Commercial and regulatory pressures are forcing CFOs to take a closer interest in marketing. CFO June 2004.
Traditionally, finance and marketing have been the corporate equivalents of chalk and cheese. Marketing spends the money to expand the business, and finance worries about not being able to measure the effectiveness of the investment. In a downturn, the marketing and advertising budgets are usually the first to be cut. This model, however, is looking increasingly dated. Finance and marketing may not have learned to love each other yet, but they are working more closely together. They have little choice.
Douglas Nicol, a managing partner at George Patterson Partners, one of Australia’s largest marketing services companies, says chief financial officers in publicly listed companies are becoming more interested in marketing partly because of the influence of the Sarbanes-Oxley Act, which has put accountability firmly on the shoulders of the officers of publicly listed organisations. “I think that is rubbing off onto markets like Australia, and [will do] more and more in the coming years,” he says. “Sometimes, marketing is a bit of a black hole in organisations. Really, I think the CFO has a role to play in making sure money is spent wisely, and importantly, that there is evidence of an increasing ROI [return on investment] and increasing level of efficiency in the way money is spent.”
Nicol says CFOs are becoming involved at two levels. There is the Telstra example, in which the former CFO, David Moffatt, has moved across to become effectively the chief marketing officer. Nicol says: “But then I think you’ve got CFOs who wouldn’t necessarily sit in on the pitch, but they would take an active and keen interest, particularly in the structures around marketing.”
Mike Beckerleg, head of the brand architecture consultancy RubberBand and former marketing chief at Vodafone, believes there is a massive difference between the mindsets of marketers and finance executives, although they are finding common ground. “In many organisations, labour and marketing are the two biggest costs,” he says. “Being the biggest costs, they are also the easiest to reduce by either sacking people or cutting marketing expenditure. It is not a pure science. There is a lot of art in marketing, and that’s what puts it at loggerheads with age-old financial systems that essentially haven’t changed a lot.”
The first thing Beckerleg did as marketing chief at Vodafone was to pull in a finance person. “I felt it was critical not just to have access to a financial expert but also to have somebody who was part of the culture and fabric of the marketing department,” he says. “I do believe the better each understands the other’s world, the better able they are to want to work together rather than feel compelled to have to work together. And there is an enormous difference in the terms.”
Beckerleg says one position used to be about investing money to drive sales and the other in controlling and driving down costs. “But that’s not the case now. They need to work very closely together.”
While closer co-operation between finance and marketing makes sense for strategic reasons, there are sound practical and financial reasons why CFOs should closely monitor the activities in which the right side of the corporate brain is engaged. Cost control is one of these reasons. In the United States and Canada, for example, two widely publicised cases have highlighted that ad agencies can misappropriate funds. In the US, two executives from Ogilvy & Mather have been charged with overcharging clients. Five Canadian agencies have been accused of misusing clients’ funds. Over the years, the odd case has been swept under the carpet in Australia.
David Brocklehurst, CEO of Firm Decisions, a specialist in agency/client agreements, says: “Media seems to have become a growing focus globally ever since corporate governance raised its head, thanks to Enron and WorldCom. Many marketing directors and finance directors – anyone on the audit committee, even, who is looking at the massive amounts of money being charged through the agency for media – have to ask if they are sure it’s being controlled [properly] by the agency.”
He says two forces may be leading to unintentional mistakes in the billing of marketing services: the proliferation of the many differing non-standard contracts between agencies and clients, and the focus on cost-cutting, which means fewer finance staff. Brocklehurst says: “The poor old agencies’ finance departments are being shrunk so fast because they are not billable. Every agency I know is flat out. They just don’t have extra resources sitting around.”
What Brocklehurst does is ensure agency billing tallies with its client agreement. For example, one area of potential abuse is time sheets. “Often agency people filling out time sheets will see it as a reflection of their own work ethic and their productivity,” Brocklehurst says. “It’s not from pressure from management to puff the billings, it’s often the employee thinking they are doing the right thing, doing it [the time sheet] a month afterwards.” He says time sheets can be indicative only of time input, as people often fill them retrospectively, often a week or month after the event. And costs of telephone, photocopying and other expenses can be misallocated to the wrong job numbers.
