When a tightwad meets an illiterate

‘Advertising received a mention in a disappointingly low number of company reports. Even where the companies concerned had a very substantial advertising spend there was almost no meaningful discussion of marketing or advertising strategy or anything to show why the spend was justified.

It was clear that we, as advertisers and marketing specialists, were not getting through to the finance departments of companies.’ The source of this gloomy comment is Janet Hull, consultant director of the effectiveness committee at the Institute of Practitioners in Advertising.

M&S versus Armani

The battle of the suits, responsible penny-watching M&S versus profligate Armani, is so longstanding as to have passed into cliche. Marketing isn’t just expensive flummery; its fundamental aim is to expedite sales. So what’s the problem? Well, quantifying the link between cost and profit has always been an extremely difficult exercise. This doubtless goes some way to explaining why so many finance directors tend to regard the marketing budget as the first target for cuts.

In early 1995, Kevin Parry, partner and head of the specialist advertising client account wing at KPMG, studied a series of corporate accounts to check on the degree to which companies reported on their advertising spend. It started the ball rolling on what was to become the most extensive examination yet of just how much the cliche still holds water.

It’s the members of the IPA who are tugging at the corporate purse strings.

The subject is naturally close to the hearts of its advertising effectiveness committee and it arranged to collaborate with KPMG on further research.

The next step was a joint survey polling 100 FDs drawn from The Times Top 1000 about their attitude to marketing. The results were disheartening.

Four points in particular are worth highlighting: 78% of FDs reported that their companies found it difficult to measure the effectiveness of advertising spend; when asked to rate their marketing colleagues’ financial literacy on a scale of nought to ten on, the 100 FDs, on average, awarded an unflattering score of 5.2; marketing lagged well behind training, IT, human resources and R&D in the FDs’ analysis of what constitutes ‘necessary spend’; and more than a quarter of the FDs (28%) said they would cut marketing spend ahead of other activities if business costs were under pressure.

The gap is still there. Both Parry and the IPA put the blame squarely on the marketing director. ‘It is vital that the effectiveness of marketing becomes more transparent and that campaigns are vigorously evaluated,’ Parry comments. ‘Marketing is not a new discipline and there is no reason why it should not justify its activities.’

Seats on the board

All this ought to have been sorted out long ago. It would clearly have been in the marketing department’s interest to do so since FDs almost always command a main board seat, while less than half of UK companies grant their marketing director the same privilege. As Parry notes: ‘There is nothing wrong with FDs wanting to see marketing departments setting clear criteria for the success or failure of marketing and advertising campaigns. It’s up to advertising agencies and marketing departments to provide more by way of empirical data that FDs can relate to.’

His sentiments are echoed by Steve Cuthbert, director general of the Chartered Institute of Marketing and himself a chartered accountant.

‘As an institute, we have been trying to get the message over to marketing directors that FDs also live in the real world. It is not acceptable for marketing directors to content themselves with taking cheap shots at FDs as short-termists or tightwads. They have to be prepared to develop performance measures and then hold themselves and their campaigns accountable on those grounds.’

The KPMG survey rams home that so called ‘soft measures’ of advertising effectiveness, such as awareness, brand image or likeability – taken as indicative of the positive outcome of campaigns – cut little ice. FDs want figures which demonstrate return on investment (ROI). The problem is that not every campaign lends itself to a clear ROI judgement, and not every campaign that doesn’t should necessarily be deemed a failure.

Peter Field, planning director at ad agency Grey London, and a member of the IPA’s advertising effectiveness committee, says of the survey: ‘We already knew that a good many advertising plans come to grief on the FD’s desk and this study shows why. The gap between marketing and finance is a direct consequence of the failure on the part of the marketing and advertising world to get their minds round the disciplines and thought processes of the finance community.’

