John McGee: Agencies uneasy as clients zero in on multi-billion cuts
Three little words - zero-based budgeting - are all it takes to strike fear and loathing into the hearts of advertising and marketing agencies and send them dizzily into a cold-sweat as they contemplate their implications for their businesses and, quite possibly, their future.
Although as a budgeting concept, it has been around for nearly 50 years, zero-based budgeting (or ZBB as it's known in an industry that loves its acronyms) has been largely ignored up until quite recently. Now, however, it's back with a bang and currently flavour du jour amongst a growing number of big advertisers looking to boost the efficiency of their marketing spend, save some money and, possibly, reinvest some of it in areas that are capable of delivering a demonstrable return to the bottom line.
As the name suggests, the annual budgeting process starts from a zero base and every item of planned marketing expenditure has to be analysed and justified. Marketing budgets are then built around what is needed for the upcoming period irrespective of whether they are higher or lower than previous years. The important thing is they start at zero and marketing departments have to make a compelling case for their proposed expenditure.
This compares to the old and more traditional way of taking last year's budget as the benchmark and either revising it upwards or downwards. While many companies still use this approach, ZBB is spreading like wildfire and there's now plenty of empirical evidence to suggest that it actually works.
Take Unilever, the second biggest advertiser in the world, as an example.
Two weeks ago it announced that, as a result of its own ZBB initiatives, it will cut the number of ads it creates by 30pc and halve the 3,000 or so agencies that it works with around the world, including Ireland.
The company, which owns a large stable of brands such as Domestos, Hellmann's, Vaseline, Cif, Knorr, Lyons Tea, Pot Noodle, Ben and Jerry's and Dove, said it is planning to double efficiency savings from its brand and marketing investment from €1bn by 2019 to €2bn after finding ways to make its marketing more efficient following its move to ZBB almost two years ago.
The seismic news was enough to send the share price of WPP down by 4.4pc at one stage as the agency holding group, the largest in the world, derives around 3pc of its global income from Unilever-owned brands.
Unilever's strategy is broadly similar to its rival P&G which has also slashed the number of agencies it deals with by 50pc over the past three years and in doing so has proudly boasted that it has saved around €591m in the process.
ZBB has also been recently embraced by Diageo, which owns brands such as Guinness, Hop House 13, Johnnie Walker and Smirnoff. With an annual advertising and marketing budget in excess of €1bn a year, the company had been examining ZBB for a while although it only kicked off in earnest during 2016 as the it seeks to drive improved returns from a lower marketing spend.
However unnerving and unpalatable this is for advertising and marketing agencies, including a number of Irish ones, the reality is that more and more marketing departments are under pressure to boost efficiencies and cut spending - and have been for quite some time.
In some cases, this drive for greater efficiency is being driven by lacklustre sales growth at many of the large multinational FMCG groups coupled with the need to appease frustrated shareholders by slashing and burning wherever they can and offloading non-performing business units.
In other cases, however, it's simply being driven by a genuine desire to weed out blatant inefficiencies, sweat existing marketing assets and rationalise overly complex and bloated agency rosters.
Indeed, it is highly likely that some companies knew they were wasting money on very inefficient practices and a complex advertising ecosystem, but just didn't know how bad the problem was and they didn't have the tools and, perhaps, the inclination to deal with it.
Rather than relying on the advertising industry to sort its own problems, including its own inefficiencies, companies are actually doing something about it themselves.
Where large companies like Unilever, Diageo and P&G lead, one can be certain that others will follow and this will pose all kinds of challenges for agencies that are supplying creative, media and other marketing services.
In many ways it's easy to see why ZBB is back in fashion. Apart from the financial constraints companies have to contend with, it's no longer business as usual for many companies. The world has moved on and many brands are staring into an uncertain and challenging future in a consumer landscape that has changed beyond recognition over the last 10 years.
Companies will also know too well that advertising and marketing industry has become far too complex, siloed and more recently it has been dogged by issues relating to transparency and advertising fraud.
At a time when the industry needs to put its best foot forward when it comes to demonstrating the importance of marketing and advertising, things like ZBB don't bode well for it. But this is not the advertisers' fault either: they have their own unique set of challenges to contend with.
The industry only has itself to blame as the writing has been on the wall for a long time.
Why it has taken so long to see it is a different matter altogether.
Contact John McGee at firstname.lastname@example.org
Sunday Indo Business