I had a conversation last month that I want to share. I believe it to be an early warning of things to come, the proverbial “canary in the coal mine.” In addition, it is the third time in three months that I’ve had this specific discussion with this type of corporate leader about marketing impact, so I see a pattern developing.
Proof’s usual customer is the CMO or perhaps the Chief Communications Officer. But on this occasion I received a note from the deputy to the Chief Risk Officer at a Fortune 100 company. A meeting was set up, and we met for coffee.
The CRO did not mince words. “We read about your software, and we’re wondering if you could help us with some analysis. We have been asked to assess the magnitude of the business risk created by our marketing department.”
“What sort of business risk?” I asked.
“Each year, we spend several hundred million dollars globally on marketing. We believe it creates positive impact and value for the business, otherwise we would simply cut that spend way back and move on. But there’s a lot we don’t know, and we need to be able to be surgical here. For example, it’s important to know where the point of diminishing returns is for our marketing spend, and we also need to know where the ‘hard deck’ is. By that I mean the point where cuts to marketing spend would substantially hurt our business. Our preliminary calculations suggest that the swing is potentially very substantial, representing as much as an additional dollar of EPS.”
Not everyone is familiar with corporate earnings lingo, so EPS refers to Earnings per Share. In simple terms, this is the pro rata of a company’s profits when allocated across its total share count. It’s a very important performance indicator, particularly for companies whose large size means that their focus is really more on their profitability than driving high levels of revenue growth.
This company’s recent EPS was around $2.00 per share. Given their share count, that would indicate that they are quite profitable, which is a core element of their investor appeal. In our conversation, the CRO was essentially saying that the company believed that it could increase EPS by as much as 50 percent if it could understand the business impacts of its marketing spend and then rebalance the investment accordingly. A 50 percent jump is a very big deal. Heck, a 20 percent increase would knock the cover off the ball. Shareholders would love it. Their share price would likely jump.
To be clear, the CRO was not pursuing an EPS improvement generated by an upside in marketing performance. S/he was talking about the company’s potential ability to increase its EPS based on targeted reductions to marketing spend that could be shown to not hurt marketing’s ability to create business impact and business value.
In other words, s/he was looking at the business risk associated with marketing spend that has not been proven to create business impact and business value. The value metrics were short- and long-term cash – nothing else.
Again, this is the third such conversation I have had since January 1. In my mind, this is starting to look like the beginnings of a trend, as well as a potentially significant inflection in the way that businesses think about marketing spend.
Historically, if a company needed to quickly improve their financials, they simply cut expenses, and marketing is usually the first on the chopping block. But unlike many other areas of the business, marketing cuts generally are made without any sort of computed view of the consequences of those actions. In many cases, the business goes too far. Later, if things have improved and the rationale from the CMO is compelling, the C-suite often re-inflates marketing spend. The problem is that like inconsistency in any area of the business, a cycle of reduction and re-inflation in marketing spend means that the relationship between marketing investment, marketing execution, and marketing’s business impact gets very lumpy. And there’s a lot of waste, both on the way down and the way back up.
This oscillation can really hurt shareholder value over the longer term, and this Chief Risk Officer clearly understood that. As a result, the company’s objective was to establish a line of cost-effectiveness that cut through those peaks and troughs. The two-fold mandate from the company’s board reflects this:
1. You will move to examine and calibrate marketing’s business value, with the goal of making the marketing expense more stable and predictable, and
2. You will capture the ineffectual portion of the marketing expense and reset the company’s investment and expectations for the rebalanced marketing expense.
This conversation illustrates quite clearly how business leader thinking about marketing investment and impact is changing. The CMO Council continues to report on the large number of marketing leaders who continue to lose their jobs, shrinking CMO tenure, and C-suite frustration at the failure of marketing teams to show business impact (fewer than 6 percent are able do it, primarily due to their inability to normalize for the long time lag to impact). The introduction of the Chief Risk Officer into the marketing impact value equation would herald very significant change, particularly when combined with the established role of procurement on the acquisition of marketing services. This will have profound implications for agencies going forward. And that’s the topic of my next post.