Types of brand

In a follow up exercise for the IPA, Field took the KPMG survey and subjected it to further analysis. He first broke the results down into ‘strong brand’ and ‘weak brand’ companies and established that there were clear ‘cultural’ differences between FDs in the respective camps. Those from strong brand companies were much more likely to rate marketers more highly on both their financial literacy and their ability to justify spend. This analysis was borne out by a further series of telephone interviews. One hundred per cent of ‘strong brand’ FDs said their marketing side set measurable objectives. Their companies were also two-and-a-half times more likely to review their advertising in the annual report, and twenty-times more likely to review it at their annual general meeting.

Chartered accountant David Haigh, managing director of Brand Finance, specialises in marketing accountability and brand valuation. He thinks that one of the major sources of the gap between FDs and marketing, is that FDs are tuned to City expectations while the City has traditionally ignored marketing spend. ‘FDs come under tremendous short-term pressure from the City, but then the City cannot be expected to give credit for marketing expenditure if the rationale for that expenditure, together with some quantifiable return, is not clearly set out for them,’ he argues.

Scarce resources

In fact, more than two years ago, in his book, Strategic Control of Market Finance’, Haigh predicted that marketing would increasingly have to compete for resources with other corporate activities, and that ‘the finance function would be much more likely (over the next few years) to put marketing expenditure under the microscope’. Both Field and Cuthbert believe this situation is now the norm across all industry sectors.

The IPA has built up a marketing effectiveness database of some 570 case studies, covering all sectors of industry, in an attempt to provide marketing departments with ammunition to persuade their financial colleagues of the value of advertising spend. Field reckons that at present the existence of this database is almost unknown to the finance community. ‘Many companies would find it very valuable as an aid to benchmarking their spend against competitors in their industry sectors,’ he says.

In the end though, both he and the IPA believe the gap between FDs and marketing will only be closed by a concerted effort on the part of the latter. Marketing directors can help themselves through identifying measurable criteria by which campaigns can be judged. They can and should ‘sell’ their goals more effectively to finance controllers and they should see to it that their organisation includes a constructive report on advertising in the Annual Report and Accounts. If they succeed in making marketing a shareholder virtue of the company, they’ll go someway to completing the virtuous circle of investment and accountability.

THE FINANCE DIRECTOR

Brian Walsh, vice chairman and group finance director of engineering conglomerate the TI Group, reckons that the KPMG/IPA survey may well overstate the degree of the gap between FDs and the marketing side of the organisation.

‘These days,’ he points out, ‘many companies are run by managing directors or CEOs with a very strong marketing background. It is unlikely that they and their FDs will be markedly out of step with each other on fundamental strategic issues.’ Walsh has considerable experience within a ‘strong brand’ company, having spent several years as FD at US giant, General Foods. ‘In the US, there really is no gap, since the marketing and finance personnel tend to come out of the same business school background and have the same objectives,’ he notes.

He is similarly dismissive of the marketing view of the FD’s desk being the graveyard of carefully conceived advertising plans. ‘The fact that not every marketing plan goes through to fruition is not an adverse comment on the FD’s understanding of marketing, nor proof of his tight-fistedness.

When dealing with marketing, you are dealing with creative energy, so if five out of ten plans succeed, that is a good thing. It shows that the creative side is producing a sufficient universe of opportunity to generate winning proposals.’

THE MARKETING DIRECTOR

Roger Scarlett-Smith, marketing director and vice-president of SmithKline Beecham’s analgesics category, is adamant that there is a gap between FDs and marketing directors in UK companies.

One specific source of the problem in the UK, he points out, is the relatively low marketing spend per company in comparison to the US. The level of spend, by and large, makes it difficult to justify incurring the high costs of a validated pre-testing or campaign tracking exercise.

‘I worked in the US for three years and the one thing that helped to bring the marketing and finance communities closer together was better quantification of campaign results. FDs knew what bang they were getting for their bucks – but they only knew this because the spend was usually big enough to allow some level of quantification,’ he says.

