FEATURE1 October 2011

What’s it worth?


Buyers and suppliers are struggling to define the business impact of research. Is time running out for them to do so? Tim Phillips reports.


There’s a perfect storm for market research agencies,” says Richard Evensen, a senior analyst at Forrester Research. He recently published a report, Monetising Market Insights, which warns that research professionals “struggle to link the insights they provide to actual business impact and value”. His conclusion is that anyone providing insight, in the business conditions that prevail, risks being downgraded or having budgets cut.

The perfect storm that Evensen sees has three elements. The first is that businesses are being measured more, with an increased expectation from above that everything can be quantified in its contribution to the top line. The second is that other elements of marketing can now be measured much more – for example the effectiveness of digital advertising and marketing campaigns. Finally, in an environment of uncertainty, insights are now more of a differentiator for the business – but only if they fit the business objectives.

“It changes the client conversation from where it’s been for the last decade, when the subject of ROI came and went several times,” Evensen says.

This stormy period occurs in the middle of a decline, or stagnation, in the global MR business. The MRS annual survey of the UK market research industry shows that revenue declined by 0.2 per cent in 2010, following a fall of 4.7 per cent in 2009. And while UK agencies are offsetting a decline in the domestic market with a 4.3 per cent increase in international revenues, the effect of public sector cutbacks will continue to be felt in 2011 and 2012.

Globally, the industry returned to growth last year, according to Esomar, following a 4.6% decline in 2009.

Research professionals struggle to link the insights they provide to actual business impact and value. Anyone providing insight, in the business conditions that prevail, risks being downgraded or having budgets cut

But it’s easy to forget that MR has not been the only consultancy-based activity to suffer in the financial crisis. Other outside agencies that claim to produce a return on investment for their clients experienced more volatility. Figures from Kennedy Consulting Research & Advisory, which tracks the management consultancy industry in the US, show that client spending on consulting services declined by 10 per cent in 2009, and did not start to grow again until the second half of 2010. It was the worst setback to the industry for 40 years. PwC monitors global advertising spending. It was 11 per cent down in 2009, recovering by 5.8 per cent in 2010.

So if the market research industry is under pressure from clients, welcome to the club. What matters isn’t who suffered most, it’s who can best demonstrate that they create value in the future. This is Evensen’s argument: research will be funded, compared to other business development input, depending on how well it can make that connection.

He says that the leaders in this are technology and telecoms clients, who combine a need for innovation with a culture of constant measurement. “The change is happening. One company I spoke to measures everything that moves – they say that if it can’t be measured now, it’s cut,” he says, adding that responsive research agencies are treating the current ROI debate as more than just the latest manifestation of an age-old strategy for squeezing price.

“First it was ‘how many reports do we produce?’ but now it is ‘how many deals did we impact?’, ‘how many products did we influence?’, and now ‘how much revenue did we have a connection to?’ Cutting-edge MR professionals are close to a lot of those metrics, but it will take a few years for this to change.”

The ‘R’ word
Some clients are going public to demand these changes, notably Coca-Cola vice president of marketing strategy and insights Stan Sthanunathan. At the American Marketing Association’s Marketing Research Conference a year ago he announced plans to encourage MR suppliers to work on a pay-for-performance basis. “Nobody should take profit for guaranteed. Brand marketers don’t take profit for guaranteed. If your product doesn’t meet expectations you get penalised,” he told Research afterwards. “It is going to be an uncomfortable journey for us and our agencies but we genuinely believe it is required. We have done it with our creative agencies, and if it can work with creative agencies why not with research agencies?”

Sthanunathan admitted that the crucial problem to solve is what the definition of performance is – which is the same as asking what the R might stand for in ROI, or how to measure value in ‘value creation’. Writing for Research-live.com in August 2010, Kathryn Korostoff fired off four reasons why “pay-for-performance will never happen” in research. The first is that markets change and may render perfectly good research operationally useless. The second is that the agency has no control over implementation. The third is that agencies will not take on more risk when their margins are being squeezed, and the fourth is that “some projects just suck”.

