Bridging the finance--marketing divide: the two disciplines have often worked at cross-purposes or have simply failed to understand each other's needs. Now, best practices find the two departments collaborating on meaningful metrics and driving accountability.
So, how bad is it? A 2005 study of senior-level marketers by Forrester Research, Marketing Management Analytics and the Association of National Advertisers (ANA) found that only one of three marketers surveyed said they build marketing budgets based on knowledge of the spending required to meet corporate goals. And, if faced with a 10 percent budget cut, only two in five marketers felt they could predict the impact of the cut on sales.
And, it may only get worse. The last few years of proliferating media options have shaken marketers' safety net and made marketing much riskier. Nowadays, there are no "fender benders;" marketers either win big or suffer huge losses.
Suddenly, what was a basic black-or-white decision--Do I advertise on TV or in print?--has become far more complicated. Marketers now confront a dizzying array of choices from digital, to product placement to sponsorship to cable to network TV and wireless, among other new media. And with so many options, failure is that much easier.
An old adage says finance measures for the short term and marketing manages for the long term by building brands. There is some truth in that. But, it is also a part of the problem. Brand-building is important. It allows a company to charge a premium, gives a company some marketplace standing and differentiation, and it builds credence for a company's innovations. However, it may be used as a shield against having to use hard measures.
Until recently, many marketing and finance organizations existed uncomfortably in a hands-off relationship where marketing did the brand creative work while finance wrote the checks. However, marketing spending is too material a part of any company's cost structure to continue to be managed without clear accountability for its effectiveness.
Marketing dollars that truly build the brand and increase sales represent a clear investment--directly contributing to the growth of the business--while marketing dollars that don't drive sales are merely lost costs.
Given the risk accumulating in marketing, it's time to better align marketing and finance.
How are companies getting it right? For some, marketing accountability is no longer the Holy Grail. While the very tight alignment of marketing and finance is still far off for a lot of firms, improved accountability is becoming a reality at some leading marketers:
* A major retailer has begun to set measurable targets for each of its marketing initiatives. The payback is an immediate short-term lift in sales, combined with a measurable increase in brand equity. By paying attention to both of these metrics, the retailer has achieved a good balance between short-term sales and long-term brand building. To accomplish this, it has launched a cross-functional initiative to manage marketing effectiveness. The team is led by finance, supported by marketing and supplemented by marketing research.
* A major consumer packaged goods company has formed a similar initiative, also led by finance, which focuses on demand creation. A key part of the initiative is measuring the effectiveness of the full suite of marketing tactics that includes, among others, TV, price promotion, trade and advertising. The team is charged with establishing a baseline for marketing effectiveness and using it as a key part of the annual budgeting process. By having a balanced scorecard, it can encourage direct accountability while enabling significant investments and innovation.
A major direct marketer has extended marketing accountability into its direct sales force. By working across functions, the company has learned that marketing and advertising can have a significant impact on what it previously believed was only a sales force-driven business.
Companies moving in this direction realize that by aligning marketing with finance, they gain a competitive advantage. Calling it a "major initiative by senior management," one Fortune 500 consumer packaged goods company, for example, is viewing the renewed attention to marketing accountability as a major organizational shift. "Think about if you could generate more sales for the same amount of spend," the company's CFO says. "What we are doing is getting more out of our working marketing dollars. It's transforming how we work with marketing. And it's transforming our business."
At a Fortune 500 cosmetics company, finance and marketing had been viewed as separate functions with disparate roles to play. But the business challenges of the last few years have made the firm realize the value of linkages between the two functions, according to the VP of finance.
"Our financial projections are the outcome of our marketing plan, and, thus, they need to be closely linked," this vice president says. "We need to quantify, track and measure everything that we can, including marketing activity. Marketing is not just art--it can also be science, thus bringing it closer to a numbers function like finance."
Dialogue Has New Dimensions
How are leading companies restructuring themselves to better align marketing with finance? For one, they are changing the very way they talk to one another. Traditionally, marketing talked about brand-building, awareness and customer satisfaction. Obviously, that terminology had little to do with the language finance was comfortable with--hard numbers like sales figures, shareholder value and return on investment (ROI).