Brocklehurst revealed to one client in London that its media agency’s accounts department had been sitting on a $2 million rebate that its account executives knew nothing about. This was something the client’s audit firm had missed.
Brocklehurst says: “If there is non-compliance, you have to find out why. It could be that [the] agency is under pressure on renumeration and needs to make up fees in other ways, such as marking up production costs.”
Marketing agencies in Australia are railing against companies such as Firm Decisions. Russell Tate, CEO of John Singleton’s STW Group, is all for accountability. “I think there is no question that, particularly over the past five years, probably 10, the marketing dollar has come under massively more scrutiny in terms of its accountability. Clearly accountability means financial accountability,” he says. Yet STW and Australia’s largest marketing group, Clemenger Communications, are against using companies such as Firm Decisions because they do not see them as proper auditors of the kind supplied by an accountancy firm.
Brocklehurst concedes that his firm is not in the same business as accounting firms. He is the former CFO of an ad agency and his idea is to employ advertising specialists who will know their way around the working of agencies. He says that “some agencies are trying to write us out of their contracts by stating that agency audits can only be done by a chartered accounting firm. Now that’s targeted at us, because we know actually what we are doing.”
STW’s Tate believes that this type of firm is comparing agency costs and trying to push them down. “Our clients can come and audit us any time and make sure that anything we are doing in terms of charging them does conform with the contract,” he says. “No problem with that. Nor do I have any problem with a client coming to us and saying can we review our arrangements because we think we are being overcharged.”
Tate does not want to be drawn into debates about whether an art director should be charged out at $101 per hour or $110 an hour. “I don’t want somebody coming in and telling me that, just because some flip down the road is giving his services away, then that’s the rate you charge.”
The formula for charge-out rates in advertising is usually 1.5 to 2.5 times salary. Tate believes that, by putting pressure on charge-out rates, clients will end up with a worse product. “The difference between an ordinary campaign – and I don’t just mean an ad campaign, a total marketing campaign – and a very, very good one can be much more than 5%. It can be 20Ã25%.
“Two or three hundred thousand dollars in agency fees will make the difference between an A-grade team and a C-grade team. And at the top line that difference could translate into five, 10, 25 million bucks. It’s not very sensible economics.”
Recognising the brand
The CFO’s role in marketing is not in the detail of execution but in the measurement and improvement in processes. At Pacific Brands, marketing – and the lack of it, up to the company’s buyout from Pacific Dunlop in 2001 – helped private equity investors pocket a $1.1 billion profit from its recent float (see cover story The secret life of brands in this issue).
Pacific Brands’s CFO, Stephen Tierney, does not get involved in specific programs, which are devolved to the group’s five general managers. But at the beginning of each year he goes with them through a budget process. Every January the company undertakes a strategic review across a three-year plan. In May, they all come back and define the next year’s budget, which details promotional activities.
Tierney knows that brands are too important to be left without recognition. The big story throughout the Pacific Brands sale prospectus was brands, brands and brands. The float was structured so that the listing entity bought the company, which enabled the company to put values of the acquired brands on its balance sheet, and tell its story to the financial world (see cover story, page 26).
Some $1150 million in goodwill was on the balance sheet, $375 million accounted for by the company’s top 25 brands.
The valuers at Interbrand, who calculated the $375 million figure in January this year, would have been running a very different set of numbers through their spreadsheets if they had entered the company’s doors four years previous.
Tierney admits that marketing was underdone in the past and, despite increases, is not yet at a level where it needs to stabilise. Between 2001 and 2003, advertising spending alone increased from $32 million to $45 million. It is forecast to hit $60 million in 2004 and $73 million in the 2005 financial year. Yet this is only a small part of the story. The bigger picture of marketing includes sales promotions, direct sales and discounts, and the total expenditure in 2005 is forecast to be 4.4% of sales, eventually hitting about 5%. In reality, although it was a big decision to shift focus back on the group’s most important brands, the financial investment has only been an additional 1% of sales.
Tierney says: “We are not yet sure where our level of advertising spend will pull up. For the forecast period it will run about 4.4%, but that is an average across the group. Some of our business units are at the 6, 7 and 8 [%] mark.