“Buyers are responding to pressure put on them. They’re being asked to demonstrate there is some value in market research”

Alastair Gordon

Yet, despite these practical problems, Alastair Gordon, industry veteran and managing partner at Gordon & McCallum, thinks that research must learn from both advertising agencies and management consultants, because the problem is not going away.

“We’re working with clientside buyers who are responding to pressure put on them. They’re being asked to demonstrate there is some value in market research. Behind that is the economics – companies genuinely have to marshal their resources, and they have to demonstrate their value internally,” he says.

“We have been locked in a project mentality. Research is doing a little worse than other types of agency. People question ad agencies about whether topline advertising is as useful as it used to be, but advertising agencies have been better at putting in new structures to justify what they do – partly because they had to think through some of these things earlier. They were so dependent on the strategic relationship.”

Gordon also believes research can learn from how management consultants package and deliver the concept of ROI. For example, they will do a large volume of data gathering but deliver only the most precise report to the person making the decision. Value, in these terms, is the opposite of volume.

Creating insight from data may also mean a cross-disciplinary approach that large-scale consultancies exploit. “When you look at the IBMs of the world who are pulling together data – the sort of things we used to do in many cases – we can look at their ability to get clients to compromise on how much they want in terms of depth so that they can get breadth.”

This presupposes that research agencies have the power, size and status with the client to command similar influence. That’s elusive, Gordon admits, because truly transformational research is rare, but also because agencies have concentrated – understandably – on acquiring business rather than being assertive in defining the questions they should be answering.

“In the future our people will spend a lot more time on the client site, working with them,” he predicts. “Not what we call client services, which is in many cases dressed up salespeople, but much more finding people to help clients develop research programmes. We reacted to clients wanting to be more engaged in many cases by firing research people and hiring salespeople. That didn’t totally work.”

Vanella Jackson, chief executive of Hall & Partners and chairman of the MRS, agrees that long-term engagements, where they can be had, will open the way to conversations about value creation. But the problem is that defining strategy may be years removed from seeing its value. “ROI is a nebulous concept unless it’s set against specific objectives, and the research business needs to get much clearer about helping clients with what they want to achieve,” she says, “Most of those objectives are set at the front of the process, not at the back end. So better quality advice at the front end is where clients will feel the value.”

It doesn’t make it easy to measure the value, though – or to use it as a basis for pay-for-performance, Jackson says (neither Forrester Research nor any of the agencies consulted thought that linking strategic MR insight to sales measures would be a practical way of implementing pay-for-performance). On the other hand, Jackson thinks the industry can adapt its approach to the client to embrace the business culture – framing its projects to gain insight into what consumers do, and will do, rather than who they are.

“It’s about answering client questions, and most of them at the moment are about where to make their investments. The research business measures ROI very well. What it’s less good at is providing the structure for clients,” she says. “We all have to be much more open to innovation – for example, neuroscience and behavioural economics. If many choices are unconscious and emotional, how do we ask rational and structured questions about awareness if it goes under the radar? Much of the industry is focused on attitudinal information and is not really grounded in the behavioural objectives.

“We talk a lot about providing actionable insight. That’s what we need to deliver.”

The research agency pricing model

No agency will volunteer for a cut in its fees, but in a blog post Simon Kendrick of Essential Research floated the idea that agencies should also consider the long-term value to themselves of the engagement. It’s not just clients that think transactionally, he says.

“Agencies don’t have to focus on the monetary value of the work they do. There are three additional benefits to them: the experience, training staff; the expertise they develop, and the exposure it gives them,” he explains. “Some of the experience I have with buyers has been that they seek to justify what they get in terms of the tangibles: how many focus groups am I getting? This leads towards commoditisation, and it avoids having to consider the intangible values.” His ambition isn’t so much that agencies work for less, as that agencies revise the way they accept work and charge for it.