Conversations between the two disciplines could take on an "Alice in Wonderland" quality. Marketing might say that the objective of a program was to drive brand awareness. Meanwhile, finance would want to know what moving brand awareness 10 points would do to shareholder value. Marketers didn't have the answer. Marketers not only didn't think in those terms; they lacked the tools to address the questions.
Pioneering companies are developing the capabilities to make marketing accountable as they shift their organizational mindset regarding marketing. At many of the author's firm's Fortune 500 clients, for example, marketing has moved from being viewed as an expense to an investment. To that end, these leading companies are building formal organizational and informal human connections between the two disciplines.
In some cases, a dedicated finance person is being placed within marketing; in others, marketing has added a finance person. Whatever the structure, however, a constructive dialogue is now taking place between finance and marketing. Now, when marketing presents a budget, it understands that it needs to deliver a set amount of sales as determined by the CFO. And if the CFO later decides to cut the budget, marketing has the knowledge to tell the CFO what sales will be under the smaller budget.
"Marketing and corporate strategy are now our key partners, because we need to be aligned to achieve our corporate objectives," says the vice present of finance at the Fortune 500 cosmetics company. "Another reason for the partnership is the need to get the buy-in for our growth strategy, and ensure that marketing activities are treated as an investment and not just as an expense."
For example, he adds, "Forecasting was primarily [done through] a 'top-down' approach, handed down from finance and corporate strategy to the marketing organization. It has now become a more consultative, consensus-driven process that is based on the volume impact and returns of our planned marketing activities."
As a result, the finance vice president says, his company has been able "to reset its marketing budgets to allocate more resources to those brands that give us better volume lifts and ROI."
Surprising as it seems, marketing until recently lacked the tools to be able to perform "what if" analyses to predict the impact of a change in a marketing budget. As we saw from the ANA study, just two in five marketers reported that they could tell the impact on sales of a 10 percent budget cut.
Working together, however, marketing and finance are enlarging their perspective. Now, both are no longer content simply to know the short-term impact of a marketing initiative but also want to understand the long-term effect.
At the Fortune 500 packaged goods company, marketers are recognizing that they need to focus on both the short and long term. "We need to have a balance between the long-term and short-term impacts," the CFO says. "We might have an excellent short-term ROI due to price promotions. However, that can undercut our long-term ROI by destroying our brand equity. We need to establish the right mix between the two."
Ed See is Chief Operating Officer for Marketing Management Analytics in Wilton, Conn. He can be reached at email@example.com or 203.834.3355.
RELATED ARTICLE: Improving The Alignment Between Finance and Marketing
* Understand what is truly driving the business. Many companies build their marketing plans based on an "urban myth and legend" of what works and what doesn't. The problem is that this only perpetuates misinformation. The right starting point is to build econometric models to understand what drives the business from both the short-term sales perspective and long-term equity side.
* Establish common language and metrics. Marketing and finance have evolved different languages and metrics. Finance can help bridge the divide by establishing a common language with marketing focused on short-term business drivers and the long-term aspects of brand equity. The common language should include marketing-based drivers, such as consumption, distribution, displays and retailer publication features, and their supporting data.
* Establish a formal organizational structure around the alignment of marketing and finance. By having a formal organization dedicated to the alignment of marketing and finance, companies can ensure better fact-based decision-making. Some companies may choose to establish a finance subgroup within marketing; others may prefer a join venture between the two functions. Either approach will work, provided that clear authority is given to the group and it is supported and championed by senior executives.
* Establish fact-based scenario planning. This provides the tools to do scenario planning based on history and fact, rather than simply gut feel and intuition. It allows marketing, finance and other stakeholders to reach agreement based on the same information.
* Establish a beachhead marketing accountability project. A pilot project can provide the foundational behaviors, metrics and organization to prove success in a reasonable time. The project can be held up to an organization as proof that marketing and finance can reach a tight and meaningful alignment that will drop dollars to the bottom line and help achieve other marketing goals.
RELATED ARTICLE: takeaways
* Finance and marketing have traditionally been on different pages, talking different languages and unable to establish common goals.
* Marketing dollars that truly build brand and increase sales represent a clear investment, directly contributing to the growth of the business.
* A number of leading companies have realized that establishing good metrics can ensure that finance and marketing work together to build accountability.
* One best-practice implementation has a dedicated finance person being placed within marketing, or has marketing adding a finance person.
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|Date:||Jul 1, 2006|
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