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GfK Healthcare | June 2010 | |
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Marketing Research Budget Cycles – A Growing Headache for Us All  One of my favorite sayings, corny though it may be, is “Don’t let the tail wag the dog.” But more on that in a moment. Having just attended this year’s spring meetings of PBIRG and PMRG, I was left with several impressions. First, I continue to be impressed by the number of people these meetings draw. Attendance at each ranged from 300 to 500 people, significant increases over a few years ago but continuing a turn-out rate we have seen in recent years. Both sessions were carefully orchestrated, anchored by excellent keynote speakers and filled with other presentations. That having been said, a couple of other observations are in order. First, as usual, client attendance at both sessions hovered around 20 percent or below. No great news value here, since client attendance has been dropping for years from the old 50/50 days. Gratefully, the content of both programs has been adjusted to reflect the new audience mix, with significant emphasis being placed on topics of interest to agency personnel. Additionally, the number of “suppliers” with booths at the “vendor fairs” continues to escalate. Many small, previously unheard of companies pop up at each conference, which amazes me considering the continued decline in the number of clients and their budgets and the significant increase in the importance of carefully negotiated preferred vendor agreements. Which brings me to the specific perspective I want to comment on in this issue of Vanderveer’s Views, i.e., the increasing difficulty, or maybe growing impossibility, of maintaining a viable business model in the health care marketing research agency space. A glance in the rearview mirror at 2009 shows that most significantly sized agencies in our marketplace were caught with too much staff in the face of dwindling budgets. As rational business people, what the managers of most such firms, including myself, did at that point was to effect a significant reduction in staff. Little precedent existed for such downsizing in our businesses, with decades of history showing successful agencies increasing in size and unsuccessful agencies dwindling or disappearing altogether. There should be little surprise that with the pharmaceutical industry cutting its typically sacrosanct sales forces by an average of 15 to 20 percent, an erroneously thought-to-be-expendable area of i business like marketing research would be cut even more, causing in turn a similar downsizing in the staff of the agencies that service the industry. This reduction in force among agencies was both painful and somewhat counterproductive. Not surprisingly, the staff members cut did not simply dry up and blow away, but rather often spawned some of the new/small agencies commented on above, thus actually increasing the number of organizations competing for the reduced marketing research spend. And thus it went last year. Conversations with my peers at the PMRG and PBIRG conferences, among other venues, have identified for me yet another challenge that the agency side of our business must face, which is not so readily dealt with as the challenge of 2009. More specifically, most pharmaceutical companies are on calendar fiscal years, and allocate and spend their budgets accordingly. In the “good old days” that often meant a large number of projects being initiated in the fourth quarter, even if in purchase order number only, since many marketing researchers faced a use-it-or-lose-it situation, in which their budgets would be adjusted downward for the next year if the budgets for the current calendar years had not been fully spent. Last year, as my peers and I perceive it based both on what we have been told by clients and what we have observed, that situation changed dramatically. That is, many clients simply ran out of budget at the end of the third quarter, with several interesting results. The first one is obvious, i.e., those agencies hoping to end the rather weak year with a banner fourth quarter were left sorely disappointed by the number of new projects during those three months. This, in turn, resulted for many not only in a weak performance for that quarter, but for the year as well. Additionally, WIP (work in progress) carried forward by many agencies from 2009 to 2010 was significantly reduced for many agencies, causing a mad scramble in the first quarter of 2010 to get off to a good start. The plot thickens as, for many agencies, the first quarter of this year turned out to be a banner one, causing many people to claim that the downward trend in marketing research was just a part of a cycle, and that happy days were here again. For those of us who had been perceiving substantially lower revenues and profits not as a downturn in a cycle but as part of the “new normal,” evidence was accumulating that perhaps we had been, gratefully, incorrect in our assessment of the situation. Over the past month, however, the worm has turned yet again. What had appeared to be a resurgence of the pharmaceutical marketing research budget in the first quarter was followed in many agencies by a relatively slow start to the second quarter. Interpretation? The work encountered early in the year was work that normally would have been started in the fourth quarter of 2009 but had to be postponed until the new year’s budget was in hand. Once this rat was through the snake, however, revenues settled back into their reduced status, at or even below those seen in 2009. Given my assumption that you are all about as fascinated by such accounting discussions as I am, I will cut to the bottom line. That is, pharmaceutical marketing research has always been a micro-cyclical business. It didn’t take a rocket scientist to know that business slowed down, albeit briefly, for occasions such as Christmas and the Fourth of July. But such downs were indeed brief, occurred in varying stages of project life cycles and thus did not cause major blips in the conduct of business. If 2009/2010 are any indicators of years to come, however, we might indeed come to expect a macro-cyclical business in which the receipt of new orders largely dries up in the fourth quarter, followed by RFPs and awarded business enjoying a significant, albeit time limited, burst of activity in the first quarter of the following year. If that is the case, how are we going to deal with such a variable work flow, especially in areas such as qualitative research, where the conduct of field work is extremely professional-labor intensive? Popular moderators will be receiving requests to double and triple book themselves in the first quarter, while drawing salaries without any work to do later in the year. While I certainly don’t have the solution today as to how to handle this consideration, I did want to raise it as an issue that I and my managerial colleagues in other health care marketing agencies are increasingly paying attention to. In a similar regard, let me note another challenge creeping into the long-standing business model which has existed between pharmaceutical companies and their marketing research agencies. More specifically, we find major health care manufacturers asking that monies spent with the international divisions of major marketing research suppliers be included in the computation of their annual rebates. Sounds simple enough, but given the wildly fluctuating exchange rates among the dollar, euro, etc., a genuine challenge exists in determining a way i to calculate that rebate in one currency. Does one do the conversions all at one time at year end, on a project-by-project basis, on an average basis, etc.? Far from trivial, such considerations may totally eliminate any profitability from a project if the exchange rate is calculated on a “bad day.” Put these two issues together with several other developing trends, e.g., the dismantling of the marketing research department by several major pharmaceutical companies, and one has the recipe for a significant disconnect between pharmaceutical companies and their marketing research agencies at a time when the research which the agencies collect and the companies employ has never been more important to optimize. Who is going to straighten this out? My sense is that it will require the assembly of a top level task force, involving representatives from pharmaceutical companies and marketing research agencies, the sole task of which will be to establish a series of win-win rules of engagement. Continuing to handle this on a client-by-client, agency-by-agency basis is clearly inefficient!  Richard B. Vanderveer, Ph.D. CEO, GfK Healthcare   |