“Recently we told a customer to can an idea. We halted their development process. There was nothing to show for this piece of work, but we probably saved the client a lot of money”

Simon Kendrick

One improvement he would like to see is that researchers can be charged out by the hour, rather than per piece of research, with a longer-term goal to steer how their knowledge is applied. This can help solve the problem of how to demonstrate value to the client, because the researcher is still on-site when the value is created. Otherwise, he says, the concept of the value of a researcher’s performance is either trite (six groups and a report) or nebulous (we provided the insight that might help you do something in the future). “And so we can end up measuring what’s easy to measure, not what’s important to measure”.

Not least because there isn’t always something positive to measure. “Recently we told a customer to can an idea. To stop it now. We halted their development process. There was nothing to show for this piece of work, but we probably saved the client a lot of money.”

As Kendrick points out, you can’t measure money and time that wasn’t wasted.

Read Kendrick’s blog post in full here

The data-obesity epidemic
When Tim Brooks moved from his role as marketing director at GlaxoSmithKline’s consumer healthcare division to become managing director at Leapfrog in April, he also spoke of the need for research providers to align themselves more closely with client business objectives. Six months in agency work hasn’t blunted his ambition: we live in a data-obese world, he says, so it’s the job of the agency to work to cut through that data rather than add to it.

“There is an opportunity, because data and decision-making based on that data is a top table issue. So the market research agency is theoretically one of the organisations that can talk to the CEO… but the client needs agency input only when the agency understands the growth agenda of the business, not the specific parochial thing that the agency does.”

But how to do this? Korostoff’s objections over market change, lack of control, risk adversity and stupid commissioning still apply. Brooks believes that clients and agencies need to engage in a pre-project project that he calls “knowledge squeezing”. This would involve a selected agency working with the scope of the project and the existing knowledge to isolate the questions that should be asked, helping the client to define the objectives that should be met.

This cyclical planning process is sensible, he says, because often the client is already sitting on a heap of data. The insights from that would change the scope of the research.

But, as he accepts, even the best agencies cannot do this in an environment where they are constantly pitching to win short-term business. “We have a couple of long-standing relationships with clients and the value they add is much greater than working on a project basis,” he says, “I don’t think the pitch process has no value, but clients often organise a pitch instead of making a decision. They make a process out of something that should be a set of decisions.”

Pitching to win business creates an atmosphere of “transactional management”, he explains – the client thinks it wants it, you offer to provide it, they pick the flashiest pitch (not the one which points out that the project is a waste of money) and they pay you for following the brief to the letter. All this would seem to fit well with the demand for return on investment from clients. It’s often how procurement departments are characterised (not, to be fair, by Brooks), but he says this breaks the ROI model, because measuring outcomes is not the same as maximising value. In his conception, agencies embed themselves in the delivery of the insight, and are trusted to influence (or take) decisions at all stages. “Our future is about actionable insights, it’s about decision-making, not observation.”

This may seem like a world away for an agency competing to win business in a market that’s smaller than it was in 2008, and which is barely growing. Many account handlers hear “return on investment” and think “they’re about to squeeze our fees again”. Simon Kendrick, senior research manager at Essential Research, has seen the value-for-money fee squeeze in action recently. “I’ve noticed the effect: we are asked to repeat the process twelve months later, but get £10,000 less to do it.” Kendrick suggests agencies need to rethink how they value the non-financial benefits of winning a project (see box above).

The universally acknowledged problem – what Brooks calls the elephant in the room – is that by the time great research creates value there are many other people closer to the product or service who can claim they created that value too. The only time you’ll get all the credit is for a failure. Only a few clients in a few industries – and a few projects from a few agencies – will easily be able to accommodate a project-based measurement that scores research in terms of sales.

For the rest, the concept of value might simply mean, ‘Can we make better decisions if we have the agency involved on a consistent basis?’ On that basis, the agency adds value in the same way as a stepladder adds value in a storeroom, and would be just as important if you want to reach the high shelf. Working out how to reward that type of performance will be a long process.