On the KPMG survey’s reported low evaluation by FDs of the financial literacy of their marketing colleagues, he says: ‘It would be interesting to see how marketing directors would grade accountants on their understanding of the key consumer drivers behind their businesses – my bet is they would score FDs pretty low. The truth is that the functions of both communities demand a high level of expertise – so what you need is commercially orientated FDs and financially aware marketing directors,’ he concludes.

CASE STUDY: BT’S ‘IT’S GOOD TO TALK’ CAMPAIGN

BT’s ‘It’s good to talk’ TV advertising campaign has boosted the company’s revenue by #297m. This represents a return on investment of six to one, the highest of all three campaigns it has run since privatisation.

That’s why BT has just won both the coveted Grand Prix prize and a gold medal for new campaigns in the 1996 IPA advertising effectiveness awards.

With OFTEL squeezing pricing levels, the only way for the company to generate extra income has been by growing the whole telecoms market. BT set agency Abbott Mead Vickers BBDO the task of breaking down public prejudices about telephone usage. They targeted the gulf between male and female perceptions of the role of the telephone: men only use it if they have to and they try to control the women in the household who like to chat.

This is largely because people still think telephone calls are expensive even though charges have gone down.

The various TV ads, all fronted by cosy-yet-macho Bob Hoskins, use the idea of family members calling in – the daughter at university, the son telling mum he’s going to the cinema – to show why it’s a good idea to use the phone and how you can use it better. The exaggerated cost perception is undermined by comparing charges to everyday items.

BT holds very detailed and accurate data on how customers are spending money. With this, and other information – the company also knows what type of equipment people are hiring and the services used – ad agency AVM BBDO measured how buying a new product or service affected phone bills.

It put together a before-and-after panel of 4,500 households for each product/service to compare over three-quarters of the bills of households that had bought a new product or service with those from a demographically matched group that hadn’t. In this way, it was possible to strip out from the measurement of advertising effectiveness the distortion of 4.93% average rise in spend post-acquisition.

There was a second distortion to sort out: could competition have grown call volumes on BT lines? If light telephone users defected to rival operators – Cable or Mercury – this would have meant a small reduction to BT’s total billings, raising the average spend figure for the remaining customers.

In fact, their final bills show the defectors to be heavy users. So AMV took them out of the equation.

It had already excluded calls from fixed lines to mobile phones to counteract the boom in the mobile market. Then it doublechecked, again using panel analysis, whether there could have been any effect on fixed line to fixed line calls. There was not.

BT has over 40 different chargebands. To simplify the analysis, it concentrated on UK local and long-distance calls which account for over 99% of volume.

A test versus control study showed that running the campaign boosted calls per line substantially. The average length of a single conversation also went up across the country. The perception of high telephone charges has fallen dramatically. Men are less uptight about their own telephone use and that of others. Women feel less guilty about gossiping.

IPA GOLD AWARD – NEW LAUNCHES: ORANGE

Two years of advertising generated 61,000 connections, equating to u128m of additional revenue. Ad agency WCRS argues this could be even higher: Orange used discounted cashflow in its flotation which valued the company on projected revenues boosted by the effectiveness of the advertising.

IPA GOLD AWARD – LONG-RUNNING CAMPAIGNS: BARCLAYCARD

The #40m spent between 1991 and 1995 is credited with increasing turnover by 3% a year.

IPA SPECIAL PRIZE – SMALL BUDGET: ROSS HARPER

The Scottish law firm spent #82,500, a tiny budget for TV advertising, to build its share of the legal aid market. During four bursts of commercials, 1,228 calls came in to the 0800 number. The average number of appointments in a month when the campaign was on air was 307 compared with 136 when it wasn’t. Cases resulting from 0800 calls generated over u600,000 in fees.

The IPA is publishing the winning entries in its 1996 Advertising Effectiveness Awards in March 1997. All 500 entries since 1980 are available on the the IPA Data Bank (0171-235 7020)