EVERY PROPOSAL TELLS A STORY
Every proposal or pitch costing is constructed based upon the task at hand in the context of the agency's perception of the client. They look at the personalities involved, the depth of their pockets, size of the ambition / vanity, know-how, previous output and countless other factors that collectively paint a picture of what the client is worth to them.
So, while benchmarking market prices may give the client leverage to negotiate, the true dynamics that will affect the outcome lie elsewhere.
The truth is to be found in how the billing proposal is constructed. Hidden under the surface of these figures is the agency's perception of how the project will play out.
Any multi-faceted project or retainer has inherent dynamics between those facets.
By understanding the relationships between the facets we can identify where the stresses lie. How much Senior Direction is there? Where are junior staff deployed? What is the relationship between discovery, creative, development and implementation?
And it is those stress-points that lead us to the questions that under-lie the project and the relationship between the buyer and supplier.
This in-turn uncovers areas that are the traditional focus of a benchmarking process – excessive hourly rates or hours billed.
Once all these stress-points are removed, then the most fundamental cause of poor projects or relationships disappear. That cause is “doubt” which is equally damaging to either side of the fence. Doubt by the Client that they are paying too much or doubt by the agency that they are going to make a loss and have a hard time of it.
All that then remains are subjective questions of creativity and quality that a smart client will mitigate with contractual questions of results, return on investment incentive and taking a long-term view of the relationship.
At Tradewind, we have developed a unique system that identifies the stress-points in a proposed or historic billing and highlights them for further investigation and discussion.
It is a system that recognises problems before they occur and thus allows them to be discussed rather than policed. It is the minority who pursue sharp practise where an honest earning can be found, and this must be recognised.
Procurement that becomes about money-off and aggressive negotiation for the sake of it, or abusing buyer power in the face of supplier need is a short-term route to long-term dissatisfaction for all.
Best practise, knowledge and the desire to be fair and equitable in the context of relationship dynamics are the foundations of a strong relationship.
Anything else is gaining money under duress.
Sam Brownfield Tradewind (London) Ltd
May 2012