“Most of the research that I do is about long-term benefits; in accountancy terms it is creating an asset rather than adding to the top line”

Paul Lindley

Creating an asset pool
Paul Lindley, the founder of baby food company Ella’s Kitchen and the co-founder of entrepreneur group Consumer Forum, has this idea in mind when he thinks about the ROI of research. “Most of the market research that I do is about long-term benefits; in accountancy terms it is creating an asset rather than adding to the top line. It creates an asset pool of understanding that is for the long-term benefit of our brand, not just for a product. Sales don’t go up by five per cent because we do this type of research.”

He agrees that it tempts many growth companies to ditch research in times of austerity – hence his idea that startups should get a tax break for employing research, which he has been lobbying ministers for this year. It’s a way to put a thumb on the scales so that research can be early-stage and strategic but also priced as an investment rather than a cost.

His fear is that when clients pay researchers for performance, they seek to commercialise (in Forrester’s terms) short-term insight: “Companies like us have got to find out points of difference. They have got to understand the consumer and the target market more. But that’s the beginning of a long process,” says Lindley. “Maybe if you have only £10,000 to invest in research you are more likely to use it to invest in something with an immediate return.”


13 years ago

The ROI of research is one of the most important issues we face and we can do a better job of talking about the value we are providing. One of the interesting issues that we face is that we too often tend to be a commodity business -- we sell data collection and report -- rather than a strategy and insight business. And often this is because the assignment is presented to the research agency in this manner. I have often argued that one of the ways to ensure that organizations get more value is to conduct a market research audit (http://wp.me/pOKHK-7C). Because the ROI of a research project can only be understood within a framework defined by (1) the importance of the decisions being made; (2) the cost of the research; (3) and availability of alternatives; and (4) the nature of the organizations decision-making process.

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13 years ago

Wow, this article does a great job of weaving together some complex angles. I had to read it three times! A few comments: 1. I would add a 4th element to the perfect storm: technology-driven change. In any industry, technology drives disruption and organizations that don't adapt their strategies and structures will suffer. I won’t cite the works of Peter Drucker here, but he articulated it better than I can hope to. Technology has fundamentally changed the decades old assumptions about what types of organizations can do what market research functions the best. 2. My own thinking about PPF is still evolving, While I still believe that market research agencies would be hard-pressed to operate in a PPF mode, that doesn’t mean new types of companies couldn’t. If a lot of client-side organizations really do want fresh thinking, valuable insights, data that pushes the outside their comfort zones, then maybe that’s a case for a new type of agency that delivers speculative research? I mean really, can a client commission a study that would be so innovative? So daring? So mind blowing? Assuming what Stan and some others here are saying represents a broader client-side need, could this mean there is actually a need for a new type of agency? To take it to the extreme, sort of a syndicated market research firm (that designs and sells its own studies) that creates BBI (Big Bold Insights)? That would be the ultimate PPF model—it would only sell stuff if it was awesome. (Assuming clients could figure out how to budget for such purchases) 3. Good research agencies already do some of the things suggested here. It has been 4 years since I ran an agency, but even back then we would rarely accept an RFP and propose to its specs. We won by discussing the RFP with the client, showing them how it could be even better, bringing our existing knowledge to them (which, in turn, would usually result in them sharing more information with us as well), and bringing the whole scope up a level…what Tim is suggesting as a pre project. So this makes me wonder: can client-side colleagues help us out here by giving us more precise examples of what they would like to see? 4. The R in ROI for market research will always vary by project type. The return on a segmentation study would be measured differently than for a product concept testing study. But again, issues of implementation and as Tim says, who gets the credit, muddy the waters. That said, I’ll offer a test: I would be happy to help a client conduct a market segmentation project at cost (just covering OOP expenses): the client has to agree it will target at least one of the desirable segments I recommend, and I get 5% of that segment’s first 2 years’ sales. Sound fair? Some additional comments on Edward Appleton’s post as well: http://edward04.posterous.com/should-research-agencies-be-paid-for-the-valu

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