January 5, 2006

The TPAs' Dilemma

For more than a decade, the leading third-party administrative services in the trade promotion world - AAS, ACB, CCI, CoAMS, Shared Marketing, TradeOne - have been engaging in a brutal battle for market share.

Though no one has ever seriously challenged ACB for the top spot - TradeOne looked poised for such a challenge when it was formed through a merger in the mid-90s - the fortunes of each have risen and fallen as regularly as the tides. At various times, rumors have surfaced that one or another was near collapse; mostly untrue, though not always (one of TradeOne's predecessors - Medianet - was in desperate straits at one point in the early nineties; I was there and I was scared). The rumors really reflect wishful thinking on the part of participants in the business. They all know that there are too many firms and that the overcapacity problem results in a supply/demand imbalance that drives prices down.

The result has been the TPAs stealing each other's business at ever-lower prices. You steal my account by undercutting my price; I retaliate by stealing one of yours the same way.

The managers of supplier trade promotion programs are, of course, the beneficiaries of this practice and, not surprisingly, egg on the TPAs by making their purchasing decisions almost totally on price.

This is, to put it as diplomatically as I can, stupid and short-sighted.

Let's look at some numbers (made up, but very realistic) to illustrate: You're managing a trade promotion program that pays out $50 million annually, and you get administrative bids from two firms - A bids $400,000, B says $300,000.

A 25% difference would seem pretty significant. But not if looked at in the context of the responsibility you are turning over to them. The winner of this bid will be responsible in large part for the success or failure of a fifty million dollar program - so you are making a decision based on a 0.2% factor.

I'm not going to make an argument for spending money unnecessarily. If there is no significant difference between the companies you should, obviously, choose the lower bidder. But a difference doesn't have to be very significant to make up 0.2%.

While the administrative services these companies provide - processing claims, answering phone calls, etc. - may be very similar, the providers might vary considerably in the quality of the information and advice they offer, based on their experience gained across hundreds of programs (many of them in your own or related categories). If that information and advice would be likely to improve the effectiveness of your spending by even 1%, then your purchasing decision should be different.

Nick James, Exec VP at CoAMS, puts it this way, "The biggest problem that we, and our competitors, face is that too many manufacturers focus more on how much they can save on our fees as opposed to what we may be able to do to help them influence better future returns on their trade spending."

And the TPAs do frequently tout their consulting and analytic prowess in the selling process. Of course, the fact that they all make similar claims in similar language helps reinforce the buyers' perception that it's a commodity decision.

And, to be honest, sometimes it is a commodity decision. The TPAs in many cases give mere lip-service to consulting and analysis - and some of them promise it during the selling process, but deliver little of value. They would respond (if they had the courage to say so publicly) that in this they are doing the same as the buyers. The buyers, they say, talk about wanting value-add services, but then make the decision solely on price, so the TPAs have little choice but to respond by cutting back on costs, in part by paring those extra services.

Sounds like a vicious cycle, and a self-fulfilling one, doesn't it? The buyers, falsely perceiving that they are buying a commodity, demand the lowest price; the sellers, needing to lower costs in order to lower prices, cut back on services, effectively commoditizing themselves; thus the reality moves closer to the perception.

Some of the TPAs, however, would like to get much more into value-add services and thus escape the endless price wars. However, these efforts to sell consultative services lead to another part of the TPAs' dilemma.

Historically, the TPAs have differed from advertising agencies in that there has been little concern expressed by clients about the handling of competitive accounts. Other than requesting separate account teams, most clients let the issue pass, and there have been few major issues.

In part this is because there are far fewer TPAs than ad agencies, and some client conflicts are therefore inevitable. But largely it has also been because the services offered have been seen as wholly administrative rather than strategic, and therefore any conflicts are seen as irrelevant.

The TPAs who want to move upscale, so to speak, need to figure out how to position themselves as your strategic partner while simultaneously explaining how they can offer the same services to your competitors.

The entire sector is faced with a dilemma. If they want to service multiple competitors, they must remain administrators only. But if they remain focused solely on administration, they are caught in a downward price spiral that is certain to kill some of them, and will make life miserable for all of them. But if they successfully position themselves as strategists and analysts, they will have to limit their client lists.

On this part of the question Nick James disagrees with me: "I don't think the issue is related to our serving competitors. Our position is uniquely different from an advertising agency. We're providing analysis of what has already happened . Advertising agencies are providing brand strategy to influence what they hope will happen ." And he adds that, "Manufacturers today have access to all kinds of competitive sales data. So, working with that in an industry vertical isn't using much more than these companies have access to now. Our role is to interpret what influencing factor made sales what they were."

To an extent, I think Nick and I are in agreement. If the TPAs move into an analyst's function, which would be a step forward, they can do so to some degree without worrying about client conflicts. But if they are to move the further step, into strategy - helping their clients decide how to change their programs in accord with the analytical findings, then they are moving into that "what will happen" role that the ad agencies play, and at this point the question of conflicts may arise.

In any case, the whole issue of pricing, value-added services, and potential client conflicts is one that needs to be aired. Most TPAs are concerned, justifiably, about discussing it openly with their clients because the clients may perceive it as an admission that corners are being cut on services. There needs to be a realistic assessment on the part of clients of what additional services they need, what the ROI on those services might be, and what is a fair price to be paid for them - above what is being paid for the barebones administrative processes.

They are not unrealistic people and I believe most of them will deal intelligently with the facts. The TPAs need to be prepared to present the facts and defend their position. Otherwise the downward spiral of prices and services will continue - which benefits neither party.

Return to News & Events

E-mail: info@houktpm.com